To The Moon

Investor sentiment improved in Asia ex-Japan from bearish to negative, in Japan from neutral to positive, and in Australia and the UK from positive to bullish. Elsewhere, sentiment remained neutral except in the US, where it stayed negative.

China: Sentiment in China continues to be driven by the policy response to the country’s declining growth prospects. Last Wednesday’s disastrous press conference by China’s main economic planning agency sent the wrong signal to investors, who responded by selling off recently purchased stocks. Saturday’s press conference by the Ministry of Finance was also long on promises but short on specifics, doing little to assuage investors’ angst. In late August, investors thought the authorities had  discovered that the economy had fundamental problems. It was their ‘Interesting. Did. Not. Know. That.’ moment. However, since then, nothing credible has been presented to address the country’s massive debt problem, which is clogging the banking system and choking the economy. Instead, investors’ reactions each time were like that feeling you get when at the restaurant, your blind date orders the salmon and pronounces the ‘l’ - you’re ordering a taxi.

US: Despite having received answers to the three biggest questions that have kept investors on the defensive over the past three years—when will inflation fall back to the Fed’s 2% target, when will the Fed start cutting interest rates, and will the economy fall into recession—sentiment among US investors remains negative. However, this has not stopped the market from climbing the big wall of election worries. If investors want to climb it too, they will need to become comfortably numb to volatility and pretend that Wall Street isn’t in New York City anymore, but in Hollywood, a town that rewards pretending.

In markets where sentiment is negative (e.g., Asia ex-Japan and the US), investors have not become risk-averse because market risk is rising; rather, market risk is rising because investors have suddenly become risk-averse. In markets where sentiment is neutral (e.g., China, Global Developed Markets, Global Emerging Markets, and Europe), neutrality does not indicate ambivalence about future developments. Instead, it reflects a mix of ‘buyer’s regret and seller’s remorse,’ and a ‘commit and keep your options open’ mentality. The only two markets where investors seem confident about their emotions, are Australia (due to a strong gold narrative) and the UK (thanks to a smooth transition of power).

For the next three weeks, investors will likely focus on earnings reports and whether expectations are met or missed. However, beyond that, they know they face a world where countries are increasingly becoming rivals, citizens have become adversaries, and governments suffer from Deficit Attention Disorder (DAD). These concerns will keep volatility elevated and investors on edge for the rest of the year.

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

• US: September retail sales report and speeches from several Federal Reserve officials. Also industrial production, import and export prices, building permits, and housing starts data. Earnings from mega caps like UnitedHealth, Johnson & Johnson, Bank of America, Abbott, Netflix, and Procter & Gamble.

• Europe: ECB’s interest rate decision, Germany’s ZEW Economic Sentiment index, and industrial production and trade balance data from the Euro Area. UK unemployment rate, inflation figures, and retail sales.

• APAC: China Q3 GDP growth rate, retail sales, industrial production, unemployment rate, housing index, and fixed asset investment data.

• Global: Israel’s planned response to Iran’s missile attack, and its impact on oil prices and regional stability.

[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.