E One Market, Two Different Sentiments

The market is driven by fear...fear of losing and fear-of-missing-out.

Fear is present today's market, but it is unevenly distributed; there is a divergence between the AAII survey, and both the put:call ratios and Robinhood data.

Fear among the AAII individual investors remains above average, even though it has seen a reduction recently. The AAII survey has been replicating the pattern from 2018 and is at a point that suggests a local top is forming in the SPX (chart below).

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Although the AAII pattern suggests a short-term local top may be forming in the SPX, the elevated level of fear in the AAII is what is normally observed near major market bottoms, not market tops, and implies a longer-term bullish bias to the stock market.

The Robinhood data, on the other hand, demonstrates an almost exuberant level of confidence (fear-of-missing-out) in the market; the number of holders in SLY (S&P 600 small-cap ETF) has increased 200% since the crisis started (chart below).  This lack of fear is normal when close to market tops.

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The 8-day MA of the equity put:call ratio has started to turn back up from a level (~0.5) that corresponds with local tops in the SPX (chart below).

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Likewise, the 8-day MA of the total put:call ratio has started turning up from a level that, in the past, has corresponded to local tops in the SPX (chart below).

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The divergence between the AAII survey, and both the put:call ratios and Robinhood data may be indicating a difference between long-term and short-term drivers. The AAII responders tend to be older individual investors who still have a memory of the GFC seared into their memories (PTSD), while the Robinhood and small option players tend to be younger with less trauma coming out of the GFC. 

There is plenty of fear present to drive the market in the long-term, but there is too much fear-of-missing-out in younger investors which makes the market vulnerable in the short-term.

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