May 19, 2020
Pain: The S&P 500 low on 3/23 was preceded by a record high in the CBOE equity put/call ratio on 3/12. The CBOE equity put/call ratio is a daily number that reflects sentiment in a highly emotional investor class and used as a contrarian indicator. Individual investors are also considered highly emotional and the American Association of Individual Investors (AAII) survey of bearish equity sentiment reached a record high on 3/12, followed by another record high on 3/26 and again on 5/7. During this period, the S&P 500 has rallied ~32% and bearish sentiment still remains elevated with the 50-day moving average of AAII bearish sentiment at an all-time record high.
Disconnect? Equity prices today reflect expectations 6-9 months in the future. The two are always disconnected with incremental real-time data/events serving as correcting function only. Over the last few days, headlines around reopening, linearity in business activity, early signs of recovery from high frequency data and encouraging treatment/vaccine reports all trend directionally bullish.