Thursday, July 6, 2023

Morning Note: The Flipping Point

The equity market's year-to-date strength (keeping in mind the uber-small number of stocks that explain the first-half phenomenon), in our view, can, to no small degree, be explained by some serious broad-based bearishness heading into the year... You see, it's hard for markets to fall apart when the whole world is positioned for it.

Presently, however, per the following from Investor Intelligence's latest weekly survey, advisor sentiment has shifted markedly since the start of the year:

"…the bears trimmed their number to 18.3%, from 18.6% last issue. Again we note the fewest bears since early Jan 2022, when their reading was slowly increasing from the super depressed count well below 20% shown during the 2021 market surge. Very low levels of bears (just 15.3% in Jul-2021) suggest most professionals have already bought." 

"The bulls rebounded to 54.9% from 50.0% a week ago. That is just above the two-weeks ago reading of 54.3% for the most bulls since Nov-2021 when they reached a danger level of 57.2%. We noted that modest retreat signaled more cash available to buy shares. The bull count is just below the 55% initial caution level, which says to prepare a more defensive strategy. Bulls 60% and above, signal elevated risk and the need to get ready for a market decline. That occurred in 2021, when the bulls hit 63.7% that Apr and 61.2% that Jul."
"The bull-bear spread expanded to +36.6%, from +31.4% a week ago. That is the largest positive difference since Nov-2021 when it was falling from even higher levels that summer. Seven weeks ago the spread was below 21%. A difference above +30% is the first sign of elevated risk. The wider the positive spread, the higher the risk. A last strong warning was during summer 2021, with spreads of +40.5% and +45.9%. Moves above 40% call for defensive measures and above 45%, even more action."
Key points:

"...the fewest bears since early Jan 2022” —  the red-circled spot on this SP500 chart:

"...the most bulls since Nov-2022." See red circle:

"The bull-bear spread expanded to +36.6%, from +31.4% a week ago. That is the largest positive difference since Nov-2021..."  See above.

Another sentiment reading worth noting would be the widely-watched American Association of Individual Investors weekly survey... The following captures retail investor sentiment from the beginning of this year to current:



Suffice to say that sentiment among both advisors and individuals has flipped on its head since the start of the year; which, as I'm implying, makes for a notably different setup heading into the second half.

Another first-half ballast, certainly for the economy, was the large consumer savings surplus heading into the year... While our proprietary general conditions index has been signaling rising recession risk since last August, the service side of the economy has held up remarkably well since.  We believe that owes largely to the fact that consumer bank accounts have remained notably flush -- providing sufficient spending capacity (and confidence) -- when compared to pre-covid levels.

Have a look at the breakdown of this morning's ADP stunningly-strong private sector jobs report (HT @NeelyTamminga):

Well, it looks like that (excess consumer savings) phenomenon may be nearing its flipping point as well:

So, while it's certainly not all doom and gloom out there, ironically, when it comes to investor sentiment, that's not necessarily a good thing for the stock market… Particularly when it corresponds with a waning liquidity backdrop. 

Stay tuned...

Asian stocks saw rough going overnight, with 13 of the 16 markets we track closing lower. 

Europe's a mess so far this morning as well, with 16 of the 19 bourses we follow trading down as I type.

And US equity averages are no exception to start the session: Dow down 344 points (1.00%), SP500 down 1.03%, SP500 Equal Weight down 1.07%, Nasdaq 100 down 1.25%, Nasdaq Comp down 1.28, Russell 2000 down 1.61%.

As for last Friday’s session, US equity averages closed lower: Dow by 0.4%, SP500 down 0.4%, SP500 Equal Weight down 0.5%, Nasdaq 100 up 1.6%, Nasdaq Comp down 0.03%, Russell 2000 down 1.3%.

This morning the VIX sits at 15.80, up 11.42%.

Oil futures are down 1.59%, gold's down 0.26%, silver's down 1.25%, copper futures are down 0.68% and the ag complex (DBA) is up 0.14%.

The 10-year treasury is down (yield up) and the dollar is down 0.08%.

Among our 34 core positions (excluding options hedges, cash and money market funds), only 2 -- DBB (base metals futures), DBA (ad commodities) -- are in the green so far this morning... The losers are being led lower by EZA (South African equities), EWZ (Brazil equities), FEZ (Eurozone equities), VPL (Asia-Pac equities) and VWO (emerging market equities).

"The most dangerous risks are not related to price movement. The most dangerous risks are in the realm of the unknowable. Obviously, it is impossible to predict these..."
"We don't know when these will happen again, but it is certain that they will. There is no excuse for blowing up due to repeat of a historical event."
--Sinclair, Euan

Have a great day!

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