A Market Timing Report based on the June 25, 2020 Close…
No charts today… Just straight talk about the markets and what I believe is hugely important in determining what lies ahead…
First the data on sentiment…
|Thurs. 12 am CT close to poll|
AAII Individual Investor Sentiment is at a -24.76% Bull – Bear % Spread this week (last night’s poll closing).
That is a record for an interesting reason; it’s 18 straight weeks of a Negative Investor Sentiment Spread.
I just looked back to 1995 before the prior Punch Bowl Market of the late 1990s of “over-exuberance,” and the longest periods of continuous negative sentiment (every single week in a row) were:
- 14 weeks straight starting 12-19-07 leading to a 1st low at -12.6%. The declines I’m stating here are from the start date of the long runs of negative sentiment. The final low 3-06-09 was MUCH lower (-41-5% from the 10.9% bounce I’ll discuss with you below).
- 13 weeks negative starting 5-9-12: Pullback of -6.5%. That was after the 2011 Mini Bear Market (my nomenclature for the smaller Bears within Bull Markets. The current one we are emerging from or about to dive back into depending on whom you talk to was/is a “Big Bear Market” by any standard including my own nomenclature. See New Rules for Dips, Corrections and Bear Markets (scroll to “New Rules” in blue…)
- 9 weeks straight negative starting 1-14-09: -20.9%.
- 8 weeks straight negative starting 1-22-03: -10.2%. As noted below, if you count 11 weeks as the run, the drop was a similar -10.3%.
It’s fascinating that this sort of continuous negative sentiment in 2003 did not develop until 2.75 years after the top of early 2000. Investors were still anchored on the good times perhaps. If you count the 0.00% spread of 1-15-03 as “negative,” there were 11 straight weeks of negative sentiment and if you calculate the drop from the first week of 1-01-03, you get a drop of -10.3%.
Can we use valuation to do market timing today? Valuations for the SP500 as a whole are not near 2000 valuations, but some stocks in the index are inflated for sure, and many NASDAQ stocks trade at nose bleed levels of Price/Sales ratios (anything over 10 used to be considered sky high). The final drop for the 2000-2003 Bear noted above was modest as it did not come until virtually the end of the Bear market. That is not our current setup.
Based on massive Fed and fiscal stimulus, the market has become overvalued vs. the current reality of economic weakness after a period of 4 quarters of negative earnings growth in 2019 for the SP-500 Index per FactSet. The weight of valuations and the effect of COVID-19 itself may be the cause of the current unprecedented post-1995 negative investor sentiment streak.
Now going back to our 4 data points above, the declines were from the day of the FIRST negative sentiment week. What if we look at the market response after the final negative week? The response was positive, which is not shocking, but must be verified of course… Below I list the reactions at the END of the negative sentiment runs to the first top, ignoring all corrections of 10% or less…
- 12-19-07 to 3-19-08 (14 weeks): +10.9%. This was just part way into a Big Bear Market. Pullback from first negative sentiment week was -12.6%. The losses after the 10.9% bounce were immense. -41.5% to the final low on 3-06-09. This shows a long run of negative sentiment can lead to a bounce followed by a trounce. That bounce was much less than the current 48.0% bounce, however.
- 1-22-03 to 3-12-03 (8-11 weeks): +45.75%. This run marked the END of a Big Bear Market. The pullback from first negative sentiment week was -10.3% (counting an 11 week run). This data point shows long negative sentiment runs may mark the END of Big Bear Markets as said, but the gain came off a low that matched the end of the sentiment run. The current negative sentiment run is still continuing after 18 weeks in a market that has “Mega-Bounced” 47.0% to the 6-08-20 high!
Answer this… Has the current negative sentiment run marked the END of a Bear market? No. It is still ongoing after the elimination of the losses from a Bear Market (for certain parts of the market)!
