Fear Abating??

The past few days have seen a significant abatement in fear across global markets. - Fear had seemed pervasive across many markets over the past couple of weeks, which merely seemed a further installment of the various episodes of recent months. - The week before last week saw a capitulation in sentiment from the retail individual investor, last week it was the turn of newsletter writers to capitulate. The most recent survey by Investor's Intelligence saw a marked drop in those who see the market as a) bullish or b) within a correction, with those defecting moving to the bearish camp. Last week's reading was:

Bullish ................... 29.4 (-3.9%)
Within a Correction... 32.9 (-2.6%)

Bearish ..................37.7 (+6.5%)
   

This is the first time that the Bullish Camp has been below 30% since MARCH 2009. The chart below shows the SP500 versus the Investors Intelligence Newsletter survey since the early 1990s

Another indicator of recent fear has been the Japanese 10 Year Government Bonds, the yield on these bonds has dropped precipitously over the past few months, from an already low 1.4% to around 0.9%. (Yep, fear has been so strong that investors have been willing to accept yields below 1 per cent for the next 10 years on an instrument issued by a country with a Debt to GDP ratio of close to 200%.  - ( yep TWO HUNDRED PER CENT) - Just for the record the Greek debt to GDP ratio is around 130% (about 2/3rds of Japan's). -- [ I know that is not how markets look at this, but one day a very clever and articulate investor/trader with big bags of bucks, will look at it like that, and suddenly realise WTF,,, he (or she) will rush to get out of Japanese bonds, as well as US and all other bonds.... followed by one or two more, then before you know it everyone is rushing for the exits, and baaaammmm, up go Japanese Bond Yields, then US yields then Euro Yields, and suddenly we are staring a bond market crash right in the face. - Of course it may not happen,, but I believe at some point in the future it probably will happen ,,,,not immediately, but possibly in the next few years.. When that happens, I would not want to be invested in anything that is not at least shiny and hard.]    --  Anyway I digress, the past couple of days have seen a sharp correction higher in JGB yields, currently they stand at 1.12%, from last week's low of 0.90%, this may be reflective of the recent fear starting to abate. This can be seen in the chart below, which also highlights the under performance of US equities at the same time as Japanese yields declined.

The next chart shows fear in relation to the European Sovereign Debt crisis. The top window in this chart is the SP500 Index, the second window is the Spanish v German 10 year yield, I use this as a proxy for all the PIIGS, the third window is the VIX index, and the bottom window is the EURUSD FX. This shows how during late April though May, the PIIGS crisis really exploded, leading to a flight from the EURO and risk, and a sharp pick up in volatility. I have highlighted 3 episodes of Fear during the past 6 months, it is noticeable how each episode, has seen lower peaks in fear as measured by the Spain v German 10 year yield spread, and the VIX index, and the higher level of the EURUSD.

This easing of fear in relation to the above, if it were to continue, could add a favourable backdrop to US equity markets going forward, and this is something which is certainly worth keeping an eye on for now.