Record High for Stocks - Without Euphoria

Record High

S&P 500 is very close to having a Record High and its best month of the year. With Thursday’s rally of 0.95%, it hit a new record high and is up 7.34% month to date. It was up 7.87% in January.

With only one down month this year, the S&P 500 is up an astounding 17.84% in 2019. If you’re wondering how stocks have done so well with earnings growth in the mid to low single digits, recognize that in 2018, the stock market fell while earnings grew substantially.

The economy continues to avoid the recession that was priced in late last year. It now has the Fed on its side and is pricing in a potential trade deal. This has been a non-conventional recipe for a rally as the economy is far from running on all cylinders and the fiscal stimulus’ effects are ending.

The only way you can view this rally conventionally is if you think this is the last sentiment boom before the end of the cycle.

However, surveys show there isn’t euphoria.

Record High - CNN fear and greed index is at 46 out of 100 which is neutral. It was up 4 points on Thursday.

As you can see from the chart below, the AAII investor sentiment survey shows there are 29.5% bulls and 31.1% bears. This isn’t like previous tops. Many investors are actually fearful of a recession.

I’m not saying it’s wrong to fear a recession as the Cass Freight index was certainly very poor. I’m only describing sentiment.

June Bank of America fund manager survey showed there was the largest jump in cash positions since August 2011.

As you can see from the chart below, the NDR trading sentiment index was at 45.56 as of Wednesday. It needs to be above 62.5 to show extreme optimism.

In the past 6 years, when the index was neutral it has had middling performance, which is worse than the results since 1994. That doesn’t take away from the point that investors aren’t euphoric.

To be clear, I’m not saying stocks necessarily will move higher in the summer. I’m just saying it’s surprising for there to not be euphoria in such a hot market. The next step will be for the market to finally exit this triple top area.

Record High - Specifics Of Thursday’s Action

Nasdaq increased 0.8%, Russell 2000 was up 0.51%, and oddly VIX was up 2.93% to 14.76. It’s unusual to see the VIX up on such a positive day for stocks.

Gold increased 0.7% to $14,007 which is a 5 year high. Every single sector was up. Biggest winner was energy because of geopolitical threats. This sector was up 2.21% and oil was 5.4% to $57.07.

Oil increased on the news that Iran shot down a U.S. military drone. It is also being helped by the decline in the U.S. dollar.

DXY index is now at $96.51 which is the lowest level since March 21st. If the dollar keeps declining, it will help American earnings. I expect it to fall below $96 soon.

MBA Applications Index

Record High - It’s not a surprise that the latest MBA applications index from the week of June 14th showed a decline because the previous report had such a massive spike.

Specifically, the composite index was down 3.4% weekly after rising 26.8%. Refinance index was down 4% after rising 47%. 30 year fixed mortgage rate increased 2 basis points.

Still, the average rate in June is the lowest since September 2017. I expect rates to fall below 3.75% by the end of July. Purchase index also fell 4% weekly after a 10% rise. It was up 4% yearly which is similar to how it has been tracking all year.

Jobless Claims Fall

Record High - Inverted jobless claims have had a very high correlation with the stock market. Some even suggest that you only need to follow this one stat to figure out where the market is headed.

This correlation remained after the latest report and the rally this week in stocks. In the week of June 15th, claims fell to 216,000 from 222,000, which was 2,000 below the consensus. That’s the lowest number of claims since May 18th.

4 week moving average actually increased 1,000 to 218,750. Continuing claims for the week of June 8th fell 37,000 to 1.662 million and the 4 week average fell 5,250 to 1.679 million.

This is the sample week for the June BLS report. That means the June employment report should show strong headline job growth. I expect there to be over 100,000 jobs created. And I expect the May reading to be moderately revised higher.

The sample reading in this month is 4,000 higher than last month’s sample and the 4 week moving average is 1,750 lower. This should be a solid report. It will be released on July 5th. Estimates haven’t been published yet.

Record High - Leading Indicators Miss Estimates

It’s not a surprise the May leading economic index had 0% monthly growth because the S&P 500 fell 6.58%. This growth missed estimates for 0.1%. In other bad news, the April reading was revised to show 0.1% growth instead of 0.2%.

Specifically, in May the index was helped by the consumer’s outlook and the leading credit index. It was hurt by jobless claims, ISM new orders, and stock prices.

In the past 6 months, the index increased 0.3% which is much slower than the 2.2% growth rate in the previous 6 months. That explains why the chart below shows the 6 month moving average of the 6 month rate of change in the leading indicators index is at 0.6%.

Since 1960, this index has fallen negative twice without there being a recession soon afterwards. A negative reading leads recessions by between 2 months and 15 months.

The good news is stocks have had an amazing June, so it might stave off negative growth for another month.

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1 Comment

  • Kevin Morgan

    June 24, 2019

    Mr. Theo Dark, I just want to say, you an extremely high value component of the TheoTrading site. Of course the video library is awfully high value too, and I think Corey's approach to the markets is very wise and everyone should digest his knowledge as well. But your several times a week fundamentals review is pretty much the sum of all the "fundamentals" I ingest regularly (I'm a technical based trader), and your analysis that integrates market action is spot on for me. Thank you!