Extreme Pessimism & Oversold Indicators
- Mike Zaccardi, CFA, CMT
- Dec 6, 2021
- 3 min read
A selloff in the last several days leaves stocks in short-term oversold territory as sentiment turns sour
Bigger picture, investors are “all-in” on equities which suggests a cautious stance if/when we see a December rally
A stealth correction has been ongoing much of this year in small caps, value stocks, and ex-US stocks (particularly EM)
Normally a cheery time for investors, the latter half of November and the start of December has featured a kick up in volatility. Small and mid-sized growth stocks have gotten smacked while value equity and foreign shares continue to come under pressure. Emerging markets, while outperforming last week, touched a 52-week low on Tuesday.
Sentiment Wanes
An up-down-up-down trading pattern recently leaves investors wary of further volatility. To wit, surveyed sentiment readings have collapsed to extreme pessimism. Readers might roll their eyes at that statement considering it was just a handful of days ago when the S&P 500 notched all-time highs. Recent market-action shows, however, that corrections seem to be happening at a faster clip. So sentiment can flip on a dime.
Watch Out for a Snapback Rally
This early-December drop could help promote a rebound later this month when seasonality improves. December is a very strong month for stocks (according to history), but those gains are often found in the back half of the month.
Levered Up
Our Weekly Macro Themes report dives into sentiment survey data to gauge investor feelings. We also investigate how traders and investors are positioned. One indicator we’ve been eyeing is Leveraged ETF Trading (the ratio of long vs. short trading activity). It suggests that traders have been eager to buy the dip during recent stock market declines. The takeaway is that longer-term greed and complacent feelings are in place despite a near-term drop in sentiment survey data.
Households Are All-In
Indeed, we find that investor allocations to equities are at multi-year highs (record highs for households in aggregate). Can you blame them? Bond yields remain not far from record lows while cash offers nothing but severely negative real returns.
Our featured chart illustrates a high degree of risk permeating markets. US Equity Leveraged Bets (US stock market leverage) combines net margin debt, net leveraged ETFs, and net speculative futures positioning. That sum is then divided by the S&P 500’s market cap. The result is the chart below.
Featured Chart: Risky Wagers

Speculative Futures Positioning
Leverage as a percent of market cap has climbed near 2018’s peak. Folks are all-in. For this reason, we treat this current pullback with caution while a very near-term snapback is quite possible. Moreover, total US stock index speculative futures positioning is the most net-long since 2018.
Bad Breadth Across the Globe
Not helping the bulls’ case is weakening breadth in Global Equities. As the ACWI index climbed to a record high earlier this quarter, fewer countries traded above their respective 50dma. Taking the US market out of the equation, the ACWI Ex-USA index paused at its 2007 peak with a near-term drop in countries/markets above their 200dma.
A Check on Emerging Markets
Finally, this week’s report checks on EM equities which have endured an awful year as EMFX drops precipitously. Interestingly, the space has fared ‘ok’ during the latest selloff—EM funds were about flat last week. Still, country breadth and EMFX breadth remain quite poor.
Bottom Line: The volatility that began after Thanksgiving has not let up. The VIX ended Friday above 30, the highest weekly settle since January. Investors have quickly turned pessimistic according to survey data, but allocations remain heavily in equities. A near-term/seasonal bounce is quite possible, but investors should be cautious on any rallies.
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During the previous quarter, when the ACWI index reached an all-time high, a smaller number of nations traded above their respective 50-day moving averages. doodle baseball