Structure leads mood: what 2016 taught about who arrives first

Derivative

The extreme

In March 2016 the structure of the market's relative prices turned first. Capital left the havens and reached for the squeezed assets; the intermarket rose to 43.3, the third straight month of improvement. Sentiment, though, had not yet decided where to go — and, when it decided, it decided wrong in pace and direction. It was the usual queue of a recomposition: allocation in front, mood behind, rates far behind.

What happened next

The order grew clear over the year. In June 2016 mood shot up late and in excess: the Ânima nailed 89.7 (extreme optimism) while the structure barely stirred (34.8). In September the enthusiasm pulled back without warning. Only in March 2017 did the structure cross firmly into strong risk-on (70.6) — and in that same month the Ânima fell back to 36.3, cooling while capital was heating up. The Selic, then, finally gave way: from 14.25% to 12.25%, a year after the turn.

What didn't happen

Mood did not work as a compass. Anyone who waited for sentiment to confirm "to be sure" entered in June, at the top of the euphoria, and then watched the index cool month by month. And anyone who waited for the rate to fall as a sign the recovery was real waited a full year. Neither one — neither mood nor the Selic — arrived at the moment of the inversion.

Honest verdict

The structure of relative prices led; mood overshot and lagged; rates confirmed last. Sentiment is the most volatile instrument on the panel — the first to overshoot in both directions and the last to serve as proof.

Continue the story: The 2016 bottom — structure before mood · The first rate cut · What the Ânima Index is →

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Characters: Structure (intermarket) · Mood · Rates (Selic)