After a full quarter of “dog chasing its tail” type action in global markets, various global indices ended Q1 at or near highs. All of this happened in spite of a backdrop of China fears, Ukraine fears, polar vortex fears, US growth fears, valuation fears, European deflation fears, fear of flying, fear of Ebola, and fear of earthquakes. After everything US and global markets have “endured” these first three months, we’ve been rather impressed with market resiliency.
Following whirlwind quarters like the one just experienced, we like to check in on how various sentiment indicators in the marketplace are lining up. When the market is breaking to new highs, we’re always a little more encouraged when sentiment leans to the dour side. Interestingly, that’s exactly what’s happened. The sentiment indicators we follow indicate mild caution, which we’ve found generally supportive of market performance.
Let’s begin with the US CBOE equity Put/Call ratio. Again, we use the 10-day moving average to smooth out some of the noise. Last time we checked in ahead of the Q1 market correction, this indicator had hit some of the lowest (more bullish) levels observed over the past several years. The correction and general negative noise in the marketplace have brought this indictor back above the long-term median and back to the middle of the range observed over the past several years despite the fact that the S&P 500 has moved into new all-time (nominal) high territory.
Next, the ISES All Equities Sentiment Index, which also captures sentiment in the options market, shows a similar picture. At the beginning of 2014, the 10-day average had reached the highest levels (more optimism) in two years. Since then, at 152.50, the indicator has dropped back into the more cautious “wall of worry” range it’s occupied since early to mid 2012.
The Farrell Individual Investment Sentiment Indicator uses the bull/bear/neutral readings each week to provide a picture on overall sentiment. Sounding like a broken record, this indicator had moved above historical median early this year towards the highest levels observed since early 2011. Since then, even with market grinding higher, the 10-week average has now moved back below median levels.
Finally, the 4-week moving average for the BNP Paribas Love-Panic Market Timing Indicator gives a picture of sentiment over in Europe. Europe has been acting swimmingly of late, yet sentiment remains in neutral territory.
Taking all into consideration, market participants aren’t demonstrating outrageous pessimism. Nonetheless, it’s interesting and mildly encouraging that investors maintain a healthy dose of skepticism while global and US markets have found a way to move towards new highs. Likewise, though there’s been some noise associated with weather in the US and abroad, there’s no indication at this point that developed market economies face immediate recession dangers. The overall backdrop isn’t completely hunky-dory for markets. For instance, we remain concerned intermediate-term about valuation levels in the US markets. Until we see a combination of overly optimistic sentiment, negative market momentum, and cracks in the growth trajectories for the leading developed markets, we’ll have to give equity markets the benefit of the doubt right now.
