February 24, 2020
The coronavirus narrative over the past four weeks had assumed the economic fallout from coronavirus would be severe, but still largely confined to Q1 and China. Weekend news of rising infection rates outside of China challenge that assumption with Italy’s regional travel restrictions acting as an accelerant. This weekend also included a challenge to the US political narrative following Sanders’ strong performance with contributions from enough demographic segments to make the November election tighter than previously assumed. Sentiment is a contrarian indicator, but our previously mentioned support level of 3150-3210 probably doesn’t include enough downside for equity sentiment to reach bearish extremes. If we get any use out of sentiment indicators during this move it will probably come from the fast-twitch CBOE equity put/call ratio, which is finally moving higher this morning to 0.73. Extreme bearish sentiment is something closer to 0.90 and the last time we used to indicator to add equity positioning was on 12/21/18 when it reached an all-time record high of 1.13. Recall, the ultimate 12/24/18 low followed a puzzling late-September Fed policy statement and December meeting rate hike despite a ~17% correction in the SPX. Present monetary conditions couldn’t be more different and we don’t expect a repeat in bearish sentiment as a result.