Potential triggers this week: Q1 earnings season continues next week, with IBM, Netflix, Intel, Johnson & Johnson, and P&G reporting their results. Elsewhere, flash PMI surveys for the US, UK, Eurozone, and Japan, US new home sales; UK inflation and unemployment rate; Eurozone consumer confidence; Japan trade balance and inflation,
Summary: All markets except China remained in the neutral zone this past week with investors increasingly befuddled about what the (uneven) strength of the global economic recovery means for markets in the short-term. They are chasing small-cap value stock one day, large-cap growth stocks the next, adopting a contrarian strategy for a week, then discarding it and rediscovering dividend yield and low PE stocks the following week. The (sentimental) neutral zone is free of strong confirmation bias in either direction, and although the bullish or bearish zones are never more than 50 bps away, with investor’s current lack of confidence, they might as well be across the international date line. Markets are rising on fresh new inflows, earnings are as good as expected, yet investors feel like they’re not being told the whole story. Perhaps they should be reminded that in the entire history of the stock market, a whole story has never been told.
US investor sentiment recovery stalls midway into the Neutral zone.
The recovery in sentiment which started in mid-March has seen an about turn last week with both ROOF ratios retracing their steps and pausing, hesitantly, just inside the neutral zone, as if awaiting further instructions (top chart). The US market continued its upward move, buoyed by fresh inflows now that the Fed has convinced investors that low interest rates are here to stay and that investment options are, well, limited. It will be up to CEOs over the next few weeks to provide investors with the confidence they need to chase prices even higher.
The supply and demand for risk is almost balanced with supply having only a slight edge (bottom chart), but nothing that could force risk-averse investors to accept a large discount for their risk assets (i.e., prices will remain range bound). Sentiment ended the week on the soft side of neutral, but baring an unforeseen negative news, an over-reaction isn’t expected in either direction.
European investor sentiment makes an attempt at regaining the bullish zone.
The strong rebound in sentiment that started in early March has seen the Sector ROOF ratio regain the bullish zone last week, despite its Style counterpart’s hesitation to go beyond the neutral zone (top chart). An improving sentiment has been supportive of recent market moves to fresh highs and last week’s divergence of opinion between our Style ROOF and Sector ROOF methodologies seems to only reflect an ongoing style rotation environment rather than a fundamental disagreement on the direction of markets.
The supply and demand for risk (bottom chart) remains strongly in favor of demand with risk aversion heading for lows previously reached right after the post-Brexit trade deal agreement. The increasingly positive cognitive bias means that an over-reaction on the downside is highly unlikely with investors’ confirmation bias likely to ignore bad news and buy on good news, even a weak one.
Global and Asia ex-Japan investor sentiment recovery suffers from lack of confidence.
Global investors’ enthusiasm seems to have stalled in the last two weeks, trending sideways in the lower half of the neutral zone (top chart). Both ROOF ratios have halted their assent despite markets heading higher. There is a sense that investors will require more proof in the recovery pudding to have the confidence to chase prices much higher from here. A gap has already opened between market and sentiment performance with the former now well ahead of the latter.
Meanwhile, in Asia ex-Japan, investors continue to be somewhat confused and uncertain about the direction of the next market move (bottom chart). Both ROOF ratios in that regions have been somewhat contradictory these past two months and are again seemingly headed in different directions with the Style ROOF falling further towards the bearish zone while the Sector ROOF remains flat in the neutral zone. This lack of consensus has weighed on markets which have been flat since February.