Sentiment is starting to turn

Sentiment turns

Even though stocks remain volatile with no sign of a bottom, sentiment has started to turn. The spread between Smart Money and Dumb Money Confidence has curled down from a near-record high and hasn’t set a new extreme for a week.

This is almost exactly the opposite of what we looked at in early February, when sentiment was turning from extremely optimistic conditions.

Smart money vs dumb money confidence

Forward returns after similar turns since 1998 were good, and while there were some medium-term losses, they were mostly muted, with small risk relative to reward. These were only short- to medium-term indications, though, and not necessarily a sign that long-term risk was low.

Historic crash

The S&P 500 crashed more than -22% over the past 2 weeks, one of the worst 2 week crashes on record. Similarly, this is one of the worst 2 week crashes for commodities (CRB Index).

Historic crash in commodities

The few historical cases saw the CRB Index rally significantly over the next year.

What happens when commodities crash

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We also looked at:

  • What sectors lead out of a "true" bottom vs a "false" one
  • Friday's selling pressure had the hallmarks of a liquidation event
  • Valuations have changed a lot in a very short amount of time
  • Looking at the largest 2-week drops across markets
  • 10-day volatility is nearing absurd levels

The post titled Sentiment is starting to turn was originally published as on on 2020-03-23.

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