Sentiment and Positioning
May 8, 2020
Doubtful: Fed funds futures are beginning to point in the direction of negative interest rates in 2021. The ECB currently has negative interest rates, which penalizes money kept on deposit. Negative Fed deposit rates seem highly unlikely given the Fed’s vocal and unanimous opposition through the years. Never say never, but rather than go to negative rates, the Fed is much more likely to continue expanding its balance sheet and eventually imposing a ceiling parts of the yield curve. The focus on negative interest rates should be conflated with the concept of negative bond yields. Bond yields are determined by market participants and reflect expectations for future rates of inflation. Negative US bond yields are more plausible and one of the reasons we continue to favor bond-like equities. Btw, if the Fed was going to institute a negative deposit rate, you’d see it about 9 months ahead of time in the price of US bank stocks.
Pain: Yesterday, we discussed the contrarian buy signal from another record high in bearish sentiment. We use extreme sentiment at both tails of the distribution to identify potential market tops and bottoms. Record bearish sentiment in the CBOE equity put call ration from 12/21/18 was a key to adding broad equity exposure. The AAII poll one week later confirmed it. A new record in the put/call ration occurred this past March 12 and confirmed by the AAII poll on March 26. And now another new record in AAII bearish sentiment was registered in last week’s survey. And fund flow reports are flashing a similar contrarian buy signal with global equity outflows last week totaling $16.2B and US equity funds seeing $9.3B in outflows. Meanwhile, money market funds during the past week attracted another $53.5B to a record $4.8T. Bearish sentiment among individual investors is at all-time record highs, equity positioning is extremely light and cash is the most crowded trade. This all keeps the risks skewed to the upside as the market tends to go where it can inflict the most pain.