The Great Capitulation

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The Great Capitulation
A great capitulation is underway in the equity market.  And we’ve seen this type of thing happen only once before.

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The chart in this article came from a discussion about broader signs of upside capitulation across the spectrum of investors in the latest Weekly Macro Themes report.
The chart shows a great capitulation by those in the "neutral" camp as investors who've either sat on the fence or sat on the sidelines have quickly moved over to the bullish side.

As noted, we've seen this kind of capitulation and transition to bullishness before. I'll leave you to look at the chart to find it, but I'll give you a hint - valuations were similar then to what they are now.
As for the mechanics of the chart. It's the bullish and neutral sentiment readings from the II and AAII surveys.  A z-score was used to normalize the series and put them on a comparable basis, and a 12-month moving average was used to smooth the series in order to capture the trends.
While there were a couple of other instances where there was a transition from high neutral readings to high bullish readings, the one that stands out to me is that which occurred toward the peak of the dot-com boom where it went full circle and neutrals flipped extremely bullish.
Will history repeat? Perhaps, but consider these 2 points: 1. there hasn't been a crossover yet; and 2. the extreme neutral readings we saw in 2016 were unprecedented.  That's what makes charts like this so fascinating, thought provoking, and special.  It also makes this chart one to keep on your radar, and I will be keeping it front of mind for my clients.
For more on the analysis, click through to request a copy of the latest edition of the Weekly Macro Themes report in which this chart appeared.
This article originally appeared as a submission at See It Market

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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.

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