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ChartBrief 82 - Institutional investor confidence indicates capitulation

The May reading of the global State Street Investor Confidence Index rose +5.1 pts to 102.5 which indicates institutional investors are feeling more confident (readings above 100 indicate increasing equity allocations). The improvement was primarily driven by North American institutional investors, as the graph below shows - with investors seemingly capitulating and being swept up in the unrelenting rally. The previous weaker readings in my view probably reflected a combination of concerns about high valuations and elevated policy/geopolitical risk. This capitulation by institutional investors may end up adding further fuel to the bull market, which looks increasingly at risk short-term based on a number of timing and risk indicators that we are monitoring.

For reference, here's some notes from State Street on the indicator:

"The Investor Confidence Index was developed by Kenneth Froot and Paul O’Connell at State Street Associates, State Street Global Exchange’s research and advisory services business. It measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors."

The global institutional investor confidence index ticked back above 100 in May.

The main driver of the increase was the rebound in the North America index, which looks as thought it could be representative of capitulation and potentially drive a blow-off top in the market.

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