Systematic Relative Strength

After the first 30 or so responses, the established pattern was simply magnified, so we are comfortable about the statistical validity of our sample. Most of the responses were from the U.S., but we also had multiple advisors respond from at least four other countries. Let’s get down to an analysis of the data! Note: You can click on any of the charts to enlarge them.

Question 1. Based on their behavior, are your clients currently more afraid of: a) getting caught in a stock market downdraft, or b) missing a stock market upturn?

Chart 1: Greatest Fear. From survey to survey, the S&P; 500 rose around +2.2%. Overall client fear numbers continue to improve, with the fear of a downfall group falling from 81% to 67%. On the other side, we saw the opportunity group rise from 19% to 33%. The overall fear numbers are now sitting at their best levels we’ve seen since in just under one year. If the market can continue to rally, we’ll probably continue to see an improvement in client sentiment levels.

Chart 2. Greatest Fear Spread. Another way to look at this data is to examine the spread between the two groups. The spread continues to fall, from 63% to 34% this round.

Question 2. Based on their behavior, how would you rate your clients’ current appetite for risk?

Chart 3: Average Risk Appetite. The overall risk appetite number moved higher with the market, from 2.70 to 2.80.

Chart 4: Risk Appetite Bell Curve. This chart uses a bell curve to break out the percentage of respondents at each risk appetite level. The bell curve continues its recend trend towards more risk. The heaviest concentration remains in 2 and 3, but the risk appetite of 4 is creeping higher.

Chart 5: Risk Appetite Bell Curve by Group. The next three charts use cross-sectional data. This chart plots the reported client risk appetite separately for the fear of downdraft and for the fear of missing upturn groups. This chart sorts out as expected, with the upturn group wanting more risk than the downturn group.

Chart 6: Average Risk Appetite by Group. Here we have a bit of a mixed bag. The upturn group’s risk average shot higher with the rising market, while the downturn group’s average fell. Both groups went their “correct” way, with the upturn group wanting risk and the downturn group wanting safety.

Chart 7: Risk Appetite Spread. This is a spread chart constructed from the data in Chart 6, where the average risk appetite of the downdraft group is subtracted from the average risk appetite of the missing upturn group. The spread continues its recent trend of whipsawing (again).

This survey round, we saw the market rise a respectable +2.2% over two weeks, and most of our indicators respond as they should. The greatest fear numbers hit the best levels we’ve seen in one year, with the downturn group at a respectable 67%. The overall risk appetite number continues to click higher, in-line with a rising market. Client sentiment levels have definitely been improving as the market rallies, and should continue to do so if the rally can hold on.

No one can predict the future, as we all know, so instead of prognosticating, we will sit back and enjoy the ride. A rigorously tested, systematic investment process provides a great deal of comfort for clients during these types of fearful, highly uncertain market environments. Until next time, good trading and thank you for participating.