Why Bullish investor sentiment might not tell the whole story Array ( [cookie] => 2cc10e-108ac9-366d73-1396cc-e5694e [current_usage] => 2 [max_usage] => 2 [current_usage_crypto] => 2 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 24520 [user_id] => [reason] => Usage under limits [method] => ) 1 and can accesss 1

Markets have entered a window for potential short-term trend change, but do not expect much selling until August.  Near-term, an SPX-4500-4620 range might hold into last couple days of July before weakening down to 4350-4400 into mid-August before rally continues

Despite a couple days of churning, US Equity markets managed to finish the week positive with regards to SPX, and DJIA, while NASDAQ suffered a small loss.

I anticipate that a pullback is near (given some of the reasons I’ve discussed this week)  however, Trends have not yet been broken, and there has been no confirmation that this is underway. 

This might take the form of a choppy final six days of the month.  There could actually be a minor push back over SPX 4600 Monday/Tuesday.  However, I expect that upside should prove limited, and the risk/reward is poor for short-term oriented investors.  Seasonality is typically poor during the time following July expiration.

Overall, the back-up in the US Dollar and rates this week should prove temporary, and should continue lower into August.  Ultimately a declining Dollar will prove to be beneficial for risk assets.

At present, the sector rotation that’s been happening over the last couple weeks looks very real and should be respected.  Thus, Healthcare, Financials and Energy have improved near-term.  In addition, the defensive groups have begun to gain traction, and typically moves of this sort happen ahead of a possible time of softness in risk assets.

(I’ll repost last night’s comments below as I believe they’re important and some clients might not have read last night’s report)

Specifically, the following are problematic and normally signal a pullback is near: 

1. Breadth and momentum divergence on hourly and daily charts
2. DeMark exhaustion on multiple timeframes and on multiple benchmark indices
3. Exiting a bullish seasonal time and entering a bearish one (Both Aug and Sept )
4. “Short-term” individual investor sentiment gauges have entered extreme bullish territory
5. Cycles show weakness in August
6. Defensive trading looks to be coming back with a vengeance just this week
7. Resistance has been reached on NYSE Composite and Equal-weighted S&P 500

To the Bulls credit, however, a lot remains right with this market, and these are as follows:

1. Weekly uptrends remain intact, and while QQQ is overbought, other equal-weighted indices are not really that overbought, i.e. Equal-weighted S&P 500, or Value Line’s Arithmetic index show RSI readings in the mid-50’s.
2. Rally has broadened out substantially in the last couple months, exactly the opposite of what typically happens before a correction starts (Narrowing of market)
3. DJIA and DJ Transportation Average have broken out to 15-month highs to eliminate Dow Theory divergences and aren’t that overbought
4. None of the heaviest constituent sectors within SPX, namely Technology or Financials, have broken their respective relative uptrends vs. S&P 500.  Healthcare has actually strengthened.
5. Key market constituents like AAPL 0.64%  and MSFT 1.07%  have just pushed back to new all-time highs this past week.
6. Institutional sentiment has NOT gotten as bullish, and despite CFTC data showing some short-covering, this remains largely neutral, not bullish
7. No evidence of weekly negative momentum divergence and this remains a very important piece of the puzzle as a positive.  To expect a large correction after a 10% rally just since mid-March in SPX, markets will need to start to wither more than they have. (

(Normally a big market pullback is initiated with weakness, which then retests a number of times and momentum starts to turn down.  At present, weekly momentum remains quite strong and showing zero evidence of divergence.)

Bottom line, I do NOT anticipate a large correction, but feel such a decline likely approximate 5%, and might take another 1-2 weeks before this truly starts to get underway.  (Thus, some choppy back and forth trading looks possible over the final week of July, but momentum and breadth could show further deterioration during this time ahead of a trend break.

SENTIMENT-  Has Investor Sentiment grown too bullish on a retail and institutional level?

