August 15, 2021
Weekly Market Outlook
By Geoff Bysshe
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…
On the other hand, the pessimism is based on the belief that growth and profits will stall due to…
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 200th 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)
This Week’s Cryptocurrency Highlights:
(by Holden Milstein)