INVESTORS' EUPHORIA NEAR HISTORIC LEVELS
FEAR AND GREED
As a new administration is sworn in, the S&P 500 is broaching new highs. This is concerning some of the largest think tanks on Wall Street like Citi, Goldman Sachs, and Bank of America. BofA’s equity strategist Savita Subramanian recently stated that, “sentiment and valuations are becoming euphoric. Our sentiment indicator is now closest to the ‘Sell’ signal since the GFC (great financial crisis).”
Figure 1: The Sell Side Consensus Indicator from Bank of America shows data as of December 31, 2020.
Citi’s sentiment model (Figure 2) paints a similar picture with investors getting more euphoric by the day. This model is at record highs, showing risks exceeding those seen in 1987, 2000, and 2008.
Figure 2: Citi’s Panic/Euphoria model illustrates the record highs of euphoria.
In addition, Goldman Sachs points out that short interest has fallen to historic lows while hedge funds are using record high levels of leverage. This ratio, as well as the rate at which traders are closing their short positions, suggests they’re giving up on the market going down. Low volume in short positions indicates that hedge funds and investors in general are in the throes of excessive speculative enthusiasm.
Figures 3 & 4: Goldman Sachs charts demonstrate how short interest is declining while hedge fund leverage is increasing.
While the state of sentiment is not a singular reason to sell, it is a warning sign we are watching. As Warren Buffett said, “Be fearful when others are greedy and greedy only when others are fearful.”
For those of you who are current clients, now is a good time to review the Risk Profile section of your Day Hagan Client Portal to make sure you are comfortable with how things are currently positioned. In the example below (Figure 5), we illustrate a Moderate portfolio with a baseline risk score of 48 (Model). Currently, one of the strategies being utilized is underweight equities, which gives the current portfolio a risk score of 35. Below each score you can see the probability of potential expected return ranges over the next six months based on the stock/bond/cash allocation. The “Your Risk Number” score of 55 represents a unique number for the individual client based on their answers to our risk score questionnaire. This helps us in your portfolio construction process. If you have not gone through our new risk score process yet, please click here to begin the short questionnaire.
Figure 5: The risk profile example above shows a personal risk number of 55 (based on questionnaire responses) in comparison to the risk numbers of the current portfolio and the baseline model.
As many of you know, our strategies have varying degrees of risk management incorporated into their processes. Another way we manage risk for you is through the selection of the specific strategies and how many assets are allocated to each in your portfolio. This is part of our portfolio construction process. For example, one of our strategies is our Defined Outcome strategy, which utilizes Buffered ETFs (combining downside buffers with upside potential). If you missed our recent blog post “How Buffered ETFs Work” by Natalie Brown, CFP®, I highly recommend you check it out. In our view, and based on the previous charts, now is a great time to reach out to see if your portfolio allocations are appropriate for you. It’s time to talk to Day Hagan.
Regan Teague, CFA®
Senior Investment Officer
Day Hagan Private Wealth
—Written 01.22.2021
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Investment advisory services offered through Donald L. Hagan, LLC, a SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member FINRA, SIPC) and Charles Schwab & Co., Inc. (member FINRA, SIPC). Day Hagan Asset Management and Day Hagan Private Wealth are both dbas of Donald L. Hagan, LLC.