Bullish Sentiment Very Low for a Market at New Highs Thu, Jun 20, 2019 The market may be reaching all-time highs today, but sentiment is hardly reflective of that. The AAII weekly sentiment survey continues to see modest improvements in bullish sentiment as it rose 2.7% this week to 29.51%, returning it to its normal range (less than 1 standard deviation from the historical average). But this improvement has not necessarily been at the same pace as the market's rally off of recent lows. Bullish sentiment is now around 10 percentage points off of where it stood the last time the S&P 500 was at these levels. Versus all other times in the history of the survey that the market was at all-time highs, the current reading for bullish sentiment stands in the 8th percentile, so it is very rare to see bullish sentiment this low given the market's current state. This means individual investors are likely totally caught off guard by recent gains, and there's plenty of cash on the sidelines that can still be put to work. Bearish sentiment saw a similar sized decline to the increase in bullish sentiment. The percentage of investors reporting as bearish fell from 34.2% to 32.13%, a 2.07% decline. That is also about 10% from a high in bearish sentiment of 42.58% that was reached in the first week of the month. This brings this outlook more into a normal range as it is only a little less than two percentage points above the historical average. Neutral sentiment still remains at the upper end of the past few years' range coming in at 38.36% this week, only a minor decrease (0.6%) from last week. As has been the case for most of the past few months, neutral sentiment has been the predominant sentiment reading among surveyed investors.
Big S&P 500 Junes Drain Life from Julys S&P 500 is off to it best June performance since 1955, up 7.34% as of yesterday’s close. If yesterday was the last trading day of June, this performance would have been strong enough to push the month to 6th best going back to 1930. Looking back to late May, this performance is still impressive even though it was anticipated following May’s abysmal showing. However, such strong performance in June may not carry over into July. Below S&P 500 performance in June has been split into positive and negative tables. Each table contains July’s historical performance as well as full-year performance. Historically July has been weaker after a positive June. July averages just 0.48% after an up June compared to a gain of 2.84% after a down June. Examining the Top 20 Junes and subsequent Julys showed only a modest improvement in performance with average July gain climbing to 1.11%. However, even if July does disappoint this year, the full year is likely to still be quite fair as past positive Junes where followed by full-year gains 80% of the time with an average gain of 13.44%.
That Was Bad Tue, Jun 25, 2019 Consumer Confidence for the month of June missed expectations by a mile this morning as the headline reading dropped from 131.3 down to 121.5. That 9.8 point decline is tied with last December for the largest m/m decline since August 2011. Not only was the decline notable, but the magnitude of the miss relative to expectations (121.5 vs 131.0) was the largest since June 2010. While headlines surrounding trade and Iran can understandably hurt sentiment, the fact that the stock market was bouncing off the June 3rd lows during this period and had no positive impact was notable. This month's reading in the headline index of the Consumer Confidence report was also the lowest since September 2017 and only the fourth period since the Financial Crisis that the index dropped to a 52-week low. In terms of the breakout between Present Situation and Expectations, both indices saw similar declines in June. With both indices seeing similar declines, the spread between the two was little changed and remains extremely elevated and at levels that have typically been seen leading up to recessions. While the spread between Present Conditions and Expectations is worrisome, the percentage of consumers responding that jobs are plentiful didn't see as large of a decline, falling from 45.3 down to a three-month low of 44.0. Finally, while there may not have been much of a decline in the percentage of consumers viewing jobs as being plentiful, young consumers have seen a sharp drop in confidence levels. While we saw across the board declines in confidence by age group, consumers under the age of 35 have seen the sharpest declines falling to the lowest levels since May 2016.
