Investor Courage Mounting Even As Sentiment Remains Negative: Citi


Below-expectation releases of economic data in recent weeks appear to have taken a toll on investor sentiment.

The recent PULSE report on US equity strategy from Citi analysts Tobias Levkovich, Lorraine Schmitt and Christina Wood points out worse-than-expected data released on jobless claims, manufacturing ISM and factory orders.

Investor sentiment on the back foot

‘PULSE’ is an acronym for Price-Unanticipated-Liquidity-Sentiment-Earnings, all crucial elements of Citi’s US equity strategy, and their current status is shown below in this figure.

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The only element in negative territory is Sentiment.

Citi’s Panic/Euphoria and Cyclical Expectations Model

“Our Panic/Euphoria model retreated but remained in euphoria territory. This week’s Panic/Euphoria reading was 0.49 versus last week’s revised number of 0.57. Euphoria readings indicate the market may retreat with an 83% historical probability of losses in the next 12 months,” say the Citi analysts.


A more substantial pullback was witnessed in Citi’s Cyclical Expectations Model, which picks up data on credit spreads, steepness of yield curve, Redbook retail sales, copper and oil prices, and railroad freight – total carloads.


VIX – the fear factor

Another useful measure of sentiment is the VIX indicator.

“A high VIX reflects increased investor fear and a low VIX suggests complacency. Historically, this pattern in the relationship between the VIX and the behavior of the stock market, has repeated itself in bull and bear cycles.” (Investopedia)

The underlying chart shows this inverse relationship between the VIX and the S&P500.


Note that during the last two trading sessions of last week, the S&P 500 rebounded while the VIX plunged downwards, an indication that perhaps investors were buying the dip.

Investors pile into the inverse VIX ETN

Interestingly, Bloomberg reported last week that the fall in the VIX led to a massive surge of funds into the XIV ETN, which is an ‘inverse VIX’ fund, i.e. it appreciates when markets calm down and investors are confident in their prospects again.

Here’s a chart of the XIV with an underlying comparison of the S&P500.


According to Bloomberg, investors added $196M to the ETN, betting “that markets will calm down and that will cause volatility to drift lower,” quoting Randy Frederick, M.D. of active trading and derivatives at Charles Schwab.


It appears that investors, though still worried, are gathering up the courage to enter equities at these lower levels.

Indeed, according to Citi’s research note, investors added $5.48 billion to total equity funds for the week ending January 29th. Domestic funds attracted inflows of $1.88 billion, while foreign funds posted inflows of $3.60 billion, however, bond funds experienced outflows of $896 million.