- 5-9-12 to 8-1-12 (13 weeks): +54.1%. This was well after the Great Recession Bear Market hit bottom, when the central banks were fooling around with various methods of goosing the economy and markets. It worked. Pullback from first negative sentiment week was -6.5%. This pessimism run started AFTER the Bear Market had ended. The one we’re in started at the beginning of the decline and has not ended despite the “Mega-Bounce.” This does not match the current situation as the Fed/Congress/POTUS have had no difficulty in quickly responding with trillions of dollars to “save the economy.” And eventually kill the dollar of course… And the pessimism continues even today.
- 1-14-09 to 3-11-09 (9 weeks): +70.9%. The end of this sentiment run almost exactly matched the low on 3-06-09 of the Big Bear Market of the Great Recession. Pullback from first negative sentiment week was -20.9%. This is the second example of a massive rally at the END of a Bear Market and at the END of a long negative sentiment run. Again, this is NOT a match. Currently, sentiment has not corrected itself and turned positive! This is why # 2 and #4 on this list don’t match the current situation.
Really NONE of the prior long runs of negative sentiment fit today’s picture. The closest is #1 above, but the bounce has come before the horse. 😉 Sentiment has NOT turned positive despite a Mega-Bounce!
Where Are We Today at Negative Sentiment Run #5 Since 1995?
- 2-27-20 (first neg. sentiment week) until WHO KNOWS? Now 18 weeks of Negative Sentiment Spread. The market is just -1.9% from the date of the beginning of this negative run on 2-26-20. We’ve had a massive stimulus from all sources. This follows a full year when the market rose despite negative earnings growth for ALL OF 2019 per FactSet. Remember too, this negative sentiment run has not ended. That means the bounce we should be expecting has yet to show up despite a “Mega-Bounce” of 47.0% to the June 8th high. Huh? There’s that bounce before the horse!
My conclusion, which is more of an hypothesis, is that the Fed et al through massive immediate stimulus were able to short circuit the element of time. In other words, time was compressed vs. the prior Bear markets. For certain stocks it was.
So what’s the big deal then? The problem is that time was NOT compressed for the businesses that are not doing well in the COVID-19 pandemic. They are a huge drag on the economy and on its prospects for rapid recovery. They cannot expand their businesses when their businesses have in fact contracted or are still contracting!
When you consider the prior two Big Bear Markets of 2000-2003 and 2007-2009, you’ll note a big difference. Prior Big Bear Markets took YEARS to unfold. This Bear market lasted 34 calendar days, “if you believe it’s over” based on the rise to new highs of the NASDAQ/NDX and the recouping of most losses for SPX.
From the sentiment analysis above and the usual duration of Bear Markets, this one is a stand out. Some say it’s because it’s all about COVID-19, which will be solved by early 2021. Then why are sectors with 45.5% of the SPX stocks in Bear markets still if “it’s already over”?
Also, why did we have a Mega-Bounce, in the midst of this negative sentiment run that never ended? The most Bullish explanation is that investors are still negative because of the continuing risk to them that COVID-19 represents. Their negativity has not served them as 35% of investors over age 65 sold all their stocks per Karen Firestone’s comment on @CNBC yesterday. But is the Bear Market really over and for whom is it over?
The Big Bear Market is over in NASDAQ/NDX (QQQ) terms and mostly over in SPX terms, but it is NOT over in RUT/IWM terms, as that market is -19.86% from the August 2018 high. The small caps (RUT; IWM) are in a Bear Market that is now nearly 1 year 10 months old.
Tell that to the NASDAQ that is now near an all time high as is the NDX (NASDAQ 100; QQQ).
What does this discrepancy mean? This is a “Tale of Two Markets,” a Tech market (particularly big cap tech by weight) that is being bid up as its services are in higher demand, along with four other stronger sectors, and the current and longer terms losers, which I’ll call New Bears and Old Bears that are in the S&P 500 Index:
- Oil stocks (XLE) are -63.2% since 6-2014. An “Old Big Bear Market.”
- Financials: Still in a Big Bear Market, -25.6% from the 2-12-20 high. A “New Big Bear Market.” Based on horrifically low interest rates as far as the Fed’s eyes can see.
