Wall Street vs. Main Street Divergence Hits Record Levels

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As a result of the much-anticipated earnings season, which is now winding down…

Last week, important players on Wall Street and main street hit new extremes in sentiment on both ends of the spectrum.

As you’ll read below, if it wasn’t August, I’d say that they can’t both be right, and that means someone’s in for a big surprise.

Both sides have very good reasons supporting their points of view.

Fortunately for all the passive investors, it is August, and Mr. Market has been remarkably calm about his job of pricing it all in.

So calm, in fact, that it’s noteworthy.

Last week I described last Friday’s action in the SPY as “not normal” noting that on a day when interest rates and gold had volatile reactions to the jobs report, the SPY was so calm that its true range for the day was the smallest it’s been since Christmas eve in 2019.

This week, despite big news on consumer sentiment, fiscal stimulus, and inflation…

The Russell 2000 ETF (IWM), also known as Grampa Russell in Mish’s modern family recorded its narrowest weekly range since this same time last year.

Pattern traders, technicians, and members of our Slingshots service should also take notice of IWM’s inside week pattern right below its 50-DMA and the high end of a 3-week range.

August is a month known for dismissing wildly different opinions about the market’s future, but September often surprises investors as it prices in extreme divergences differently.

Don’t get surprised.

As shown in the chart below, last week the percentage of buy ratings on companies in the S&P 500 by Wall Street hit 56%.

That’s the most bullish these analysts have been on the U.S. since 2002, and the same measure applied to the Stoxx Europe 600 is at its highest in 10 years!

However main street isn’t as bullish…

Last Friday, the University of Michigan’s preliminary sentiment index fell by 11 points to 70.2, the lowest since December 2011, and the measure of consumers' outlook for the economy had the biggest decline since the pandemic.

Considering the fact that the consumer drives about 70% of GDP, this sentiment reading would make it easy to assume that the Wall Street analysts may be wearing rose-colored glasses, or suffering from a severe case of recency bias after a blowout earnings season.

However, before we judge…

As noted above both sides have good reasons for their point of view.

The optimism is based on fundamental factors of…

• Continued earnings growth
• Fiscal stimulus getting passed
• Excess liquidity in the financial system
• Gains in productivity, which Ed Yardeni argues will out-weigh inflation concerns.

On the other hand, the pessimism is based on the belief that growth and profits will stall due to…

• Rising COVID cases, and related hospitalizations and deaths
• Rising inflation
• Rising interest rates

Last week, the bond market (TLT) was rattled by both sides of the argument.

First, it sold off into the CPI report on Wednesday, but then when CPI report indicated much higher than expected inflation numbers the slide stopped.

Two days later, the TLT sympathized with the consumer’s bearish economic outlook with a move that led it to close up and on its highs for the week.

While the bonds are likely to influence stocks, the TLT has formed a range from roughly 153 to 145 over the last several weeks, and the stock indexes seem comfortable with that.

Consequently, the stock indexes seemed uninterested and continued to do what they’ve been doing. That is to say, the SPY rallied, QQQ consolidated and closed at the highs of the week, and the IWM waffled and closed lower.

Last week marked the 200^th day without a 5% correction. Impressive.

Thanks to Ed Yardeni, of Yardeni.com, for putting this in perspective with the chart below.

As you can see such a stretch without a 5% or more correction is unusual, but not unprecedented.

Bull markets that rise on low volatility are the most durable and persistent trends, and that seems to describe the SPY and QQQ right now.

Furthermore, considering how bull markets tend to “climb a wall of worry,” there seems to be plenty of fuel for the bulls right now.

Based on earnings season coming to an end, it seems likely that the next couple of weeks will be more of the same at least until September begins a new season.

However, as you’ll read in the highlights below, the steady climb in the indexes has occurred with much volatility in individual sectors, and this week was a good example of that.

Don’t be misled by a steady SPY or QQQ, there’s a lot going on underneath.

Keep an eye on the sectors, and if you’d like to learn more about how to profit from it check our recent presentation on ETF sector rotation strategies that are beating even this year’s hot market indexes.

 

This Week’s Market Outlook Highlights:
(links with a “$” will only be accessible by premium members)

• The Risk Gauge ($) remain bullish on the SPY.
• The SPY closed at an all-time high, helped by the value stocks in its index. As noted here last week, S&P 500 Value index tracked by IVE broke above its 6-week range and rallied. This week it closed at all-time highs. This can also be seen in the VTV ($). The significance of this is that bull markets are much stronger when both SPY and IVE are in bullish trends.
• Daily Real Motion indicators continue to show bearish momentum trends in DIA and IWM and demonstrating resistance at current levels in SPY and QQQ. However, the weekly Real Motion trends remain bullish in all 4 indexes. As a result, if QQQ breaks above its 200-day RM resistance it could lead to a new leg up. Until then, weakness should be considered bearish.
• The best performing sectors all rallied over 2%; Homebuilders (XHB), Materials (XLB), Consumer Staples (XLP). All three sectors are also among the worst performing sectors over the last 3 months. In contrast, the worst performing group (SMH) last week is the strongest performer over the last 3 months
• The Financials (XLF and KRE) continued their rally’s from the prior week, as you can see in the Modern Family charts here ($), the Triple Play indicators are now bullish for the first time since they turned negative as KRE broke its 50-DMA in May.
• Last week we highlighted that the New High/Low ratio has continued its bearish pattern of moving from above to below the 85 level. This is best seen on the Nasdaq chart. If the market pulls back, it will be concerning if the number of new 52-week lows expands to more than 200. While that hasn’t happened, Friday the QQQ closed higher, but there were MORE new LOWS than new highs. 
• Last week we noted that Long-term bonds (TLT) ($) got hit due in reaction to the stronger than expected jobs report, but it’s sitting on support just over the 200-DMA with a bullish Real Motion divergence pattern. Further weakness would be bearish, but it would not be surprising to see it hold support. On Friday, the gloomy Consumer Sentiment data sent TLT soaring off of this key support level.
• For the last few weeks, we’ve noted that Oil (USO) has a bearish Real Motion Condition ($). Follow through on the downside hasn’t happened, but its technical setup has not improved. In addition, energy stock ETFs (XLE, OIH, XOP) look equally as vulnerable.
• Last week Gold (GLD) collapsed on Friday to the low its 1-month range ($), This was likely driven by the as the dollar index (UUP) rallying and bonds (TLT) falling sharply. On Friday, TLT had an unusually large move up, and as a result, so did gold. TLT had good reasons. GLD is probably just the stuck in a range trading on short-term currency and interest rate correlations.

 

This Week’s Cryptocurrency Highlights:
(by Holden Milstein)

• Bitcoin (BTC) is up 2% over 7-days after cooling down late on Saturday night from a high over $48,000 back under $46,000 as of Sunday morning. Look for a strong start to the week with BTC's 10-dma moving above the 200-dma for the first time in 83 days, with expectations of bare minimum support at $40,000 and the next major target at $50,000.
• Ethereum (ETH) is roughly flat over 7-days, but showed a very promising bounce off of support at $3,000 on Thursday that kept the coins 1-month growth of 65% in fact, with the next resistance area to beat around $3,350
• Altcoins are back in full-swing, with the two most notable being Cardano (ADA) up 40% over 7-days and Ripple (XRP) up 54% in the same span. Watch these two large cap projects to potentially achieve previous all-time highs before BTC or ETH
• Many of the same trends that appeared at the beginning of the late 2020 Bull cycle are reemerging now including increased institutional investment, a craze for Non-Fungible Tokens (NFTs), and a diversification into altcoins.