May 27, 2021
The Tape, the Fed and Sentiment – the three legs of Technical/Quantitative analysis. Recall T/Q analysis is a combination of four fields of market analysis; macro-economic, fundamental, technical and behavioral. What’s the message coming from the big three? Let’s start with the easiest discernment; the Fed. Normally, the Fed’s job is “to take away the punchbowl just as the party gets going” to quote former Fed Chair William McChesney Martin. The Fed used to be early giving warnings of an end to easy money. The Fed now says the punchbowl stays full, as they want inflation and will not act until it gets out of hand. So, compared to previous cycles, the Fed may be late on this one. For that reason, it would seem reasonable to lean on the Tape even more than normal. I mentioned on Monday some recent Tape deterioration. Without getting all wonky on you, there are close to a dozen various Tape measures and when algorithmically combined, the output falls on a chart broken up into three zones – bullish, neutral and bearish. Today, the reading is neutral after being bullish for over 14 months. For visual learners:
That leaves Sentiment. There are more kinds of sentiment readings than Tape and Fed data points combined. And in contrast to those two, the rule for using sentiment as a market diagnostic tool is “go with the flow (crowd) until the measure reaches an extreme and begins to reverse” – that is the point where it pays to be contrary. There are short-term sentiment indicators and long-term ones and while we look at the short-term kind searching for trend changes, it’s the long-term kind that are incorporated into investment decisions. As noted in these notes for weeks, both the valuation data (one form of sentiment) and much of the macro data (another form) have made new all-time highs in recent months. Two more recent record highs have been made in margin debt and CEO confidence. So, in most sentiment readings, we are at an extreme, but no sell signal yet.
In sum, the message from the big three today is best summarized by a Lee Cooperman quote made last week in a an interview when asked how he’s positioned in the market in his family office (formerly Omega Advisors) – “I’m a fully invested Bear”. We too are at full equity market weight and waiting for a new message from the big three – we suspect it may not be too far away.