Equities had another big bounce on Thursday as the roller coaster start to the year continues. The bulls have taken the ascendancy again, post what commentators believe was a dovish set of minutes from the last Federal Reserve meeting. Doves is the term used to describe those members of a rate setting committee who believe inflation is not a threat and rates should stay where they are. We stick very much to the view if rates do rise this year in either the US or the UK it will be no more than a token gesture. Two-year yields, which are considered the most sensitive to changes in rate expectations, were virtually unmoved after the release of the minutes.
We described at the start of the week the old adage about the first few days of trading setting the tone for the year ahead, After a rocky start to the year equity markets have made a good fist of trying to close the first five days at least in line where they started the year.
Asset managers appear to remain twitchy, as sentiment seems to change almost on a daily basis. Market sentiment continues to remains very geared to changes interest rate expectations. We saw earlier in the week European shares getting hit hard when fears that the situation in Greece may further prevent the ECB from introducing quantative easing, only to rally when those fears started to recede.
One-measure speculators can use to determine where equity sentiment lies is the put/call ratio. Traders and money managers buy puts to protect the portfolio, so it follows when the ratio of puts traded relative to calls is high it’s an indication of fear, and low it’s an indication of greed. Looking over the past 6 months the ratio has traded as low as 0.5 and as high as 1. It has worked as a fairly good indicator for the tops and bottom of the of the equity market trading ranges. Currently the ratio is 0.73 indicating sentiment remains encouragingly cautious.