In their latest technical analysis report, UBS' Michael Riesner and Marc Muller warn that, it’s been a long time since we had such a relatively clear and one-sided picture on the sentiment side, which we can just describe as tactical contrarian and too complacent.
With the vertical post-election rally, the reflation trade with the relevant consequences on sector performance got a quite obvious and consensual theme. It caused significant spikes in our sentiment work and a big decline in the put/call ratio as well as in the market volatility, as the basis for a relatively high SKEW/VIX ratio, which has been moving into a contrarian sell territory.
Both the AAII Bullish Consensus and the Investor Intelligence Bullish Consensus have reached 50%, which is contrarian.
The CBOE put/call ratio has been deteriorating to contrarian low levels, which means there are no more hedges in the market.
Again, this does not necessarily mean that the market has to break down tomorrow. It just means that the market is vulnerable for any kind of negative surprise, from wherever it comes.
Furthermore interesting is the big decline in the neutral camp of US retail investors, where the number of neutral/undecided investors has been deteriorating to the lowest level since September 2014, which was prior to the washout into October 2014 before resuming the underlying bull trend.
Translated, it means that retail investors have a very high conviction, which makes the high bullish consensus to a pure contrarian indicator.
Conclusion: Our sentiment work has reached contrarian territory, which minimum limits further upside and more likely leaves the market vulnerable for a pullback, which can last several weeks to bring down the sentiment towards levels that have a better risk/reward for calling/expecting the next bigger tactical rally.
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