Whip it Good

As Devo so aptly put it in 1980, when a problem comes along, you must whip it. Unfortunately, when the problem is investor confidence, it's not as easy as simply cracking a whip.

The model I use for risk-on, risk-off navigation of the market has five components. Two of them are sentiment based. The Vix component has an element of expectational sentiment due to the sensitivity to the implied volatility embedded in the formula from which it is derived.

The direct sentiment component, the AAII survey, is a weekly reading of the opinions of real investors with skin in the game. The bullish reading (shown above - at 25%) has yet to rise above its long term average reading of 38% since the Trump bump last fall. Bull market in pessimism indeed!

These two model components have begun to whip back and forth with every headline out of either Washington or Pyongyang, and investors are not happy. I guess I should accept the failure of my model to cope with such binary non-economic variable such as geopolitical event risk, but it still bothers me. But in this very long in the tooth bull market, it stands to reason that investor behaviour is fraying at the edges. As Yogi said when asked about poor attendance at the ballpark, "if people don't want to come, you can't stop 'em".

I'm thinking back to the time when I was eight years old and the Cuban missile crisis was in the news. The school deemed it necessary that all students learned a nuclear survival protocol which consisted of hiding under your desk. When you're eight you really don't understand why anyone would want to annihilate a place like Kitchener, my home the time. I still don't get it at sixty-two.

So I get why we are risk-fatigued and the market is increasingly losing sponsorship. With the current news backdrop, the compulsion to invest is in severe decline. Net outflows are still being experienced by the major asset gatherers. An investing malaise has descended on the stock market. But with earnings still rising and rates so low, however, there is still no alternative, hence no correction.

With those happy thoughts out of the way, I note that the TSX has dug in its heels in August on the back of higher metals prices and a couple one-offs like GC and TD. The RSI rose to 50 giving a positive Risk Model reading. The gold rally has been accompanied by rising copper, keeping the ratio in positive mode.

Now that the investing crowds are back from the lake, we will see how much the market has left in it. But new catalysts for a rally are hard to find.

The current commodity rally, mainly metals, is encouraging but seeing both gold and bonds rally is a worry. This non-confirmation must resolve itself for a true late cycle environment to develop. The risk model kicked back into 'risk-on' last week because of the decline in the VIX. With the threat of a government shut-down diminishing because of Harvey's more pressing requirements, maybe we can fool the growing consensus around a 'bad' September market. Maybe we can whip it good!