S&P 500 Somehow Hits Another Record High
The stock market has hit stall speed in the past few days as it has barely moved. Extremely overbought levels haven’t catalyzed a correction like many expected. Not that there have been any big increases in the past few days either. In the past 5 trading days, the biggest movement was the 0.26% increase on Thursday.
As of Wednesday’s close, the S&P 500’s 14 day RSI was at 69.91. With the very slight increase of 8 basis points on Thursday, it may have broken the 70 mark which signals oversold.
In the past few days the CNN fear and greed index has fallen. 1 week ago it was at 91 and now it’s at 83 even though there has been zero decline in the S&P 500. This index can’t stay at extreme greed for long. It falls if there aren’t big risk on movements in markets.
Slight increases in the S&P 500 can’t keep this index in the extreme greed category. It will fall below 80 soon if stocks continue to barely move. Investors expect a bigger movement in stocks on Friday than we have gotten recently. Mostly because of the big economic reports coming out (retail sales & industrial production).
The chart above shows the Fed’s balance sheet compared to the VIX. Personally, I don’t see the connection because I don’t think the increase in the balance sheet aimed to fix the repo market is causing stocks to rally. This chart is interesting because of how the VIX is grouped.
This year, there have been 3 streaks where the VIX has been below 15 for significant lengths of time. Previous 2 streaks were 26 and 21 days. Current streak is 24 days. VIX was up 5 basis points to 13.05 on Thursday. This streak is just like the 26 day streak without the S&P 500 falling on back to back days.
Sentiment Check
Bank of America fund manager survey showed managers have capitulated and gotten much more bullish in the past month. They can get a bit more bullish before I’d call it euphoria. But they certainly aren’t bearish like they were this summer.
As you can see from the chart below, about 55% of fund managers think equities will be the top performing asset class in 2020. There’s definitely a lot of hindsight bias with this. On the other hand, to think government bonds, cash, or corporate bonds will do better than stocks, you need to be pretty bearish.
It's difficult to come out with a prediction for 2020 yet because the year isn’t over. However, even a 5% return would outperform most of this list. It’s technically possible for you to think commodities will be the top performer while also thinking equities will increase decently. This poll is skewed to make it look like managers are really bullish.
On the other hand, the percentage expecting equities to do the best is probably much higher than it would have been if this question was asked a few months ago. Again, managers have gone from very bearish and seeing a recession, to modestly bullish.
AAII individual investor survey shows similar results. It isn’t expressing the high amount of optimism seen in the CNN fear and greed index and the 14 day RSI, but there are more bulls than average. In the week of November 13th, the percentage of bulls increased 0.4 to 40.7%. That's above the historical average of 38%.
Percentage of bears rose 0.9 to 24.8% which is below the average of 30.5%. These aren’t great numbers if you are a bull. But they are very far from reason enough to sell stocks or go short. Maybe the bulk of the rally has been had, but this data doesn’t signal a big decline is coming.
We need to see many more bulls and many fewer bears to expect a correction based on this data. To be clear, a correction can occur, but it won’t be because of this reading.
Details Of Thursday’s Trading Session
Nasdaq fell 4 basis points and the Russell 2000 fell 2 basis points. Thursday was a very flat day. Best 2 sectors were real estate and materials which were up 0.84% and 0.49%. Utilities were up again because of the decline in long bond yields. 10 year yield is only at 1.84% which is 12 basis points from its recent peak and that’s including the 2 basis points it was up on Thursday evening.
2 year yield is at 1.6% as the difference between the two stayed at 24 basis points. Steepening in the curve has stalled out as long term yields have fallen in the past few days. Bond investors are less bullish on nominal growth even as the S&P 500 keeps making record highs.
With the decline in short term yields, the chance of a rate cut in 2020 increased to 60.5%. Odds are increasing in this bullish trend correction. A main thorn in my forecast has been the S&P 500 which has ignored other markets.
Mid-Single Digit Earnings Growth In Q4
It continues to look likely that there will be a bounce in earnings growth even though the estimate for Q4 earnings growth has fallen from 2.79% to 1.58% in the past 14 days. On September 1st, the estimate for Q3 growth was -1.59%.
It’s very likely the Q4 estimate will stay above that by December 1st. Estimates shouldn’t fall much in the next 2 weeks because there are very few earnings reports coming as earnings season is 91% over. If estimates for Q4 earnings growth start earnings season at about 1%, with an average beat of about 4% we should see 5% earnings growth.
Bears love to state that 2020 earnings estimates are way too high, but they really aren’t that optimistic. Even with weak comps, the Q1 and Q2 EPS growth estimates are 4.94% and 5.83%.
In the next few months, they will probably fall to about 3% and 4%. That’s not a high hurdle to overcome if the economy recovers. If it gets worse, earnings growth will be negative.
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