Another Angle of Gauging the Mood of Market Participants
- cornerstoneams
- Mar 31
- 5 min read
CAMS View from the Corner
March 31, 2025
We have shared countless editions over the years, including recent months, where the central focus was on collective market participant messaging. We have done this by viewing various markets and the messaging the respective participants have left in the wake of their trading operations.
There is seemingly an endless stream of views an investor, as well as an economic prognosticator, can use to gauge the collective forward views of market participants. Sometimes we can use a particular view to assist in economic expectations, if taken with a grain of salt, as well as to simultaneously gauge the general mood of participants.
The latter point is very important for an investor. It can help them steer clear of falling into the trap of fighting the market.
Fighting the market is where positioning can be counter to what the developing mood of market participants are showing, and hence, being left baffled as to why their self-convinced view is not panning out. Worse than this is when positioning not only does not pan out but actually causes notable financial pain.
The simplest example of this is using extreme opposites of positioning in order to emphasize the point.
That is, the investor, being convinced the stock market has to move lower per their research, consequently loads up on short positions. This while market participant messaging is offering little, if any at all, corroborated evidence that they are losing their “animal spirit” trading behaviors.
Offered differently, said participants are offering little evidence they are considering a more cautious stance, and yet, an investor, lathered up in their personal conviction, pushes their short positions heavily, expecting to ring the proverbial register. This then devolves to the logical conclusion of solid losses presenting themselves to said person. Follow-on confusion surely follows as to why their much-researched view did not work out according to plan.
Simply, they were unknowingly fighting the market, or worse, at some level, they may have known they were fighting the market but really felt “this bet” had legs. The “bet” part of their mindset had them doomed. Throwing proverbial dice in the air and hoping, or trusting, said dice will land as you need them to land is gambling.
Rolling dice has no place in market operations. Highly disciplined market operations are the antithesis of a gambler’s approach toward markets. It is an imperative approach.
Ratio Charts, a.k.a. Relative Strength
If we group certain industries together within the stock market, we can get broad categorizations. Through this, we can then compare categories or sectors, as they are often referred to, in order to see how their pricing behavior is acting.
We can view the sectors outright and see how participants are viewing respective categories. We can also view how they are performing when pitted against one another. The latter approach is known as ratio chart analysis. By employing this type of process, we can get a clear visual of the relative strength leader of the two.
The relative strength aspect simply offers which area is performing best relative to the other. This can be quite a useful tool in helping gauge the general mood of collective market participants. Ratio analysis can be offered across a plethora of industries and, in a larger sense, sectors.
As a very important aside, relative strength leadership of the two does not mean it is or will be a stellar performing area. Rather, it simply means that when placing the two together we can easily view the top performer between the two.
The performance of the two in question, on their own basis, can be quite strong or even quite weak. The takeaway is simply that a relative strength outperformer does not mean that it is a guaranteed strong performer in its own right.
Discretionary vs. Staples
The above is a ratio chart of Consumer Discretionary stocks as compared to Consumer Staple stocks. For perspective, the above dates back to 1999 so we can capture the history for this century as well as the end of the bull market of the late 1990’s.
When the blue line in the above ratio chart is trending lower, it means the more cautious/defensive sector of Consumer Staples is outperforming the Consumer Discretionary sector. Our red arrows note the periods of significant change toward caution in this chart.
When the line is trending lower, it offers more caution emanating from collective participant messaging via their trading operations.
Earlier we offered that particular market participant views can assist in assessing economic expectations, if taken with a grain of salt. The above is such a view. Its primary function is to aid in gauging market participants’ mood if you will.
It is one tool that is meant to inform if they are leaning toward cautiousness, throwing caution in the wind, or offering little discernable messaging on a relative strength basis.
Downstream from this primary function is assessing messaging on economic expectations. This function is more questionable, as the above chart underlines for us.
Note we have five down arrows pointing to notable increased cautiousness over the history of the chart. Three of the five arrows led to recessions. Two of the five arrows pointed to stock market cautiousness but offered no accuracy on downstream economic messaging.
This takes us to our current day with our far right black rectangle. This is highlighting the notable drop in this ratio analysis in late 2024 to the early part of this year. This has pointed to increased cautiousness by collective participants as this year began and has continued to date.
For our part, this has played a role, along with a corroboration of many other signals of our simultaneous cautiousness in deploying capital. As shared previously, fighting the market is a hard game to win. We choose not to fight that fight. If caution is radiating from collective participants, then we heed their messaging.
As we stand currently, the above continues to offer increased cautiousness emanating from collective stock market participants. Again, this does not offer accurate recession prognostication.
As the above history reflects via our red arrows, the current behavior highlighted by our black rectangle can move tremendously lower. If this occurs, stock market issues can be expected to continue and most likely increase. Importantly though, even under that scenario, it will not point to a certain incoming recession.
Although the deeper the above line falls, the more concerning recession becomes. We are not there currently, but we are in a market environment that is consistently offering increased cautiousness. This has been unfolding for a few months, which adds to its messaging.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Comments