With bankrupt Hertz surging again on Tuesday after a sharp overnight drop despite even CNBC explaining - much to Cramer's disappointment - why the stock is completely worthless behind billions in impaired debt and the only reason it is being bought is on expectations that greater fools will emerge, the FOMO mania is clearly raging among the retail investor community, which also explains how - as retail investors became the dominant price-setter in the market - stock trading has made even less sense than usual (take a look at BA, HTZ, CHK, NKLA and other popular Robin Hood stocks), the question is when/if institutional investors will come back and start chasing risk assets.
Answering this question, Goldman overnight writes that in recent weeks, most positioning indicators have become more bullish from the extremely bearish levels seen in March, adding that overall cross-asset positioning still seems slightly below neutral levels, with the bank seeing "potential to increase further if macro data continues to improve and lockdown easing remains successful" as the average percentile of the sentiment indicators Goldman tracks now at the 40th percentile level, up from the 5th percentile reached in March.
And while some positioning metrics, such as systematic investors, equity funds flows, and equity futures positions are still far from sending bullish signals - certainly far from the retail euphoria as millions of Americans working from home have decided to try their hand in the stock market casino - and could contribute to a near-term continuation of the recent pro-cyclical rotation, Goldman warns that "the large increase in retail investor activity, and narrow market breadth seen during the initial phase of the equity rally, could indicate that there is more stretched positioning in some pockets of the market." Moreover, the bank warns, "options positioning indicators have started to signal the first stage of FOMO, and investors have likely hedged the upside tail via options" while at the same time fund flows into riskier credit have also increased materially, while equity fund flows turned positive last week.
Keeping a contrarian bias, Goldman writes that going forward, the bank which still has a 3,000 year-end price target would turn more cautious "if investor sentiment and market pricing of growth become too bullish, given the potential risks related to a second wave of infections, US-China trade tensions and US elections" even as the bank adds that at the moment, neither looks particularly stretched considering the recent improvement in macro data, with Goldman's markets team framework suggesting that there is still upside to cyclical pricing if the consensus moves closer to our forecast.
Is Retail Leading the Rally?
As we pointed out first three weeks ago, many indicators confirm strong in retail investor activity in the US. Furthermore, recent data showed that US personal income has surged 10% MoM in April, given large support from government transfers. At the same time, consumption expenditure dropped by 14%, leading to one of the largest increases in US savings. In annualized terms, US savings increased from US$1.4 tn in February to US$6.2 tn in April. Unsurprisingly, the US savings rate is now at levels reached during WWII
Furthermore, as we also showed in May, although US savings remain highly skewed towards cash, recent data shows a significant pick up in retail investors' activity in financial markets.
This confirms the record increase in US savings - largely thanks to government stimulus payments and various backstop programs - has supported retail investments into riskier assets. Data collected by online retail brokers shows a large spike in the number of retail trades in the last months. This has likely supported retail favorite stocks, which have outperformed recently.
Additionally, as reported last week and as Goldman's options strategy team confirms, there has been a large increase in retail activity in the option and shares market. In fact the share of small amount trades (< US$2,000) has increased to 2.3% of total trading volume, up from 1.5% at the beginning of the year. This is even more relevant for options, where the percentage of options volume from one-contract trades has surged to 13%. Not surprisingly, the options call vs. put volume ratio has turned the most bullish among the indicators Goldman tracks.
With Retail unleashed are there already signs of FOMO?
According to Goldman, over the last week, options positioning has shown the first signs of FOMO:
- the call vs. put volume ratio has reached elevated levels, in particular in Europe
- spot/vol correlation has turned less negative, suggesting investors' demand for call options has put pressure on volatility
- out-of-the-money calls have become more expensive, relative to at-the-money, as highlighted by the increase of call skew across regions
That said, options positioning is not yet at the stretched levels seen during the melt-up in January 2018, when bullish positioning was extreme. Shorter-dated call skew has become more expensive, but long-dated skew remains much cheaper, suggesting investors are rushing into short-term levered positions while keeping a cautious stance longer term.
Finally, we summarize Goldman's key positioning indicators below:
- Systematic strategies: CTAs and risk parity strategies' equity positioning remains at an historical low. Since the start of May, CTA trend-following funds' performance is down 5% while the S&P 500 is up 13% and the GSCI 23%. CTAs performance beta to the S&P 500 is around 0, close to historical lows (Exhibit 2). As realized volatility during the rally remains elevated, and bond volatility has plunged vs equity, risk parity strategies have not re-risked yet and retain high exposure to fixed income.
- Options: Options positioning indicators have started to signal the first stage of FOMO. Since the recovery, investors have likely increased their exposure to equities with options, as the volume on calls rose in comparison to puts (Exhibit 3). Both EURO STOXX 50 and S&P 500 call-put volume ratios are close to historical highs. In the US, the increase in call option activity has been primarily on single stock options, suggesting investors have selectively re-risked in equity. The call skew has also started to increase, and spot-volatility correlation has become less negative, suggesting investors have hedged the right tails in equity.
- Fund flows: Fund flows remained defensively skewed, although last week, equity fund flow turned positive for the first time since April and money market funds registered the first weekly outflow (Exhibit 4). Since February, money market funds have attracted most of the inflows (c.US$1,200 bn) and equity the largest outflows (c.-US$70 bn). Corporate bonds fund flows have recovered more quickly, as they have been positive since the bull market began. US HY inflows have already outpaced the outflows during the bear market.
- Markets indicator: Following the initial phase of the bull market, characterized by defensive leadership, investors have shifted towards more pro-cyclical assets, suggesting more constructive sentiment on growth. After dislocating from the end of March to the end of April, the relationship between cyclicals and defensives performance and equity has now converged to its historical pattern (Exhibit 5). This suggests growth optimism is now leading the risky asset rally. Our Risk Appetite Indicator has sharply increased to neutral levels, from the historical low reached in March. In order to push the GS Risk Appetite Indicator into positive territory, a continued improvement in macro data is required.
- CFTC Futures positions: US equity net futures positions have remained light overall, and have room to increase further in our view. Hedge funds' net long equity positions have continued to decline while asset mangers' net length, which is usually more correlated with performance, has increased modestly (Exhibit 6). US equity future asset managers' positions are now c.US$90 bn, still down US$110 bn from the highs seen in January. Futures positioning into safe assets such as gold and the JPY remains strong.
- Surveys indicators: The AAII Bull vs. Bear indicator, which tracks equity sentiment across more than 300 individual investors, has picked up in the last two weeks and is now closing the large gap with 1-month equity return (Exhibit 7). The Investor Intelligence survey, which tracks sentiment from more than 100 independent investment advisors' newsletters, has already picked up to neutral levels.