Confidential: Global Pessimism
Comment of the Day

July 22 2022

Commentary by Eoin Treacy

Confidential: Global Pessimism

Thanks to Iain Little for this short chartbook depicting various measures of how pessimistic investors are.

Eoin Treacy's view

Here is a link to the full report. 

I have to admit I have a sense of caution in holding short positions when so many people have already sold, and many shares are down in excess of 70%. However, in order for a decline to reverse we need to see some evidence that hopes for better outcomes are in fact realizable.

Here is the commentary Iain attached to his email which may also be of interest:

These are the “People Pattern” charts that show the extreme and sustained pessimism in terms of market sentiment today.

It is not enough for pessimism to be extreme though extremes certainly help in identifying lows in markets as they show how negative investors are, and therefore how uninvested or cautious they tend to be.  This creates the conditions for the reversal of a “bearish” trend towards “bullish”.

If pessimism is also sustained in terms of length of time, it is more powerful still.

Behavioural market psychologists would say that sustained bearishness gives more time for a greater number of market operators to “short” or reduce their equity positions in greater volume.  Therefore the subsequent reversal of trend amidst improved psychology is usually more pronounced and long-lasting.  What is then needed is liquidity to drive the buying, a factor arguably missing today.

Both conditions -extremity of pessimism and duration of pessimism- are present today.  The current 8 months of negativity is one of the longest in nearly 40 years.

These 2 factors guarantee nothing in terms of short-term market direction, but they are certainly a “condition precedent” for longer term and sustainable recovery.

One thing that is also worth considering is counter trend rallies in bear markets have produced some of the largest individual upside days in market history. Bouts of acute pessimism contribute to short-term oversold conditions but without a ground swell of the liquidity necessary to drive new speculative interest, the bull will have difficulty gaining critical mass. The clearest sign of that is an inability of the market to hold rallies.

10-year yields compressed in a dynamic manner over the last two days. That reflects both the willingness of the bond market to price in the potential for a recession and also the potential the Fed will be cutting rates before long.

The stock market has not fully priced in the potential that economic growth and therefore earnings will need to decrease before a recession can start and the remedial action can take place. This is one situation where looking through the problem, to the solution, and skipping the intervening difficulty is unlikely to work as well as in the past. The reality is the inflation scare is challenging the reliability of many trading strategies. 

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