Fear of Messing Up

Suppose they gave a party and nobody came.

It would seem that last week's rally has some skeptics. The market's breakout was met with more selling than buying, as measured by the Chaikin money flow indicator. This indicator tries to measure the force of a move. Force, in physics terms, is mass times acceleration. The money flow indicator is similarly measuring the volume confirmation of a given move in stock prices.

SPDR S&P 500 ETF

As we se from the above chart, the recent move has been unconfirmed by volume. This is a deserved lack of conviction, given that the entire premise of the market rally is based on a couple of optimistic tweets from BoJo and Pres Cheeto. Hardly the stuff upon which to build a high conviction trade.

But fear not dear reader, the real basis for this trade is developing slowly in the background. The combination of stronger than expected earnings and a positive equity risk premium is very supportive for risk taking. Combining those preconditions with a decline in the high levels of pessimism created by the Brexit/Trade War headlines, and stocks are poised to do well into year end.

FOMO, the fear of missing out, has been replaced by a tentative response to the rally. FOMU, fear of messing up, is now the prevailing sentiment. After running to the comfort of bonds and bond-like equities (Reits, Utilities and Consumer Staples), investors are loath to re-risk their portfolios. They are hoping for more of the comforting negatives that escalating U.S. - China trade battles and 'hard' Brexit previously provided.

Hence the lack of commitment seen in the Chaikin indicator.

As we are now pausing to evaluate the legitimacy of the recent moves to new highs, there is a chance for the high levels of cash and defensive posturing to be 're-risked'. If investors can only get over their fear of messing up.

Risk Model: 5/5 - Risk On

'Nuff said here. There is still lots of room for sentiment to improve. The Bull/Bear ratio is coming off a bottom and has yet to regain the levels typically seen at the highs.

AAII Bull/Bear Ratio