Using ETF Data to Paint a Sentiment Picture

Transcription

1 Using ETF Data to Paint a Sentiment Picture Tony Welch, CFA, CMT ETF Strategist 02/08/2017 MTA Web Series Please see important disclosures at the end of this report. Periodical

2 What We re Discussing NDR s Traditional Sentiment Metrics Pros and Cons of ETF Flow Data Broad-Market Sentiment Through an ETF Lens Being Smarter About Short Interest Aggregating Stock Sentiment Bringing it all Together 2

3 Go with the flow until it reaches an extreme and reverses. Focus on sentiment today! 3

4 Sentiment polls Excessive optimism coincides with poor returns. 4

5 as well as positioning Average 10-year annualized gain is 3.6% 5

6 and valuations How much are investors willing to pay for a dollar of earnings? 6

7 come together to form NDR s aggregate sentiment indicators. Tree of indicators approach 7

8 Traditional NDR sentiment work suggests pessimism remains on bonds In a zone where bonds tend to do quite well. 8

9 dollar still reversing from optimism 9

10 and gold. Trend trumps sentiment! Stats since 2011 gold downtrend Full history stats back to 94 10

11 Crude sentiment not yet optimistic. 11

12 We have utilized fund data for some time. Shift from active to passive makes this indicator less reliable. 12

13 Combining ETF data with mutual funds does show an outflow but from record levels. Record high in assets as the outflow is turning around! 13

14 In theory, ETFs should open up a whole world of possibilities. 14

15 Not so fast, institutions use ETFs for a variety of reasons. The Institutional ETF Toolbox, Eric Balchunas via Ben Carlson on awealthofcommonsense.com -- Ways Institutions Utilize ETFs: Cash equitization Manager transitions Portfolio rebalancing Portfolio completion Liquidity sleeves Shorting/hedging Long and lend Tactical moves In-kind creation/redemptions Bespoke ETFs Tax-loss harvesting Long-term allocation Personal usage 15

16 However, leveraged and inverse funds still give us a pure picture of the speculative crowd. Steady assets despite the large flows into ETFs in general. 16

17 Comparing recent trends to history gives us a nice risk indicator. Market s upward bias makes it a lot easier to get the buys right. Sells are tough! 17

18 Possible strategy: broad market hedge timing. 18

19 Have used short interest data for a long time as a broad market sentiment indicator. 19

20 Short interest data can help round out the picture for ETFs. Financials sector a good case study. Huge inflows in the first few weeks of November. 20

21 And short interest was trending lower optimism building? 21

22 At NDR, we do a lot of work with the constituents, and sentiment is no different. 22

23 Building a stock sentiment composite. 23

24 Taking XLF as an example again. Elevated sentiment on the constituents of XLF. Subsequent returns have been better following pessimism. 24

25 Not many areas showing pessimism, most areas showing optimism. 25

26 Current Sentiment Picture: Broad equity market sentiment is extremely optimistic on both a short and long-term basis. Bond sentiment is extremely pessimistic. Gold, oil, and the dollar are fairly neutral but reversing from extreme trends. Financials have been a leader on the advance, taking advantage of extreme pessimism in the spring and rising interest rates. However, Financials are now one the most optimistic areas we track while short interest on constituents has picked up and insiders are selling. REITs and Staples would benefit from a reversal in sentiment extremes on stocks, bonds, and the individual companies that comprise those funds. 26

27 Beware the crowd at extremes but also Be Objective and Be Disciplined Our quantitative model still favors stocks because: Stocks are in an uptrend relative to bonds The majority of global markets are participating Global macro data is improving Especially positive on Tech because it is showing relative strength. Within bonds, still aggressive with allocations to high yield and EM debt. 27

28 BOTTOM LINE Do not use sentiment in a vacuum. Use it to help frame risk/reward. Trend trumps sentiment! ETF flows can be a good tool for your toolbox but beware of the limitations. Mitigate the issues by bringing in other data points like short interest, insider activity, and other company specific data. me at: tony@ndr.com 28

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