My conclusion is that this is not the case, despite several very bullish readings out of many of the familiar polls. My thinking is based on five key points:

1. Sentiment has literally just turned bullish as of early June.  While short-term sentiment seems to be optimistic, this directly followed a very lengthy period of bearishness which has been ongoing since Spring of 2022, over a year ago. 
2. Institutional sentiment tells a different story.  CFTC data along with data from JP Morgan’s sentiment polls shows neutral sentiment, not bearish
3. Most in the financial media, both anchors and strategists being interviewed, are all pointing to three things that are problematic:  A) Overbought markets B) Low Volume C) Selective participation.  Given that many continue to point to the problems of this rally and are not openly embracing it and making dramatic upside changes to their targets, there remains a sense of hope that markets will fall to offer investors a chance to buy dips for those who do not wish to pay $445 for NVDA 0.27% .
4. My personal conversations with many institutions in recent weeks indicates that many are still scratching their heads as to how markets can rally when (in their view) A) earnings have not been great, B) Stock prices have run up on nothing but market multiple expansion, and C) P/E’s look overpriced
5. My personal conversations with friends in recent weeks also involves many worrying about the prospects for a recession, and interest rates being elevated compared to a year ago, or what the Fed is going to do.  This is completely opposite from conversations from the late 90’s or 2021 when many were enjoying huge portfolio gains and making money easily.  The Equal-weighted S&P 500 has been lower in three of the last five months, dropping in February, March, and May.  Thus, it’s only been recently that stock prices have rocketed higher and rallies have begun to broaden out.  Thus, this is hardly the recipe for rampant enthusiasm.

Let’s break down some of these polls, one by one:

The latest AAII data shows that investor sentiment has gotten even more optimistic in the near-term with Bullish readings having grown to the most optimistic since 2021 while bearish readings have also dropped to the lowest levels in 2021 as well.

This aligns with what Ned Davis’s investor survey is saying, along with CNN’s Fear and Greed Index as well as Investors Intelligence.

Thus, multiple sources are claiming that sentiment has certainly begun to elevate, rightly so, in response to a 10%+ lift in SPX since the broadening out in market participation began back in mid-May of this year.  Looking at this alone, or based on some of the other polls mentioned above might be cause for concern for US Equity investors.

J.P. Morgan’s Global Equity sentiment index is also mid-range, not exuberant

This poll is an aggregate measure taking into account indicators like flow, volatility, positioning, and sentiment surveys in an attempt to offer a complete picture.

This weekly chart shows this index still quite a bit below the optimistic levels reached in 2013, 2018 and 2021, which all produced drawdowns in stock prices.

Conversely, the lows were reached in late 2008, 2016 and 2020 during times of downside volatility and coincided with markets bottoming out and rallying.

Overall, despite the lift in this index since last October, it’s still largely mid-range and has not approached any kind of high level that would indicate complacency or greed.  One typically utilizes readings in polls like this from a contrarian perspective.

CFTC data on S&P positioning is also mid-range, not wildly bullish

This poll also helps to provide some perspective to the recent market rally from an institutional perspective.  This Non-commercial (Hedge fund/Large Speculator) positioning data shows a big spike in positivity over the last month from abnormally low levels.

Yet, positioning remains short as of the latest reading from last week, not wildly exuberant.  A couple key points to make:

1. S&P Positioning dropped sharply this past Spring into May despite markets having risen (SPX and QQQ, although Equal-weighted SPX declined in February, March and May)
2. Positioning at the May lows was lower than in March of 2020 following a 33% decline in SPX in a little over one-months’ time.  That’s pretty astounding.
3. The absolute peak in bullish positioning happened as 2021 was coming to a close into early 2022.  This directly coincided with the broader global Equity peak that happened in US, Europe and most of Asia (though some of these countries peaked in November 2021)

The takeaway from this poll is that positioning has certainly improved a bit in the last month.  However, this has a long ways to go before truly turning optimistic.  This positioning data directly correlates with some of my own conversations.

Most institutional investors find it difficult to go from super bearish to super bullish and this transitioning takes time, in my view.

Overall, these are but a few polls of literally hundreds out there.  My view is that some are indeed optimistic.  However, my sense is that positioning nor investor appetite is truly all that bullish.

Therefore, any pullback in August is likely to cause sentiment to get fearful a lot more quickly.  This, in turn, should make weakness prove short-lived for now, and buyable.   If/when multiple institutional bullish surveys along with positioning data starts to show tremendous optimism, this would justify making decisions based on sentiment.  At present, while minor weakness might be around the corner in August, this shouldn’t detract from a bullish intermediate-term view for the 2^nd Half 2023 and the year as a whole. 

Have a great weekend.