Axioma ROOF™ Score Highlights: Week of November 18, 2024

欧洲期货交易所Eurex
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Investor sentiment declined last week across all markets we monitor as investors globally reassess the implications of a second Trump presidency for everything from the strength of the USD, monetary policy, global trade, and their own markets. Only investors in Australia and Japan managed to maintain their recent optimism, though without further gains. The weakening Yen against the US dollar and the perception that Japan will benefit from the US’s trade policy of decoupling supply chains from China under the Trump administration continue to boost sentiment among Japanese investors.

Sentiment in other markets ended the week in neutral, with only investors in the UK and Global Developed ex-US maintaining a positive outlook. In contrast, sentiment in China resumed its downward trend, weighed down by ongoing disappointment over the authorities’ latest economic stimulus efforts. The Chinese market has now lost two-thirds of its September stimulus rally, returning to levels not seen since August.

Although Donald Trump strikes me as someone who is generally not superstitious, even he must have felt as if he’d made a substantial withdrawal from the karma bank by seeing all three races: the White House, the Senate, and the House of Representatives, go his way.

Aware of his own divisiveness, Trump has been appointing equally polarizing figures to key positions in his administration. He has then leveraged his most powerful tool, an ultimate loyalty reward program, to foster a widespread and unwavering allegiance. This strategy will be tested over the next few weeks.

Absolute power in politics tends to cut both ways with investors. On the one hand, they are aware of how often it deforms the moral character of people who possess it, which is why they generally prefer the divided government election outcome; on the other hand, it represents a kind of perfect capital that investors are instinctively averse to seeing wasted.

After a knee-jerk relief rally that democracy had survived, and some obvious repositioning – buy brown energy, sell green energy, buy prison companies, sell vaccine makers, buy banks, sell real-estate, etc. – investors now seem to be having a Jerry Maguire moment with the Trump administration. And since at this time, it is doubtful that anyone with an internet connection is getting unbiased advice, it seems more prudent from now until January 21st, to treat investing as more of a spectator sport - you learn more sitting still than chasing after.

Globally, the results of the US elections will continue to dominate market sentiment and direction. Investors know who won, they anticipate a peaceful transition, and they recognize that one party now holds full control. They also understand that changes are coming, but the extent and impact of these changes remain uncertain. Sentiment swings positively one week when Trump announces plans to address specific issues, only to turn negative a week later when he details his approach. This ongoing uncertainty is likely to result in a reactive short-term investment focus, as investors respond to frequent volatility spikes, and a constant need to keep up with Trump.

When uncertainty and volatility are high, even the smallest allocation in your portfolio needs to justify what scarce, potentially high-cost (losses) real estate they occupy. Every sector, style, stock selection bet - every single exposure must continually earn its keep. The meter is always running.

Haven’t recovered your buying price or reached your target one yet? Out.

Want to bet on new exposures? First neutralize previous ones.

Changed your investment thesis? Time to unload the exposures designed to harvest the old one.

No room for redundancy here, nor sentimentality for that matter. Out with the old, in with the new.

But what if this position has sentimental value?” you say. Take a screenshot of it. Then out it goes.

It’s one thing to be sentimental, it’s another to hold on to positions that recent developments tell you can no longer have realistic return expectations, or which long ago stopped being in favor with Trump.

Uncertainty is no insignificant hurdle. It’s an insidious force to be reckoned with, tripping up mechanisms in the brain otherwise reliable when it comes to making rational investment decisions. Coupled with high volatility, it can be devastating to unsuspecting portfolios, as was observed in early August this year, and throughout Trump’s first term. To Trump-proof your portfolios in 2025, adopt a faster-safer-cheaper investment process.

 Potential triggers for sentiment-driven market moves this week[1]

  • US: Manufacturing and Services PMI, housing starts, and existing home sales data. Speeches by several Fed officials. Anything Trump says, does, or just even hints at.

  • Europe: Speech by ECB President Lagarde. Eurozone consumer confidence, manufacturing and services PMI data. UK inflation and retails sales data.

  • APAC: BoC interest rate decision. Japan inflation, PMI, and trade balance data.

  • Global: Any retaliation by Iran on Israel, said to come before January. Any signs at next weekend’s APEC and G-20 meetings that China is gearing up for Trade War II.

[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the markets we follow:

How to Interpret These Charts:

Top Charts:

The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

  • A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).

  • A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).

  • A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:

The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

  • When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.

  • Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:

The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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