May 5, 2020
Bearish equity sentiment, light equity positioning and massive amounts of liquidity remain highly supportive. Individual investor equity sentiment is a highly reliable contrarian indicator at extremes. While bearish equity sentiment reached an all-time record high on March 26, it remains very elevated with a 50-day Moving Average clinging to record levels. Other measures of sentiment like the CBOE equity put/call ratio remain similarly elevated. Positioning data from HFRX shows that hedge funds are still underweight equities despite the ~30% rally off the lows. And most importantly, money market funds have attracted an additional $1.1T since the 3/23 low to an all-time record of $4.73T (April month end). In the last two months alone, total cash in the US has increased by $2.3T based on $1.6T in Fed buying bonds from non-bank entities and $700B of increased bank lending. While the numbers may be unprecedented, the conditions aren’t…we’ve seen this before…this is a liquidity boom that will likely drive a significant pain trade in equities.