Monday, 3 February 2014

Well what a day. Volatility and sentiment provide the next insights

Forget the Dow Jones Index being off 300 points, the charts to focus on are the volatility and sentiment ones. 

Take the VIX.  The volatility index has closed above the 20.0 level twice before in the last year...but it did not stay there for long. 

And this time?  Well I am guessing that investor sentiment is going to be very important.  On that basis, the following two charts are telling me that we have not yet reached an obvious sentiment low.  Certainly investors are pessimistic...

...but it is nothing we have not seen periodically before over the last few months and years

Now the above indices and others (such as the AAII index with its current very high 'neutral' weighting) have all been calculated in the last week or two.  Current market conditions should impact these sentiment indices negatively.  So we are building into a sentiment low and with that opportunities are rising. 

One area with slightly clearer capitulation statistics are the emerging markets.  Here we are closer to real (recent) lows in outflows. 

 Fast FT had a useful statistic on the emerging markets which provides good insight. As the saying goes, is the baby being thrown out with the bathwater?

The MSCI Emerging Markets index is now trading at only 8.9 times expected earnings, compared to 14.4 times for global stocks as a whole.

Of course differentiation is the key.  Not all emerging markets are made alike...

 ...but that should just drive differentiated stock picking opportunities. 

Volatility and a stock picker's market feel as if they are linked together in 2014.  It is time to know your favourite themes and stocks and look for the opportunities to embrace low sentiment.  I anticipate being a clear net buyer during Tuesday trading.

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