Russell 2000 New Lows By Sector Wed, Jun 26, 2019 With the S&P 500 right near 52-week and all-time highs, there aren't a lot of new lows to speak of in the index. So far today, for example, the only stocks in the index to hit a 52-week low are Iron Mountain (IRM), Kroger (KR), Macerich (MAC), and Simon Property (SPG). While the S&P 500 hasn't seen much in the way of new lows, small-cap stocks have really lagged their large-cap peers which has resulted in significantly more stocks on the new low list. Through this afternoon, we have actually seen more than 60 new lows in the Russell 2,000. We were curious to see if there was any specific sector driving the relatively high number of new lows in the Russell 2000, so the chart below breaks the stocks hitting new lows today out by sector. Looking at the list, we were somewhat surprised to see that the Health Care sector alone accounts for nearly a third of all the new lows today with 19. Behind Health Care, the next closest sectors are Communication Services and Industrials, each with nine. On the other extreme, not a single stock in the Russell 2000 Utilities sector traded at a new low today, but with the 10-year yield right around 2.0%, that should not come as a surprise. One sector with relatively few stocks on the new low list today is Energy with three. With oil rallying over the last few days, the sector has gotten a reprieve, but as recently as a week or two ago, there were regularly more than 30 stocks from the sector on the new low list.
US Falls to the Bottom of the Pack Thu, Jun 27, 2019 In a post earlier this week, we provided an update to the Citi Economic Surprise indices broken out by region. With economic data in the US continuing to disappoint this week, the Citi Surprise index (percentage of economic indicators that are beating vs. missing estimates) for the US is coming increasingly close to taking out its late April low and declining to its lowest levels in two years. What's also notable about the current reading is that at the most recent reading of -67.5, the surprise index for the US is more negative than any other country or region that this series tracks. Below we compare the Citi surprise reading for the US and Europe over the last twelve months, and what a reversal it has been. Heading into 2019, economic data in the US was coming in much better relative to expectations versus Europe, but ever since then, data in the US has been getting progressively worse relative to expectations, while data in Europe has been consistently improving.
Sentiment Still Not Buying the Highs Thu, Jun 27, 2019 As the S&P 500 moved up towards an all-time closing high last week, we noted bullish sentiment levels were relatively muted in spite of this price action. We also highlighted that it is not exactly common for the market to reach new highs when sentiment is this subdued. But as the S&P 500 reached those new all-time highs one week ago today—followed by several sessions of selling—investors haven't been excited by the new highs. This week's AAII survey of investors showed hesitation more than anything with very small changes across the board. The percentage of investors reporting as bullish rose only 0.08% to 29.59%. Bullish sentiment saw a similar sized move only one month ago when it had risen from 24.71% to 24.79% in the final week of May. Given these readings, bullish sentiment remains at the lower end of its normal range sitting over 8.5 percentage points from the historical mean. Bearish sentiment perfectly mirrored bullish sentiment this week as the percentage of investors pessimistic investors falling by just 0.08% to 32.05% and still above the historical average of 30.32%. Neutral sentiment was completely unchanged this week. Holding firm at 38.36%, this was the first time that neutral sentiment saw no change since February 26, 2009. Like bearish sentiment, while off of recent highs, neutral sentiment remains elevated above the historical average of 31.5%. Again, across the board, the changes in sentiment levels in the AAII survey were very small this week. In fact, bullish, bearish, and neutral sentiment all simultaneously moving less than 0.1% is something that rarely has happened in the history of the survey. This was the first occurrence in over 20 years. The prior times this has occurred, twice in 1999 and once in 1995, all saw no change in these readings week-over-week (prior to 2000, AAII readings weren't expressed in decimals). While it is a small sample size, forward performance has generally leaned positive going forward, although we wouldn't put much weight into it.
Trend Analyzer - 6/28/19 - Teetering On Overbought Fri, Jun 28, 2019 After the S&P 500 (SPY) set a new all-time high last Thursday, stocks have yet to make a push back above these levels as all of the major index ETFs sit below where they were at last Thursday's close. This pullback was partially a function of the large-cap major index ETFs like the Russell 1000 (IWB) working off overbought levels. Whereas all of these were overbought last week, currently only the Dow (DIA) still sits in overbought territory although other large caps are teetering on joining DIA. The Core S&P Small Cap (IJR) and Micro Cap (IWC) are only lower by 0.41% and 0.33%, respectively. These are smaller losses compared to other ETFs which lost around 1%. Ironically, this outperformance also comes as IJR and IWC are now showing sideways trends rather uptrends across the rest of the ETFs. Granted, not all small-cap indices have been outperforming. Another small-cap index, the Russell 2000 (IWM), has seen performance more inline with other ETFs, declining 1.07%. Every sector except Materials (XLB) is lower over the last week. As shown in our Trend Analyzersnapshot below, it's the defensives that are finally lagging, with Real Estate (XLRE) down 4% and Utilities (XLU) down 2% since last Thursday's close. At the moment, only Materials and Health Care are overbought, while the rest are neutral.
