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When mood caught up with money — July 2020

Episode

The extreme

For months, the Brazilian market ran with its legs out of step. Invested capital surged ahead — by June it was brushing the top of the scale — while investor mood barely lifted off the bottom, still gripped by the fear of March. It was an uncomfortable mismatch: money was betting on a recovery that sentiment refused to endorse. July 2020 was the month the laggard finally caught up to the race, and closed it on the side that had fallen behind. In numbers: the Ânima index rose from 33.8 to 41.4, crossing into neutral for the first time since the peak of the stress; the Perene Risk Index decompressed from 99.9 to 71.5 without leaving risk_on; and the Cyclical/Non-Cyclical ratio jumped from z 0.95 to 2.47 in a single month, handing command to the activity-linked sectors.

What happened next

The convergence lasted as long as a single breath. Three months later, in October 2020, the two gauges separated again — and on the worse side. The intermarket grid rose to 67.0, in comfortable risk_on, while domestic mood sank once more: Ânima fell back to 28.6, deep pessimism, and the Perene Risk Index zeroed out. The dollar, which had closed July at R$ 5.2802, climbed to R$ 5.6258. The mood that had touched neutral in July was only passing through; by October it had already returned to the gloom that had stamped the readings since March.

What did not happen

July's reunion did not become a trend. Anyone who read the crossing into neutral as the end of entrenched fear got ahead of themselves: mood did not consolidate the ground — it gave it all back by October. The rotation into cyclicals, that one held for months ahead; but the sentiment that seemed to accompany it did not come along. And the exchange rate, far from yielding to the improvement in mood, did the opposite: it rose. The alignment of the gauges was real. It was not durable.

The honest verdict

July's reading got the instant right — the three gauges did in fact align — but confused instant with trend. Six months ahead, the realized return was +16.5%, above the central band of the distribution of similar configurations; and even so the deterministic verdict was one of ambiguity, over just twelve comparable episodes and wide dispersion. The final number was good; the conviction it deserved was not. An alignment of gauges marks a moment — it does not promise that the moment will last.

Continue reading: Mood versus appetite — Ânima × Perene Risk · How long mood takes to catch up with flow · The April 2020 turn →

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Characters: Flow (risk appetite) · Mood