Welcome, Sandbox friends.
Today’s Daily discusses:
180 degree reset in sentiment as bulls disappear
Let’s dig in.
Blake
Markets in review
EQUITIES: Russell 2000 +0.15% | Dow -0.16% | S&P 500 -0.21% | Nasdaq 100 -0.69%
FIXED INCOME: Barclays Agg Bond +0.22% | High Yield +0.11% | 2yr UST 4.241% | 10yr UST 4.615%
COMMODITIES: Brent Crude -0.89% to $81.32/barrel. Gold +1.04% to $2,746.2/oz.
BITCOIN: +0.42% to $100,206
US DOLLAR INDEX: -0.10% to 108.981
CBOE TOTAL PUT/CALL RATIO: 0.86
VIX: +2.98% to 16.60
Quote of the day
“If you need an indicator to tell you sentiment is extreme, it isn't.”
- Walter Deemer
Market sentiment reset
As they often say, nothing quite changes sentiment like price.
After a few tumultuous weeks of grinding and selling pressure, a strong relief rally has ensued this week across risk assets.
The multi-month ascent higher in bond yields has been arrested (for now), while easing inflation data and strong earnings from several financial companies underpin this week’s strength. The table was set coming into this week following recent short-term oversold conditions and weak bullish sentiment.
The NAAIM Exposure Index, which measures a two-week average of active investment managers' exposure to U.S. equities, rebounded slightly in the latest reading this week after crashing since mid-December. The measure remains subdued at 70.21 after reaching its lowest readings since August 2024 when seemingly overnight everyone became aware paranoid of the Yen carry trade.
This data suggests investors de-leveraged for several weeks following two strong years of market advance.
It is important to recognize that the NAAIM Exposure Index is not predictive in nature and is of little value in attempting to determine what the stock market will do in the future.
The primary goal of most active managers is to manage the risk/reward relationship of the stock market and to stay in tune with what the market is doing at any given time. As such, the NAAIM Exposure Index provides excellent real-time insight into the actual adjustments being made to client accounts.
Meanwhile, another popular sentiment gauge shows a similar pattern amongst the average investor at home.
The American Association of Individual Investors (AAII) Sentiment Survey – a nice juxtaposition of the “retail” investor against the “professional” investor, as described above in the NAAIM Exposure Index – reported that Bullish Sentiment slipped for the sixth consecutive week after its near-term peak on December 4th.
In fact, the current AAII Bullish Sentiment reading (25.43%) sits at its lowest level since November 2, 2023 (24.31%), and registers one standard deviation below average.
Like the professional risk manager, the average investor at home has responded to the recent pullback in markets.
Sentiment gauges are excellent contrarian indicators and most effective in their signal on the downside – similar to the current backdrop.
Despite the choppy price action over the last month and deterioration in breadth and momentum measures, the primary uptrends for the major market indices remain intact, and modest dips should be viewed as buying opportunities. Also, for patient capital, waiting for rallies off confirmed support levels to add to positions is always advisable.
Source: National Association of Active Investment Managers, American Association of Individual Investors
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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