Broadly Weak Manufacturing Data There was a huge slug of data out from all around the world overnight and today. The results did not live up to expectations as the majority (35 data points) came in either worse than forecasts or worse than the previous period. Meanwhile, five met expectations or were unchanged and fifteen indicators saw improvement. The data slate over the past 24 hours was primarily comprised of manufacturing data including final June Markit PMIs, the ISM PMI in the US, and Japanese Tankan indices. Of all the manufacturing data points out today, over three quarters came in below expectations or worse than the previous period (highlighted in red in the Global Economic Scorecard below). The Americas and Australia at least provided some relief as the US, Mexico, Brazil, and Australia were the only bright spots for Markit PMIs. Each saw the opposite result of the rest of the world with beats. Granted, the picture is a bit more muddied taking other indicators into account. Australia's AIG Performance of Manufacturing index was weaker and the US's ISM PMI also had some weak spots despite a headline beat. ISM Prices Paid came in with a contractionary reading and ISM New Orders also weakened to a flatline reading of 50. Japanese data was similarly mixed in the quarterly results for Tankan indices. While the data was generally worse, large manufacturers were a silver lining given a better than expected reading for outlook. Additionally, non-manufacturing data for these same Tankan indices held up better than their manufacturing counterparts. Later this week (beginning tomorrow night into Wednesday) we will see other non-manufacturing data with the release of Markit Service PMIs from around the globe.
Small Business Optimism Takes a Pause Small business optimism took a dip in June, ending a streak of four straight monthly increases. According to the NFIB, the headline small business optimism index fell from 105.0 down to 103.3. Despite the decline, the headline reading was better than expected. The key behind the pullback this month was most likely tied to the increased uncertainty created by the escalation in trade tensions between the US and China as well as the threat of tariffs on imports from Mexico. As the NFIB's President summed things up, "Last month, small business owners curbed spending, sales expectations and profits both fell and the outlook for expansion dampened." That's definitely not a sign of confidence, although we would note that with the trade war back on hold and the threatened tariffs on Mexican imports not materializing, that should set the stage for a rebound in sentiment next month. With respect to the issues that small businesses see as their biggest problems, Quality of Labor remains the biggest problem, although the percentage of businesses that cited it as a problem last month fell from 25% down to 21%. Issues that took up the slack were Taxes (increased from 16% up to 18%) and Cost of Labor (up to 10% from 8%). With regards to interest rates, only 2% of small businesses see interest rates as their biggest problem, so it's not as though small businesses are having any trouble borrowing. Inflation is a very minor issue as well as it too was only cited by 2% of small business owners. Above we mentioned that the threat of higher tariffs was lifting levels of uncertainty, and that is reflected in the NFIB Uncertainty index which saw its largest one-month increase since the 2016 election. At its current level of 87, the index has only been higher three times in the history of the index, and all three of those higher readings occurred during the period following Brexit and the 2016 election.
