Headlines
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Sentiment is cycling from panic to euphoria, kind of:
A proxy of the Citigroup Panic / Euphoria model shows some components in euphoria territory, but also some showing neutral or even panic-like conditions. The public model is firmly in euphoria territory, which has unnerved some investors. Historically, the record is mixed, especially when it's at this kind of extreme.
50-day high on 50-day low volume: The S&P 500 fund, SPY, closed at a 50-day high on Monday, with its lowest volume in 50 days. Trend has been volatile, and its 200-day average is almost perfectly flat. That's happened 11 other times in its history. It added to gains over the next month 4 times, falling back 7 times. Risk was higher than reward up to three months later. For those curious, the dates were 1994-08-30, 2005-11-25, 2006-05-09, 2008-04-21, 2008-04-28, 2010-08-09, 2010-10-11, 2015-04-24, 2016-03-21, 2019-04-02, and 2019-07-15.
Focus on the strongest: While they let up a little bit on Monday, investors have been greatly favoring those firms most likely to survive the shakeout coming for U.S. businesses. An index of stocks with strong balance sheets from Goldman Sachs hit a new high on Monday, while an index with weak balance sheets is still in a bear market. This has never happened before. The last time there was even a small divergence was March 2019. On Tuesday, we'll have a closer look at times when strong balance sheet stocks are leading the overall market.
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Smart / Dumb Money Confidence
Smart Money Confidence: 54%
Dumb Money Confidence: 67%
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Risk Levels
Stocks Short-Term
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Stocks Medium-Term
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Bonds
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Crude Oil
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Gold
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Agriculture
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Research
BOTTOM LINE
A proxy of the Citigroup Panic / Euphoria model shows some components in euphoria territory, but also some showing neutral or even panic-like conditions. The public model is firmly in euphoria territory, which has unnerved some investors. Historically, the record is mixed, especially when it's at this kind of extreme.
FORECAST / TIMEFRAME
None
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Every once in a while, an indicator or model catches the investing public's attention. Reasons vary, but the gist of it is that we all want to find the holy grail, a simple and perfect guide that tells us what to do.
The indicator du jour is the Citigroup Panic / Euphoria Model published weekly in Barron's. It did a very good job of indicating euphoria in January and February, suggesting sentiment was overdone and stocks were due for below-average returns going forward. It flipped to panic in late March, another good call. Now it's back to euphoria, even more than at the beginning of the year.
When an indicator puts a couple of good signals together, it often gets praise as the "new thing." Once it inevitably fails, people move on to the next one. This particular model has been around for a long time, as have its detractors.
Based on publicly released data, the model's inputs are somewhat unusual. It includes:
We've looked at all of these at some point, and few of them have any consistent record at being a contrary (or other) indicator of future stock returns.
Maybe they work better together than separately. To see, let's take each of these inputs and compute a 1-year z-score, then average them together. This may not be even remotely like the methodology they use to calculate their model, but the result over the past year comes pretty close to the published version.
The biggest reason why it's not higher right now is that margin debt is low, commodity and gas prices are low, and money market assets are high, all of which suggest apprehension, not euphoria. The table below shows each indicator's current reading relative to its average and standard deviation over the past year.
Below, we can see each of the components over the past three years and where they are in relation to their ranges along with a tag showing whether it's currently neutral or showing a panic/euphoria extreme.
We're making the assumption that the following extremes would show euphoria (reverse for panic):
- High optimism in the AAII and II surveys (investors think stocks will rise)
- Low put/call ratio (options traders betting on rising prices)
- Low short interest ratio (short-sellers covering bets against the market)
- High margin debt (investors pledging shares against loans)
- High Nasdaq volume relative to the NYSE (speculative fervor)
- Low retail money market fund assets (investors see no need for cash cushion)
- High commodities prices (bets on economic growth)
- High gasoline prices (lots of mobility as the economy hums)
It's a pretty mixed bag, which means that the overall average is almost exactly zero, not showing any particular sense of panic or euphoria. It's unclear why the "official" model from Citigroup is showing euphoria - we can clearly see the components above.
If we look at historical returns after the model fell into panic territory, then the S&P did well, especially over the next 6-12 months, with an average return of 21.6% over the next year.
At the opposite extreme, it wasn't as good of a contrary indicator. The S&P still managed an average return of nearly 9% over the next year, and medium-term returns were still solidly positive. Much of that was due to initial readings of euphoria during the beginning of the 2003 rally, and again in 2017.
Based on the published model, we should be concerned because it's showing that investors are euphoric about the potential for a further rally. It did a very good job of warning us early this year, which is a mark in its favor.
When drilling down into the components, it's not clear why the model is currently showing euphoria, as most of the components seem to be neutral or even showing panic. Clearly, their methodology for constructing the model is different, and perhaps weights some indicators more than others. Historically, the model has done better as a contrary guide when showing panic versus euphoria, which is the case with most oscillating indicators.
While its recent record is very good, historically the model has been inconsistent after registering euphoric readings, and many components of the model don't agree. Because of that, we wouldn't consider it anything but a very minor (and iffy) negative here.
Active Studies
Time Frame | Bullish | Bearish | Short-Term | 0 | 1 | Medium-Term | 8 | 4 | Long-Term | 35 | 1 |
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Indicators at Extremes
Portfolio
Position | Weight % | Added / Reduced | Date | Stocks | 38.9 | Reduced 10% | 2020-05-13 | Bonds | 0.0 | Reduced 6.7% | 2020-02-28 | Commodities | 5.1 | Added 2.4%
| 2020-02-28 | Precious Metals | 0.0 | Reduced 3.6% | 2020-02-28 | Special Situations | 0.0 | Reduced 31.9% | 2020-03-17 | Cash | 56.0 | | |
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Updates (Changes made today are underlined)
In the first months of the year, we saw manic trading activity. From big jumps in specific stocks to historic highs in retail trading activity to record highs in household confidence to almost unbelievable confidence among options traders. All of that came amid a market where the average stock couldn't keep up with their indexes. There were signs of waning momentum in stocks underlying the major averages, which started triggering technical warning signs in late January. The kinds of extremes we saw in December and January typically take months to wear away, but the type of selling in March went a long way toward getting there. When we place the kind of moves we saw into March 23 into the context of coming off an all-time high, there has been a high probability of a multi-month rebound. After stocks bottomed on the 23rd, they enjoyed a historic buying thrust and retraced a larger amount of the decline than "just a bear market rally" tends to. While other signs are mixed that panic is subsiding, those thrusts are the most encouraging sign we've seen in years. Shorter-term, there have been some warning signs popping up and our studies have stopped showing as positively skewed returns. I reduced my exposure some in late April and was looking for a pattern of lower highs and lower lows to reduce it further. With weakness on May 12, our studies turned even more negative over the short- to medium-term so I reduced a bit more. Some short-term indicators are already nearing oversold so we may get a quick rebound but it is what it is. If we see a clear pattern of lower lows, I may reduce even further in the week(s) ahead. Long-term prospects look decent because of the thrusts we saw off the low, but I'm more comfortable in cash in the interim. I'd consider adding back if we see our indicators and studies start to skew to the upside again, or if price action turns clearly better, indicating my caution is wrong.
RETURN YTD: -6.5% 2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%
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Sector ETF's - 10-Day Moving Average
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