FOMO makes a return to markets

MARKET: Investor sentiment has seen a sharp increase in the past six weeks, according to our proprietary indicator. Now at the highest levels in near two years (see chart) and a flashing yellow warning. Its the first sign of investor FOMO or Fear Of Missing Out, with the indicator surge driven by large performance-chasing fund inflows. The twin bull market pillars will be tested this quarter. As Q1 earnings start April 12th and June is set for the first ECB and Fed interest rate cuts. Markets are due a breather or 5% pullback, and this sentiment surge adds to our conviction. But with fundamentals strong and cash on the sidelines it shouldn’t be feared.

SENTIMENT: The sentiment index spike has been driven by rebounding ETF flows. With significant inflows for four straight weeks, focused on US large caps. We are not surprised by this. With the large amounts of cash on the sidelines and the remorseless fundamentally driven rally we have seen since November. VIX volatility has also fallen back towards historic lows, and AAII retail investor sentiment is near the most bullish levels of the year. Only the equity put/call ratio remains near average. This sentiment indicator spike is a contrarian signal of lower returns ahead. But not of sharp weakness. It historically works better at signaling bull not bear markets.

INDICATOR: Our proprietary eToro investor sentiment indicator tracks the VIX, fund flows, retail sentiment, and the put/call ratio. A low number is contrarian bullish, with more investors left to turn positive the market. Whilst a high number is a signal for contrarian caution, with investors already bullish. It’s typically been a better buy than sell signal. It is specifically made of 1) Equity mutual fund and exchange traded fund (ETF) flows. 2) Long-running American Association of Individual Investors (AAII) sentiment survey. 3) The VIX index of expected 30- day S&P 500 volatility. 4) S&P 500 put/call ratio, proportion of put buying (option to sell) vs calls (to buy).