Lowest Percentage Of Bears Since Mid-2016

Stocks Rise After President Trump’s Positive Tweet

Many think stocks will rise on almost anything even if it’s mildly positive because sentiment is so bad. That situation occurred on Thursday. S&P 500 increased 0.64% after President Trump’s positive tweet on trade.

There’s no proof of any agreement. We’ll need to wait until Friday for that. Specifically, Trump tweeted, “Big day of negotiations with China. They want to make a deal, but do I? I meet with the Vice Premier tomorrow at The White House.”

There may be some sort of agreement which doesn’t get at the big issues and eventually leads to a worse trade war. We’ve seen agreements following the prior 3 visits by the Vice Premier, but they all ended badly. Both sides want a deal.

It’s not a matter of whether they want one. It’s a matter of what they are willing to give up. And...it’s about how badly they want a deal. I don’t think they are about to give up enough to make a deal, but we will see. We’ve seen reports of China being willing to do a partial deal, but the devil is in the details.

Poor Investor Sentiment Signals Stocks Will Rally

Investor sentiment isn’t good even though the S&P 500 is within striking distance of its record high. This is great news is you’re a bull. Stocks didn’t even need to correct 10% for sentiment to become terrible.

There isn’t optimism about a trade deal, but stocks aren’t down much. It’s weird to consider how high stocks would be if there was a deal since there is still a cyclical slowdown.

Specifically, the CNN fear and greed index rose 6 points to 36 which is still fear. VIX fell 1.07 to 17.57. In the AAII investor sentiment poll, the percentage of bulls fell 1.1% to 20.3%. And the percentage of bears rose 4.5% to 44%.

Percentage of bulls is 17.7% below the historical average and the percentage of bears is 13.5% above average. Also, the percentage of bulls is the lowest since mid-2016. But the percentage of bears is only the highest since August.

As you can see from the chart below, the NDR daily trading sentiment composite is at 28.89 which is in the extreme pessimism category. Since 12/28/2017, the annual gain when the index is pessimistic has been 3.83%. That’s because stocks haven’t rallied much since then. Since the end of 1994, the results are better. Annualized gain is 29.82%.

Thursday’s Trading Session

Nasdaq was up 0.64% and the Russell 2000 was up 0.4% on Thursday. Every sector rose, but the utilities which fell 0.12%.

Best 2 sectors were energy and the financials which rose 1.28% and 1.02%. Financials like the steepening yield curve seen in the chart below. It shows the 10 year yield is now almost above the 3 month yield. 10 year yield is now 1.67% and the 3 month yield is 1.69%.

Coming rate cuts will steepen this part of the curve. Steepening usually signals a recession, but I don’t think it will this time. 2 year yield is at 1.54% which means it’s 13 basis points below the 10 year yield. If the 10 year yield gets above 2% and the 2 year yield keeps falling because of rate cuts, there will be enough steepening to be consistent with a recession.

Just because I don’t see a recession, doesn’t mean I won’t keep track of the indicator. Current odds for a rate cut in 19 days are 80.7%. It will happen unless there is a miraculous trade deal. Fed’s quiet period starts on the 19th, so the Fed is about to stop talking. 

Biden Has A Good Poll

Healthcare sector was up 0.51%. It may have been up because of the latest Fox News national poll which showed Biden up by 10 points over Warren. Technically, this poll was a big improvement for Warren. She gained 6 points from September. Sanders lost 1 point and Biden gained 3 points. His lead only fell by 1.

The October 15th debate will have 12 candidates, but it will be in one night. This many candidates on stage probably won’t have a huge impact on the top candidates’ speaking time. Moderators barely ask the bottom candidates any questions.

So far, 8 candidates have qualified for the November 20th debate. I think the ones who don’t make that debate will drop out, finally narrowing the field. I’m guessing the threshold to make the 6th debate will be higher than the 5th one which will further limit how many candidates make it.

22nd S&P 500 Firm Reports Earnings

Earnings season will get going next week as the big banks report results. On Thursday, only 1 firm reported. Delta Airlines beat EPS estimates, but missed sales estimates and reported weak guidance.

It’s $2.32 in EPS beat estimates by 5 cents. It’s $12.56 billion in revenues missed estimates for $12.624 billion. The firm expects Q4 EPS to be from $1.2 to $1.5. Estimates were for $1.5.

Now 86% of S&P 500 firms have beaten EPS estimates. However, 91% of firms have had their Q4 estimates slashed.  With 22 firms reporting results, EPS growth is 3.8% and sales growth is 3.26%.

Only 55% of firms have beaten sales estimates. That’s below the 3 year average of 71%. Average EPS surprise is only 2.36% which is way below Q2’s rate of 5.48% and the 3 year average of 4.09%.

Conclusion

Stocks rallied on the hope of a trade deal (probably won’t happen) because sentiment is very bad. It’s amazingly bad when you consider how well stocks have done this year and how close they are to the record high.

3 month 10 year curve is about to normalize. Delta reported weak guidance just like many other firms this quarter. It hasn’t been a good earnings season so far. The Democratic debate on Tuesday could impact healthcare and the banks if it impacts the polls.

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