Morning Notes — Recency Bias

Sentiment: Light equity positioning and elevated bearish sentiment are keeping the pain trade aimed higher. Yesterday’s release of weekly AAII sentiment (individual investors) resulted in 47.78 as bearish and only 24.37 as bullish. The all-time record high in bearish sentiment was 52.66, reached on May 7 after two prior records were reached on March 12 and March 26 of this year. In the opening sentence, I characterized bearish sentiment as ‘elevated’ because sentiment tends to be a contrarian signal at ‘extremes.’ I’m trying to be careful with the designation, especially after a ~39% rally in the SPX, but 47.78 is dangerously close to being a contrarian signal. Meanwhile, positioning indicators measuring mutual fund flows, hedge fund long/short and CTA flows continue to show a lighter-than-average allocation to equities and historic record flows into fixed-income ETFs.

Recency bias: The term ‘recency bias’ refers to our tendency to apply what happened in the recent past to the future. This is just a reminder to ‘keep an open mind’ about the potential for a more robust recovery. We’re in the early stages of a massive and historic liquidity boom that has the Treasury yield curve and even the WTI crude futures curve positively sloped.