Typical July Trading: Strength Early, Weakness After Mid-Month July is usually the best month of the third quarter and this July got off to a solid start with market gains during its first three trading days. However, the day after July 4th was tepid and weakness has persisted to start this week. Weakness after the 4th is not uncommon and it generally does not stick around for long. In the chart above you can see the average performance of DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 over the most recent 21-year timeframe. This chart suggests the market is likely to resume its trend higher soon and it will likely persist through mid-month before the market takes another pause. S&P 500 has Slipped in 7 of Last 9 Pre-Election Year July Second Halves Selling the September S&P 500 futures contract on or about July 15 and holding until on or about July 24 has a 56.8% success rate registering 21 wins against 16 losses in the last 37 years. The best win was $19,150 in 2002, and the worst loss was in 2009, posting a $12,650 bereavement. This trade had been successful in 13 of 15 years from 1990 to 2004. Since then it has nearly the opposite record, posting losses in 11 of 14 years from 2005-2018. However, in the last nine pre-election years this trade has been successful seven times. Losses were registered in 1983 and in 2011. In 2011, a longer holding period would have allowed the trade to turn profitable as S&P 500 dropped 16.8% from July 22, 2011 through August 8, 2011. This year the setup is compelling as S&P 500 is struggling to breakout above 3000. Growth and earnings are slowing while the race for the White House in 2020 is beginning to heat up. Rate cut enthusiasm could also fade as quickly as it materialized. NASDAQ’s Christmas in July Rally Ends Soon Toward the end of June we primed you for NASDAQ’s 12-day Midyear Rally, what we like to call a little Christmas in July for the market. Two days later we reminded you that this NASDAQ Christmas in July rally was looking for support at the June 25 close of 7885, which remains just a hair above the 50-day moving average. Well, NAS sure found support and has already delivered its usual gifts for a 3.3% gain so far over the last 9 trading days with just 3 days left in this annual tech rally. Now that NAS has weathered a couple of days of selling, it looks poised to make another run at new highs. But, if seasonality holds sway (as it has mostly this year) and the news flow from the Fed, Congress, the Trump administration, the Democratic candidates, tariffs, immigration and geopolitics remains volatile, the market is likely to hit the summer market volume doldrums on cue in the second half of July, setting up a pullback from the recent highs. Support at 7333 at the March/June low is likely to come into play, which would be about a 10%. There is also some technical support below that around 7000, but let’s not get ahead of ourselves just yet. We are still positioned for more sideways action and backing and filling over the next few months, so we don’t expect a big summer rally and use any further strength this week to shore up your portfolio for the usual summer swoon.
Robust Summer Rallies Trim Fall Pullbacks It’s usually about this time of the year, when trading volumes begin to slump and markets meander that we begin to hear talk of the infamous “Summer Rally” featured on page 74 of the Stock Trader’s Almanac 2019. The “Summer Rally” is usually the weakest seasonal rally of them all. We looked at the current Summer Rally and found it to be above average already, up 10.2% from the Spring low on May 31, and that does portend well for the Summer and Fall Corrections. We lined up the Summer Rallies ranked from weakest to strongest since 1964. Over the past 55 years prior to this year DJIA has rallied and average of 9.1% from its May/June low until its Q3 high. The Fall Rally averages 10.9% and the Summer and Fall Corrections average a loss of just under 9% for a net average gain of a few percentage points over the summer and fall. As shown in the table below, when the Summer Rally is greater than or equal to the 55-year 9.1% average, the summer and fall correction tend to be bit milder, -6.2% and -8.2%, respectively. Summer Rally gains beyond 12.5% historically had the smallest summer and fall corrections. One prominent exception being 1987.
Sentiment Steps Back After collapsing below 25% at the start of June, bullish sentiment had rebounded for six consecutive weeks, but this week's release of the AAII survey snapped that streak. The percentage of bullish investors dropped to 31.74% from 35.93% last week. This comes despite the major indices once again reaching all-time highs yesterday (which admittedly would have little effect on the survey due to timing) and earnings season kicking off to a solid start with rising beat rates and guidance spreads. While this was the biggest drop in bullish sentiment since May, it has not brought the indicator to any sort of extreme low, but it has now been below its historical average for 11 consecutive weeks. While that may sound like a long streak, in the history of the survey—going back to 1987—there have been 19 other such streaks; six of which continued on for twice as long. Whereas bullish sentiment fell, bearish sentiment picked up. Bears now outnumber bulls with 32.02% of investors reporting as bearish versus last week's 28.64%. This is the first time that bears have outnumbered bulls since late June when a streak of nine straight weeks of this came to an end. Bearish sentiment has also now moved back above the historic average of 30.33% after staying below for two weeks. Before that, bearish sentiment was above average for 8 straight weeks. Although bears outnumber bulls, neutral is still the predominant sentiment level at 36.24%. For a solid chunk of this year—16 of 30 weeks—those reporting as neutral have outnumbered both bulls and bears. That is already more than the entirety of 2018 (14 weeks) and is closing in on that count for 2017 (18 weeks). Neutral sentiment continues to stay in a fairly tight range as it has for most of the year.
