The latest weekly investor sentiment poll on twitter showed up a couple of interesting divergences that may offer clues on the next steps for markets. As a reminder the weekly sentiment poll asks if people are bullish or bearish — for “fundamentals” or “technicals” rationale. We’ve found this distinction can draw out some very interesting responses.
The first divergence is between equity and bond sentiment i.e. net bulls - which is total bulls minus total bears. Typically, all else equal, you would expect bond market and equity market sentiment to move consistently i.e. bullishness in equities vs bearishness for bonds. However the chart shows a break from that intuition, with significant bearishness on both equities and bonds. This sentiment could prove well placed were bond yields to spike in a fashion that disrupted the equity market e.g. as a result of a change in expectations around the inflation, or more importantly; central bank (QE) outlook.
The other notable divergence is net equity bulls (inverted) against the VIX. A wide gap has opened up. Note, a gap has existed since the start of the year (you could argue this is a fear gap - people are more fearful or pessimistic than what the VIX would suggest). The current reading would imply a VIX reading around 20. This would be consistent with the analysis in our latest weekly report which showed an emerging mispricing in the level of VIX.
So we're left with a couple of questions: 1. Who will be right: the bond bears or the equity bears, or both? and 2. Who's wrong: the VIX or equity net-bulls? It's an important set of charts and questions because the implied scenario of the latest survey basically says: bond yields rise, equities fall, and the VIX spikes.
The crowd is often wrong, particularly at extremes, but then again it's a big data week ahead and there are a number of risks laying in the background. That said we still run a constructive outlook on the underlying trend in the fundamentals so will be watching with great interest for any episodes and opportunities.
Article by Callum Thomas, Top Down Chart