In the world of financial markets, retail sentiment can often be a powerful force that drives short-term price movements. Sentiment analysis tools like JPM’s positioning skew can help identify shifts in retail investor sentiment, which can have significant implications for various asset classes. Recently, JPM has observed a rotation in retail sentiment between two key sectors: software (IGV) and semis (SMH). This rotation has resulted in a tactical mean reversion opportunity in the relative pair, according to JPM’s analysis.

To understand this rotation and its implications, let’s first examine the underlying factors driving retail sentiment. Retail investors are often influenced by emotions such as fear, greed, and confirmation bias, which can lead to herding behavior and create short-term price movements. In addition, retail sentiment can be influenced by various macroeconomic factors such as interest rates, inflation, and geopolitical events.

In the case of software (IGV) and semis (SMH), JPM has observed a significant shift in retail sentiment over the past year. Sentiment for software has improved by 10%, while sentiment for semis has deteriorated by 7%. This shift in sentiment has resulted in net flows and ETF volume that are skewed in favor of software. Specifically, there have been 1.5 times more net flows into software than into semis over the past year, and ETF volume for software is up by 4 times compared to the same period.

These shifts in retail sentiment can create opportunities for tactical mean reversion in the relative pair. Mean reversion is a market phenomenon where prices return to their historical averages after deviating from those levels due to various factors such as sentiment, fundamentals, or technicals. In this case, JPM believes that retail sentiment may be overly optimistic about software and undervaluing semis, creating an opportunity for a tactical mean reversion in the relative pair.

However, it is important to note that mean reversion is not always a linear process and can take various forms, including sudden reversals or gradual drifts. Moreover, mean reversion opportunities may arise from a variety of factors such as changes in sentiment, fundamentals, or technicals. Therefore, investors should be cautious when attempting to identify and capitalize on mean reversion opportunities.