- Retail (I’m looking at XRT here which includes AMZN which is NOT participating in this Bear!) -21.6% since 8-31-2018 high when the small caps topped out last time. An “Old Big Bear Market.” Although not an SPX sector, I wanted to see if retail was still a Bear and it is, even with AMZN included.
- Real Estate: Close to a Bear (Mini Bear Market still by my nomenclature). -19.4% since the 2-21-20 high. A “New Mini (prev. Big) Bear Market.” Based on people not being able to be congregated in close quarters in buildings and with a trend that could reduce in office head counts for those who can work from a home office.
- Utilities: -22.1% from the 2-21-20 high. It’s a “New Mini (prev. Big) Bear Market.”
- Industrials: -22.1% from the 2-21-20 high. It’s a “New Mini (prev. Big) Bear Market.”
That means 5/11 SPX sectors are in Bear Markets…
Consumer Staples, XLP, is -10.6% (in “Correction” per my definition) while the relative winners are XLK, XLY, XLC, XLB, and XLV, which are all down less than 10% with XLK the best at -0.25% from its Feb. 2019 high.
What’s working better are in other words: Tech/Communications (XLK/XLC), Consumption by Wealthier people who have jobs (XLY is doing better than those selling products required by all consumers (XLP), which is also sold at lower prices), Companies that Sell Input “Stuff” to other companies (Chemicals to Mining to Paper), and those (XLV) that “Sell Drugs/Provide Medical Care/Devices.”
The groups of companies in Bear markets are 224 companies/503 today in SPX or 44.5% of the SPX (retail is excluded from the losing group because both XLY and XLP are in corrections, not Bear markets; the smaller retailers are in a Bear Market).
In what sense can this be a healthy market with 44.5% of SPX in a Bear Market? And how do the other sectors end up getting MORE business from the 44.5% group of losers (on average; there are always standouts in losing sectors) to grow their own business? Who is taking on extra online cloud storage based on a falling business?
Just as an example, how can Microsoft’s (very close to an all time high) sales numbers just keep going up while the global economy is shrinking? Perhaps some must move to the web in these COVID-19 days, and that is the temporary driver of their cloud business.
But this concept is why the market could be bumpy over the coming weeks and months with the added fun of the impact of the election on corporate profits. I first bought MSFT when it was around 10 X EV/EBITDA which is a good way to value companies. It now trades for over twice that at 21.14 X EV/EBITDA. The growth in its cloud business may continue for a while, but competition and global slowing could take their toll at some point. Then how will the stock price adjust? Until then, the sky’s the limit they say.
We don’t need to focus on MSFT alone here, and I’m not doing any full analysis here, because it’s a general point I’m making. Tech companies depend on non-tech companies for business. If the business for weaker non-tech companies is slowing, when will it hurt tech companies and bring the entire market down a significant notch?
And when will layoffs cycle back to consumption? We’re 70% tied to consumption in the US.
There is a lot that could come home to roost.
What letter of the alphabet is this market? V, W, L???
I say the market is a “V with a Weight On It.” Unless the Fed et. al. continue to pour gasoline on the fire, the fire will diminish over time… That’s the caveat.
The above says it’s been a V, but the V now has a weight on the right part of it, which will be weighing it down, likely also with the stock market in the coming weeks to months…
The Shortest Term View? Yesterday my market timing indicators were mixed with some saying the selling was enough and others saying “more to come.” Today’s numbers as of 15 min prior to the close did not look a lot different. Price-wise the market rose today by less than half of the drop yesterday. Not good enough, but it’s a bounce off the 200 day moving average, which provides a story for the Bulls to tell. 😉 I remain prepared, as always to buy higher or lower! If you control your risk and preserve enough of your capital, you can make money over the longer term, whatever the market does over the short term.
The fact I believe that the market is “V with a Weight On It” is why I am maintaining more cash now than I would in a Bull market in which the market is healthy as a whole. Last check (6-23-20 close) I was at 78.75% (rounded to nearest 0.25%) of my usual maximum exposure during a healthy Bull Market. If you have more exposure than I do, I would watch your stops if you believe at all in market timing!
Adjust to taste! “It’s your money, and your decision as to how to invest it,” as I always say…
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