June 2, 2020
Elevated bearish investor sentiment and still cautious positioning continue to keep the pain trade aimed higher. Recent outperformance from cyclical sectors also giving broad market strength credibility amid widespread press skepticism. Other cross-market indicators like US Dollar Index weakness and the performance of Copper relative to Gold reinforce the strength we’re seeing in cyclical sectors. Nonetheless, the popular drivers around reopening, stimulus and improving high-frequency data are now well known and each incremental headline will likely have diminishing utility for the bullish narrative. The S&P 500 has rallied 37% off the March 23 low and close to the ~3100 level that we’ve been using as our near-term target. At the time, we estimated this level would move the z-score for our momentum indicators in SPX futures close to 1.5σ, which technically defines ‘short-term overbought.’ In actuality, those indicators sit at 1.2σ, but they’re close enough for us to at least consider a near-term period of consolidation. We say ‘near-term’ because every positioning indicator for real money investors (futures dominated by CTAs/systematic funds) still show very low levels of equity positioning.