Why 2020's Crash Isn't Lining Up With the 2008 Financial Crisis
As of now, a couple of things are looking different with respect to the 2007-2009 bear market and this year's plunge in both the economy and the stock market:
The Fed has acted much more aggressively in cutting rates, and massive stimulus packages have come much sooner, unlike how the slower-moving financial crisis unfolded. This is likely because the pandemic-related crash in the economy was deeper and unfolded much more quickly.As a result of huge Fed rate cuts and enormous stimuli as soon as the economy imploded, volatility expectations, as measured by the VIX, have plummeted more aggressively, perhaps indicating that the bottom is in, instead of a prolonged bottoming process
Would it be a major surprise if volatility expectations continue to decline? Not really. After all, note how large speculators on CBOE Market Volatility Index futures, who have a near perfect batting average on being wrong ahead of major turns in volatility, have an unusually small net short position on VIX futures. This same group had a huge short position on VIX futures ahead the last volatility spike.
"According to an Evercore ISI survey of institutional equity managers and hedge funds, exposure to more economically sensitive industries versus more classically safer ones has fallen to the lowest ever in data going back to 2004."
- Bloomberg News, April 23, 2020
In the meantime, many sentiment indicators that we track have signaled either multi-year highs in pessimism or levels of fear on par with that of the 2009 bottom, a necessary condition for a bottom to be in place. The excerpt above is yet another example of the extreme caution in the investment community.
I have highlighted many other sentiment indicators during the several weeks. They include: the actions of fund managers, the equity exposure of active investment managers, the behavior of the options crowd with respect to less demand for hedging, due to less to protect, and options buying from a speculative perspective. Additionally, I will note that the 10-week moving average of the percentage of bears just hit its highest level since July 2009 in the weekly American Association of Individual Investors (AAII) survey.
While sentiment measures suggest bullish action in the months ahead, the technical outlook suggests many hurdles ahead in the short term. This might contribute to a slow grind higher, with a lot of sector rotation, as big inflows into defensive names by some fund managers have supported the market, in addition to massive short covering in the second half of March that accounted for a strong finish to last month.
Todd Salamone is Schaeffer's Senior V.P. of Research
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