Implied volatility, as measured by the CBOE Volatility Index (VIX) has trended up about 50% since the most recent low on June 5th. I’ll call it a moderate volatility expansion. Normally a volatility expansion from 23 to 40 would be considered a material event, but relative to the highest spike we’ve seen in March, it doesn’t seem huge for 2020.
The Bank of America Bull & Bear Indicator is at 0.90 vs. 0.40 last week. It is used as contrarian indicator to identify market extremes in investor sentiment. Currently, their measure of investor sentiment is very bearish, which is bullish for the stock market.
Bank of America Private Client Sentiment shows bearishness, and here is a line chart showing its history.
On the topic of investor sentiment, and the Bank of America Bull & Bear Indicator, here is a chart of its history going back to 2002. As marked on the chart, it was backtested pre-2013.
I share the CNN Fear & Greed Index a lot, because it’s easily assessable, so anyone can view it. The Fear & Greed Index is neutral right now.
Within the Fear & Greed Index are seven different investor sentiment indicators. Unlike the Bank of America Private Client Bull & Bear Indicator, which is a survey of their clients, the Fear & Greed Index is derived from quantitative technical indicators.
Stock price breadth, or how well stocks are participating in the uptrend, is the leading driver on the Greed side. They use the McClellan Volume Summation Index, which measures advancing and declining volume on the NYSE. It shows during the last month, approximately 8.08% more of each day’s volume has traded in advancing issues than in declining issues, pushing this indicator towards the upper end of its range for the last two years, which is extremely bullish.
The only other of the seven indicators showing bullish investor sentiment is safe haven demand. That is, the demand for bonds over stocks. They measure it by the difference between the past 20 day stock and bond returns. Stocks have outperformed bonds by 6.99% during the last 20 trading days. This is close to the strongest performance for stocks relative to bonds in the past two years and indicates investors are rotating into stocks from the relative safety of bonds. Of course, this bullish investor sentiment is a sign that greed is driving the market. Notwithstanding these two extremes, overall, the Fear & Greed Index remains neutral.
Value is a Value
The dispersion of stock valuation multiples between the lowest and highest valuations has narrowed. But, despite the recent relative strength in value, it is still wide relative to history. So, value stocks remain a relative value.
Hot Momentum Stocks are Showing Relative Strength
According to Goldman Sachs, the most popular retail trading stocks have materially outperformed the S&P 500, so far.
Cross-Asset Realized Volatility has been Extreme
Another sign of dispersion is the number of 3 standard deviation prices moves. We’ve already seen more extreme trends across asset classes in 22 years.
Despite the impressive V shaped rally from what is so far the low on March 23rd, I continue to notice the mean reversion year to date and over the past year. Here is year to date, and I marked the high, low, and average percentage.
At the low, the S&P 500 was down about -31% YTD. With the help of a very aggressive Federal Reserve proving liquidity, it has recovered most of the decline in one of the fastest in history.
It ain’t over till it’s over, and this ain’t over.
Asymmetry is about the upside vs. the downside in terms of asymmetric risk/reward. No observation of the price trend is complete without also noting the downside drawdown it took to achieve it. The drawdown for the S&P 500 was an astonishing -34% in just 23 days. It’s a reminder of risk.
I believe risk must be measured, directed, and controlled if we are to compound capital positively.
It doesn’t matter how much the return is if the downside risk is so high you tap out before it’s achieved.
Clearly, in 2020, we’ve surely seen some of the finest examples of risk, divergence, and volatility.
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as advice to buy or sell any security. Securities reflected are not intended to represent any client holdings or any recommendations made by the firm. Any opinions expressed may change as subsequent conditions change. Do not make any investment decisions based on such information as it is subject to change. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect a position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.