Huge week for economic data – with all eyes pointing towards Friday’s labor report. Consensus estimates are calling for +200,000 job growth in Friday’s nonfarm payroll number. For the 54th time, “weak” now means “good”, i.e. labor weakness is the foundation for a Fed pivot on rate policy. Likely a slowdown in labor is underway but we need an UGLY labor report to really get things moving in the other direction. We’ll know Friday at 8:31am EST.
A Fed pivot combined with weak investor sentiment is the recipe we are looking for. Investor sentiment remains weak, as evidenced by the put/call ratio on the VIX volatility contract. Usually a low put/call ratio is indicative of investor bullishness – lots of call buying. But when you are betting on something that goes up when things get volatile (and that’s what the VIX contract is) you have to think in the inverse. Call buying on the VIX is about people betting on fear and volatility. And right now, you have to go back to the very early, very dark and very lonely days of COVID to see the put/call ratio on the VIX as upside downs as it is now. A low put/call ratio on the VIX is signaling a nervous investor community…consistent with elevated levels of bearishness and high cash levels in fund manager surveys.
There’s plenty of fear already priced into the market. Bull/Bear ratios, and elevated cash levels, and “normal” put/call ratios on the broad market, very, very bearish investor behavior are a great contra-indicator to the direction of the market. Sentiment follows price. The only way to get rid of the bearishness is to have things go up in price and sentiment will follow along.
Richard Barrett
Chief Investment Officer
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