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The start of 2018 in confidence — and the defensives that vanished off the map

Episode

The extreme

Anyone who read March 2018 through the sentiment gauges saw nothing happen. The two indices were merely recovering from February's scare and, for the first time since December, were pointing in the same direction. The real signal was buried one floor below, in the hierarchy among sectors — where defense was abandoned all at once. In numbers: the relative strength of Utilities against the IBOV collapsed from z −0.24 to −1.44 in four weeks, a drop of more than one standard deviation in a single month. The Perene Risk Index returned to 32.1 and Ânima to 56.0, both lukewarm, both neutral.

What happened next

Three months later, in June, capital did the opposite of sentiment: Perene risk exploded from 14.6 to 93.6 while Ânima barely lifted off the ground, from 11.2 to 13.2. The money came back; confidence stayed behind. In September, sentiment finally acknowledged the appetite — Ânima jumped from 11.5 to 54.6 and the cyclicals retook command (Cyclical/Non-Cyclical from z 0.08 to 1.15). And a year later, in March 2019, the market scared itself again on its own: Perene risk slumped from 51.4 to 25.6, while the cross between asset classes barely moved, from 49.88 to 45.84.

What did not happen

The exit from defensives did not become a trend. March's warning — that if the strength of Utilities stayed below −1.4, the adjustment would turn into flight — was not confirmed: a year later, the utilities had reclaimed their defensive premium, with z back to +1.74. The calm did not last either. The reconciliation of the two gauges, which seemed to be March's story, survived only a few weeks — by June flow and sentiment would part ways openly.

The honest verdict

March's most striking move was not the one that lasted longest. The fall of the defensives drew attention and then unwound; the divergence between flow and sentiment, which March barely hinted at, was what would govern the year. The largest deviation of a month is rarely its largest legacy.

Continue reading: Capital before confidence in 2018 · How long sentiment takes to catch up with flow · The two clocks after the election →

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Characters: Structure (intermarket) · Flow (risk appetite) · Mood · Dollar