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The euphoria that switched chairs — May 2021

Episode

The extreme

Anyone looking only at the thermometer would have seen a party. The two domestic mood axes rose together, with unusual force, to the near-ceiling of the scale — an appetite that looked unanimous. But the market's internal composition told the opposite story: while the investor was celebrating, he was quietly switching the chair he sat in, abandoning the economic cycle and running for defense. In numbers: the Perene Risk Index jumped from 55.9 to 94.3 (full risk_on) and Ânima went from 63.6 to 84.6 (extreme optimism) — at the very same time the cyclical/non-cyclical ratio plunged from z +0.41 to −1.09, almost a point and a half of deviation in thirty days.

What happened next

The flight to defense was not a spasm — it was the start of a process. In August 2021, three months later, the cyclical bet sank even further: the cyclical/non-cyclical ratio touched z −1.87, the most depressed reading in the series, with utilities recovering relative ground. In November, the market attempted a patch from within without switching sides, still in risk-off. And only in May 2022 did cyclicals lead again — z +1.01 — but defense gave back the post without ever having confirmed the thesis that had placed it there.

What did not happen

The euphoria of 94.3 did not become continuity. Anyone reading the extreme optimism as a sign of more gains ahead would have been mistaken: by August the Perene Risk Index had already collapsed to 21.8, back to risk_off. The terrain of extreme optimism is not comfortable to inhabit — it rarely guarantees what it promises. And the defensive rotation, which started quietly, did not reverse either: it deepened month after month.

The honest verdict

The thermometer got the euphoria of the moment right and got what it meant wrong. The information was not in the high number of the mood, but in the divergence between it and the structure: when aggregate appetite rises while the sector anatomy refuses the cycle, it is the structure that tends to lead. The Radar logged the disagreement; it admitted, at the time, that the base of comparable cases was too shallow to settle merit.

Continue reading: The middle of 2021 — inflation returns · Cyclicals vs. defensives: who leads each regime · Ânima vs. Perene Risk: mood against appetite →

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