Published April 26, 2024
Below is an analysis of very recent market activity by Blake Millard. First, Blake talks about the technical condition of the stock market. The stock market became oversold last Friday which often leads to a bounce, which we have seen this week. As the market weakens, investor sentiment follows (note: sentiment does not lead). The deterioration in investor sentiment sets up a new rally as the “wall of worry” has been put in place and sellers have already sold – e.g. there is fresh money for new buys. All the market needs then is a catalyst to kickstart the shift. This week’s tech earnings could have provided that catalyst. But interest rates keep rising. So a couple of tame inflation reports would do the trick.
Here’s Blake:
“Given the strong market performance to start 2024, equity markets were clearly in overbought territory, as the 14-day relative strength index (RSI) floated above 70 several times throughout January and February.
However, the RSI approached oversold levels last week on Friday – kissing the 30 level – which was its lowest reading since the market low in October 2023. See yellow highlights below.
The corrective action from the last few weeks saw an increasing share of stocks reach oversold levels. In fact, 12% of the S&P 500 index had an RSI that was less than 30 last week, again the highest reading since the market low last fall.
The percentage of S&P 500 index constituents having made new 1-month lows would also suggest that markets were oversold. After the stronger than expected Retails Sales reading last week, we saw new 1-month lows spike to the mid-50% range, which was the highest reading since the October 2023 lows and the regional bank crisis last spring. This is a critical level because historically, when we get new 1-month low readings of 50-60%, equity markets start to trough.
And a tale as old as time, when price corrects, sentiment often follows in spades.
This week – for this 1st time in nearly half a year – bears now outnumber bulls, as the American Association of Individual Investors (AAII) reported that bullish sentiment fell for the 6th time in the last 7 weeks.
So, in addition to the cleaning up of market technicals, sentiment has also corrected.
The spread between bullish and bearish sentiment has declined rapidly from the 95th percentile over the last 10 years, and now stands at -1.8 – meaning we now have more bears than bulls, a sign that sentiment is getting overly pessimistic.
Market Update
A big week for stock investors as the latest quarterly earnings reports from three of the market-leading Magnificent Seven companies were due in addition to another reading on inflation. Monday brought a bounce from the prior week’s selling with stocks rising +0.9% on easing tensions between Iran and Israel. Positive earnings inputs from General Motors, UPS, Danaher and a jump in new home sales kept the rebound alive Tuesday. Stocks recovered +1.2% Tuesday. Stocks were flat Wednesday with Tesla shares zooming higher after beating downbeat expectations. Texas Instruments and Visa also found reports well received by investors. The progress was almost all undone Thursday as GDP came in lower than expected with inflation problematic. Meta’s earnings failed to live up to high expectations sending that stock down about -15%. The company reminded investors that heavy spending is required to deliver their AI-fueled vision. Further souring the mood, Caterpillar missed earnings forecasts as did IBM. But stocks recovered more than half of the early session losses to close down a modest -0.5%. After the market close, two other member of the M7 delivered earnings and this time they were pleasing. Google parent, Alphabet, announced its first dividend alongside a large stock buyback program to add further joy to a positive earnings report. The stock opened higher by more than +10% Friday. Microsoft also posted solid results. A report on the Fed’s favored inflation gauge assuaged investors concerned that rate cuts may be entirely off the table this year. Reports from Exxon and Chevron were mixed. For the day, stocks rode the goodness from Alphabet and Microsoft to a solid +1% advance.
A rollercoaster week for investors found the S&P 500 (SPY) recovering much of the prior week’s swoon. The index posted a +2.64% gain. Nasdaq 100 (QQQ) zipped upward by +3.96%. Smallcap stocks (IWM) recovered +2.72%.
Warm wishes and until next week.