Here Comes August, Time to Buckle Up? It has been a great year for stocks. As of July 30, 2019, the S&P 500 Index is up more than 20% so far in 2019. To put that in perspective, since WWII only seven years have been up more than 20% by the end of July, with 1997 being the last time it happened. Here’s the catch: August has tripped up many a good year, and we are on the lookout for potential seasonal weakness this time around as well. “August has been tough on stocks historically and is actually the worst month of the year over the past 10 years,” explained LPL Senior Market Strategist Ryan Detrick. “Additionally, don’t forget this is a pre-election year. In August 2015 we had the surprise Chinese yuan devaluation, which lead to the first 1,000-point Dow drop ever, while August 2011 had the U.S. debt downgrade.” Both of those unexpected events happened in August and caused massive downside volatility. Here are a few other takeaways to remember about August: The S&P 500 has been down an average of 0.78% in August over the past 10 years, worse than any other month. The S&P 500 has been down an average of 0.05% in August since 1950, with only September being worse. When it is bad, it is really bad. Since 1990, when the S&P 500 has been negative during the month of August, it was down 4.6% on average, again the worst out of any month. Since WWII, the S&P 500 has been up at least 20% by the end of July seven times. 2019 very well could be number eight. August was down 5 of those years and the last time it happened in 1997, the S&P 500 lost 5.7% in August 1997. August 1990 is when Iraq invaded Kuwait; August 1997 had the Asian contagion; August 1998 had the Russian debt crisis and Long-Term Capital Management (LTCM) collapse; August 2011 gave us the U.S. debt downgrade; and August 2015 delivered the Chinese currency crisis. We won’t pretend to know why these significant and out of the blue events seem to always take place in August, but what we will say is with the S&P 500 up 20% for the year and near our fair-value target of 3,000, we are watchful for any developments that could lead to potential market weakness. Last, as our LPL Chart of the Day, August Has Been A Rough Month For Stocks The Past 10 Years, shows, August has been tricky for stocks, especially over the past 10 years.
August’s First Trading Day Goes Splat From the Stock Trader’s Almanac 2019 (page 86), it is known that the first trading days of each month combined have produced a majority of the market’s gain. However, the first trading day of August does not contribute to this phenomenon ranking worst among other First Trading Days in the 2019 Almanac. In the upcoming 2020 edition of the Almanac August’s first trading day is still the worst and only negative first trading day. In the past 22 years DJIA has risen just 31.8% (up 7, down 15) of the time on the first trading day of August. Several sizable gains in those up years, have mitigated the average first day percent change, but the median performance is a more sizable loss. Over the past eight years, DJIA and S&P 500 have both declined six times.
ISM Manufacturing Near a Three Year Low Thu, Aug 1, 2019 The pace of growth in the manufacturing sector continued to show signs of a slowdown in July as the ISM Manufacturing Index came in at a level of 51.2 versus expectations for a reading of 52.0. The last time we saw readings this weak in the ISM Manufacturing Index was nearly three years ago back in August 2016. Not only did this month's reading come in below expectations, but it was also the fourth straight monthly decline which is the longest such streak since the eight-month stretch ending in January 2016. Talk about a rut! As you might expect given the ISM Manufacturing Index's move towards 50 (the dividing line between growth and contraction), the commentary from respondents in this month's report is sounding increasingly cautious. The frequency of terms like weakness, slowdown, and other terms like these have been on the rise in recent months. In looking at the breadth of the ISM Manufacturing Index's sub-indices, things were biased towards the downside as six components saw m/m declines and just four saw increases. On a y/y basis, things were even worse as Customer Inventories was the only one higher versus a year ago. Just as the headline index saw its lowest reading since August 2016, a number of the sub-indices are also at their weakest levels since 2016. Both Production and Imports haven't been this weak since August 2016, Prices Paid and Export Orders haven't been this weak since February 2016, and Backlog Orders dropped to its lowest level since January 2016. In order to not close on a down note, we would note that New Orders managed to show a slight increase rising from 50.0 to 50.8.
ISM Non Manufacturing Index Near a Three Year Low Mon, Aug 5, 2019 Just like its manufacturing counterpart last week, the July release of the ISM Non-Manufacturing survey came in shy of consensus expectations. While economists were expecting the headline reading to increase slightly from 55.1 to 55.5, the actual reading came in at 53.7. That's a level that is still consistent with steady growth, but it is also the weakest reading since August 2016. Similarly, on a combined basis and accounting for each sector's share in the economy, the combined Composite PMI for July came in at 53.4, which was the lowest reading since August 2016. The table below breaks down the July ISM Services report by each of its sub-components and shows their m/m and y/y changes. Breadth in this month's report was biased to the downside. Compared to June and last year, just three components showed increases. One of the biggest decliners on both a m/m and y/y basis was Business Activity. After hitting its highest level since August 2005 back in March, the index is now at its lowest level since August 2016. Overall, the July ISM Services report wasn't a disaster, but it certainly wasn't a picture of strength either.
