What technical and sentiment analyses say about equity markets

As COVID-19 confounds traditional fundamentals, alternative indicators suggest multiple reasons for optimism

What technical and sentiment analyses say about equity markets

For many investors, trying to navigate the COVID-19 market environment with traditional measures of stock value has been like flying blind through turbulence. Many variables are still X factors, including when it’s safe to fully fire up the global economic engine, when we’ll get a vaccine, and whether consumers and businesses will be comfortable enough to resume “normal” activity.

With so many blanks left unfilled in traditional models, it makes sense to look afield and consider other forms of market analysis. That includes technical and sentiment analyses, which John Christofilos, senior vice-president, chief trading officer and Investment Management Operations Strategy at AGF Investments, discussed in a new blog post.

“Among the technical instruments we watch every day, the most obvious is the S&P 500 index,” Christofilos said, noting how the benchmark broke through the key inflection point of 3,232 at the end of July. He said that if the index could hold at that level, it would suggest a base of support forming around 3,300, hinting at the possibility of a breakout to 3,457. But if it drops back to the low 3,200, there’s a potential opportunity for investors to put more money to work in equities.

He also pointed to the VIX, which spiked during the throes of the COVID-19 crisis and has since levelled off, though volatility remains historically high. “The VIX is above 22 this month, compared with sub-15 pre-pandemic,” he said, adding that a sustained measurement below 20 would represent a bullish market signal and a vote of investor confidence in “expectations for the course of the pandemic and its resolution.”

Looking at the U.S. dollar, he said AGF expects the USD index to see a new support level at 90; if it falls below that, it would be a bullish sign for gold and a very good indicator for emerging markets, particularly those with considerable US-dollar-denominated debt.

With respect to sentiment analysis, he pointed to trading activity among four key investor segments. While hedge fund managers have done a bearish-to-bullish turn as the world transitions from COVID-19 panic to cautious recovery, long-only asset managers have maintained their generally bearish constitution. Advised retail investors appeared neutral-to-bullish, and were expected to adopt a more constructive stance on markets assuming the rally continues to run.

“The fourth group of investors we monitor for sentiment is self-directed retail investors, and they merit special focus,” Christofilos said. Such investors have been extremely bullish and emerged as a powerful driving force in the market’s rise, accounting for 26% of daily trading volume in the U.S., up from 8% last year.

“However, retail investors can be subject to quick turns in sentiment and to panic,” he said. “Bad news, even if its impact is only short-term, could lead to a mass exodus from markets.”


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