How Wide Is The Equity Risk Premium?

This will all end badly, we’ve not the slightest doubt, and the only question is when. Probably not tomorrow, as we say. But that’s as far out as we’ll go. ~ Alan Abelson,  “Up and Down Wall Street,” Barron’s, May 24, 1993 (Dow Jones Industrial Average at 3492) via Niederhoffer’s “Practical Speculation”, chapter “The Cult of the Bear”

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at sentiment and positioning across player types, we then dive into the technicals and discuss why overbought usually becomes more overbought. We talk about the fat risk premia on offer + liquidity that is driving the moves in risk assets. And finally, we end with a look at the cheapest assets on offer plus a Florida real estate play breaking out of a MASSIVE base…

Let’s dive in.

***click charts to enlarge***

  1. Last week I shared the Investors Intelligence Bull-Bear chart showing the spread was at its widest point since the Jan 18’ blowoff top. This week we’re going to run through some more sentiment and positioning charts to see how they breakdown across investor types. Here’s the NAAIM Average Exposure Index which measures the reported equity exposure amongst professional money managers. It typically reflects more tactical positioning. It recently hit its highest level since December of 17’ and its third highest point in the survey’s history.

  1. The “Fed has the market’s back” has become a consensus take. This narrative combined with stimulus money and WFH has led to a large rise in speculative activity amongst retail traders. Here’s a chart from SentimenTrader showing Call Open Buys – Put Open Buys (adjusted as % of NYSE Volume) is at an all-time record high.

  1. But there’s one group that stands apart from this speculative orgy and that’s large asset allocators/hedge funds. The chart below shows the general equity exposure amongst this slower-moving class of money managers. It’s still in post-recession/bear market low territory. And even more notable, is how long they’ve been under-invested for. If you think they’re the “smart money” then you could take this as a bearish sign. Or this could be thought of as still yet an untapped source of potential equity demand should they soon shift their risk preferences — I lean towards the latter.
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Disclaimer: All statements are solely opinions and are for educational purposes only.

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