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From a sentiment perspective, is this what 2017 felt like? Thumbnail

From a sentiment perspective, is this what 2017 felt like?

Someone asked, "From a sentiment perspective, is this what 2017 felt like?"

The short answer is, no, it's not even close, and that's just from memory. 

The beauty of data analytics is we can look back over the past to see how it compares, and what has changed. 

The first chart I drew with YCharts confirms my initial hunch from memory. Investor sentiment reached a bullish extreme in 2017, far more than today. 

  • The first panel is the percentage of allocation to stocks according to the AAII Individual Stock Allocation Investor Sentiment Survey. In 2017, individual investors surveyed by the American Association of Individual Investors stated they had about 35% allocated to stocks. Today, it's less than 31%. 
  • The second chart panel is the US Investor Sentiment percent Bull-Bear Spread, which shows that in 2017, the ratio of bullish vs. bearish reached an extreme bullish level of 44% compared to just 24% today.  
  • The third panel is a sentiment survey of professional investment managers. The National Association of Active Investment Managers (NAAIM) publishes the NAAIM Exposure Index, which represents the average exposure to US equity markets reported by its members. By the end of 2017, the NAAIM equity exposure was 121%, compared to 105% today. 

An even better representation of individual investor sentiment on the stock market is the AAII Total Stock Allocation, which combines stocks and stock funds. In 2017 their exposure reached 72% (highlighted below) and today it's just under 68%. 

And finally, by the end of 2017, expected future volatility, as measured by the Cboe Implied Volatility VIX Index, had trended down to an all time low of 9.14. 

Implied (expected) volatility had never been so low, going back decades. 

What does it mean? 

Investor sentiment is bullish right now, but not nearly as bullish as it was in 2017, so it's a reminder that investor sentiment can continue to get even more optimistic and euphoric than it is today. 

Keynes once said that markets can stay irrational longer than you can stay solvent. 

We can say the same about narratives such as artificial intelligence (AI) and cryptocurrencies like bitcoin. 

There is no upper limit on how silly investors can get.

The upside may be unlimited, but eventually all things come to an end. 

The edge is having a signal that best determines when a trend is ending. 

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Mike Shell is the founder, president, and chief investment officer of Shell Capital Management, LLC, and the portfolio manager of Asymmetry® Managed Portfolios.  Shell Capital Management, LLC, is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies. Shell Capital provides investment advice and portfolio management to clients with separate accounts at Goldman Sachs Advisor Solutions with an investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not individualized advice and is subject to change without notice. Investing involves risk, including the potential loss of principal, which an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise the implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. If this website contains information regarding options trading, please read the Characteristics & Risks of Standardized Options, also known as the Options Disclosure Document (ODD). Options involve risk and are not suitable for all investors. The views and opinions expressed in Asymmetry® Observations and Asymmetric Investment Returns are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.