Sentiment Red Flags

This article reviews the data from the latest weekly sentiment survey we conduct over on Twitter.  The survey measures respondents’ equity and bond positioning/view – differentiating between whether the view is bullish or bearish for technical or fundamental reasoning.  The latest results showed a further decline in net bullishness on the equity survey, driven by an increase in technical bears (+7pts) and drop in technical bulls (-6pts), albeit the fundamentals bull-bear spread ticked up.  At a highest level it shows a divergence between price and sentiment… a bearish divergence.

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The first two charts show how sentiment is rolling over vs price, which has in the past flagged an impending selloff.  Likewise the sentiment vs VIX chart shows a gap opening up. This gap seems to be implying an expected VIX level of at least 13-14 vs the current 9-10.  This lines up with the commentary in the latest Weekly S&P500 #ChartStorm ("Overbought and Overhyped").
Finally, the last chart shows how "fundamentals" sentiment has been tracking in the equity and bond surveys, and how there has actually been a big improvement here.  So taking this all together I would say there is a reasonable chance of a sell-off, but if the improved fundamentals sentiment is anything to go by such a selloff would probably be short-lived.
The overall bulls vs bears spread has rolled over.  This contrasts with higher prices and has in the past been a red flag for markets.

On a similar note, the bull/bear spread (shown in the graph below, inverted or upside down), has opened up a gap vs the CBOE Volatility Index, and is suggesting a higher VIX from here.

Finally, the "fundamentals" sentiment picture is still looking pretty good, with the upturn in equity fundamentals bullishness confirmed by that observed in the bond market.

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About the Author

Top Down Charts
Topdown Charts: "chart driven macro insights" Based in Queenstown, New Zealand, Topdown Charts brings you independent research and analysis on global macro themes and trends. Topdown Charts covers multiple economies, markets, and asset classes with a distinct chart-driven focus. We are not bound by technical or fundamental dogma, and instead look to leverage any relevant factor to capture the theme. As such, here you will find some posts that are purely technical strategy, some that just cover economics and data, and some posts that use multiple inputs to tell the story and identify the opportunities. Callum Thomas Head of Research Callum is the founder of Topdown Charts. He previously worked in investment strategy and asset allocation at AMP Capital in the Multi-Asset division. Callum has a passion for global macro investing and has developed strong research and analytical expertise across economies and asset classes. Callum's approach is to utilise a blend of factors to inform the macro view.