July 14, 2023
Good morning,
Crowd sentiment is the emotional state of the market at any point in time and falls under Behavioral Analysis in our overarching Technical/Quantitative market analysis methodology. Behavioral Analysis is one of the four types of analysis in the T/Q Methodology, the other three being; Macro-economic, Fundamental, and Technical, Analysis. Most behavioral work is counter-intuitive at first blush – a little paradoxical. For example, when investors are very bearish, it is a bullish sign for the market. The opposite is true as well; very bullish emotional readings of investor sentiment are a bearish sign for the market.
Our sentiment paradox has been on display in the market all week. It is displayed by the way investors interpret data, headlines and commentary. The inflation data on Wednesday was good and reflected a largely expected decline of inflation in the context of a resilient economy and low unemployment. It was a glass of water filled to or slightly above the expectation line halfway up the glass. When investor sentiment is running positive (a.k.a. bullish and overbought market), fear of missing out on a rally overwhelms the fear of the Fed strangling inflation all the way into a recession. Wednesday’s CPI report – a half glass of water – was just the excuse an anxious market needed to hit the “buy” button on stocks, bonds, and commodities. That glass was half full – markets are up broadly this week on a relatively minor CPI “beat.”
We’re seeing the sentiment paradox at work again this morning. JP Morgan and Wells Fargo are seeing big pre-market gains, with investors breathing a sigh of relief at their 2Q earnings results this morning that had been steeped with pessimism.
There’s obviously a long way to go between now and the September Fed meeting. Sentiment towards financial assets has swung towards something approaching euphoric territory, and despite the usual rush of blood to the head, that’s often not a great time to be adding risk.
Hope you have a great weekend.
Be well,
Mike