Down Friday/Down Monday Warnings: A Quick Recovery Could Stem Further Downside Yesterday’s selloff triggered the fifth DJIA Down Friday/Down Monday of 2019. The combination of a DJIA Down Friday* followed by a Down Monday** has been a rather consistently ominous warning, but they have also occurred at significant market inflection points (interim tops and bottoms). The previous occurrence was on around the long Independence Day holiday weekend in early July. Since January 1, 2000 through todays close there have been 209 DJIA Down Friday/Down Mondays (DF/DM) including todays. From DJIA’s closing high within the next 7 calendar days to its closing low in the following 90 calendar days, DJIA has declined 200 times with an average loss of 6.8%. Declines following the DF/DM were greater in bear market years and milder in bull market years (see page 76 of Stock Trader’s Almanac 2019). The eight times when DJIA did not decline within 90 calendar days after were following DF/DMs on October 7, 2002; May 19, 2003; November 17, 2003; February 3, 2014; October 13, 2014; October 31, 2016; September 25, 2017 and October 9, 2017. When DJIA’s close on Monday of the DF/DM is used as the starting point of the subsequent decline (a lower price), DJIA has declined an average of 5.4% over the next 90 calendar days, but there were 36 times when no further decline occurred. In the following chart, the 30 trading days before and 60 trading days after a DJIA DF/DM have been plotted alongside the 8 times there was no low after the subsequent high and the 36 times there was no lower low after Monday. Based upon this chart above, if DJIA recovers its recent losses within about 4-7 trading days, then the DF/DM that just occurred may have been the interim bottom. However, if DJIA is at about the same level or lower than now, additional losses are more likely. *Friday or the last trading day of the week. **Monday or the first trading day of the next week.
August Summer Market Storms Are Common Mild summer market storms like we are experiencing so far this August have been a common occurrence over the years. After the banner rally we have been having this type of selloff should not be surprising. However, from our analysis of Down Augusts, it can get dicey for the rest of the year if August losses deepen and if September is down as well. You can see in the tables below that the market has usually weathered these typical mild August market declines in stride. It’s mostly the larger losses at the top of the list accompanied by losses in September that have nasty market years. Years like 2019 with big gains year-to-date at the end of July that had August market storms fared better.
August Option Expiration Day: DJIA & S&P 500 Down 7 of Last 9 This week is options expiration week and mid-August is usually better performing than the beginning and the end of the month. This strength is punctuated with a three-day string of bullish days running from Thursday August 15 until August 19. A bullish day is defined as a trading day in which the S&P 500 has risen greater than or equal to 60% of the time over the past 21 years. Unfortunately, this bullish cluster has not always resulted in full-week gains during option expiration nor does this daily bullish streak guarantee market gains on each day. DJIA and S&P 500 have declined on August option expiration day seven times in the last nine years and have suffered full-week losses in six of the last nine August expiration weeks.
Yield Curve Inversion Triggers Risk Aversion Unless you have been asleep for most of the day in preparation for an upcoming midnight shift, you have probably already heard, over and over, how the 10-year Treasury bond yield falling below the 2-year Treasury bond yield has a perfect record in recent years of forecasting a recession sometime in the future. The result was declines exceeding 3% by DJIA and NASDAQ. S&P 500 just missed this mark falling 2.9%. Since 1971, when NASDAQ began, this combination of losses or worse has only occurred 66 times prior to today. And of these 66 times, 25 occurred during the financial crisis bear in 2008 and early 2009. Plotting the 30 trading days before and 60 trading days after past occurrences reveals (top chart) initial steep and brisk declines followed by modest average gains over the following 60 trading days (approximately three calendar months). However, market performance did pick up nicely at the 6-month and 12-month later points and the frequency of gains also improved. The market could be in for more choppy trading especially in the often-turbulent months of August, September and October.
