All bears went to heaven or are they waiting at the horizon?
On Monday 22 Jul 2024 611pm, I emailed Clients my latest post titled 'Is it 2020 all over again?''
Below is the full transcript for your perusal:
'Dear Clients,
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Since my last memo, the SPX (S&P500 Index) has continued its upward stretch without any significant correction. This scenario reminds me of the late 2019 to early 2020 period, where US indices kept marching upwards to new all-time highs before experiencing a painful 35% drawdown in March 2020.
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While I'm not suggesting an imminent crash or the return of COVID-19, my bearish bias remains unchanged. However, the retracement targets need to be adjusted as SPX hits new all-time highs (since my May memo). A detailed recalibration will be provided in another memo.
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Technical Analysis
Market Breadth:
Market breadth refers to the number of stocks participating in a move within an index. Despite the recent months' continued strength in US indices, it was predominantly supported by a handful of mega-cap stocks driven by the AI theme (think FAANG & Nvidia/Tesla), while the majority of the SPX component stocks have struggled.
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This dynamic shifted somewhat last week after a weaker-than-expected inflation (CPI) report on 11 July. Cooling inflation and Powell's comments about acting sooner rather than later increased the odds of a rate cut by September. Concurrently, 10-year bond (treasury) yields fell, supporting interest rate-sensitive sectors.
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The sharp drop in yields suddenly caused a 'panic' rotation from 'mega-cap stocks' to 'everything else'. This shift is evident in the RSP ETF (equal-weighted S&P500 Index) breaking to new all-time highs as well as the IWM ETF (Russell 2000 small caps) hitting a new local high. See Chart 1 below.
Chart 1 - SPX vs RSP ETF vs IWM ETFs dated 19 July 2024
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However, this rotation more likely reflects a tactical shift within the market rather than reflecting a genuine economic recovery. In effect, the paradox in this rotation is that the decline in bond (treasury) yields actually reflect weakening economic activity on which the mid to smaller-capitalization companies are dependent for earnings.
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Investor Sentiment:
Investor sentiment remains at extreme levels among professional fund managers & US retail investors.
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- The NAAIM (National Association of Active Investment Managers) Exposure Index recently hit a local high of 103.66, indicating a probable correction, even if it's just a single-digit percentage pullback. See Chart 2.
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- The AAII (American Association of Individual Investors) Sentiment Survey showed bullish sentiment at 52.7%, well above the historical average of 37.5%, indicating an overextended market condition. See Chart 3.
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As previously mentioned in my other memos, Sentiment Analysis often reflects market conditions rather than providing a clear buy or sell signal. Currently, the market resembles an extremely stretched rubber band, poised for a potentially swift and painful retraction when the conditions eventually matter. The risk/reward at this juncture is simply not favorable.
Chart 2 - National Association of Active Investment Managers) Exposure Index July 2024
Chart 3 - American Association of Individual Investors) Sentiment Survey 17 July 2024
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Macro Perspective
Recent US economic data is deteriorating rapidly:
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- The labor market is slowing down, with the unemployment rate rising to 4.1%, the highest since November 2021.
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- Revisions to the May jobs report (from 272,000 to 218,000) and the April jobs report (from 165,000 to 108,000) highlight weakening employment.
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- The Jun ISM manufacturing & services index both missed forecasts, indicating ongoing weakness.
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- Key drivers of US consumer spending are losing momentum simultaneously, as per a recent Bloomberg/BT report.
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Source:
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Outlook
As the saying goes, 'the market can remain irrational longer than you can remain solvent.' With earnings season approaching, the SPX may continue to reach new highs if mega-cap stocks like Nvidia, Microsoft, Apple, etc report strong earnings.
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My Fibonacci Projection tool points to potential SPX targets at 5,804 (3.382%) and 5,923 (3.618%). See Chart 4 below. While these targets are extremely stretched, the rally might continue into the historically volatile Sep - Oct period. The Sep - Oct period is historically the worst months of the year for the stock market based on annual seasonality performance.
Chart 4 - SPX Fibonacci Projections (note black arrows)
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Summary in Layman's Terms:
1. The current SPX development mirrors early 2020's strength.
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2. Market breadth has improved, but the recent strength in small to mid-cap stocks suggests a tactical rotation, not a broad-based economic recovery.
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3. Macro and fundamental data are weak, with GDP growth, ISM numbers, and employment data all being revised downward recently.
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4. The SPX has already reached the 3x Fibonacci projection at 5,617. While I cannot rule out that higher targets exist, this low-probability scenario should be approached with great caution.
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5. I will provide recalibrated SPX retracement levels in another memo when support levels are decisively broken.
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6. Consider Fixed Income (Bonds), Precious Metals complex, or even the IBIT Bitcoin ETF as they have seen significant drawdowns and are positioning for the next breakout. Skate to where the puck is going, not where it has been.
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7. For SG markets, consider taking some profits on banks since the next major move by the FED is likely the start of a rate easing cycle. On a similar vein, consider accumulating the Lion-Phillip SG REITs ETF and Gold ETF. Lastly, taking a position on SIA Engineering may make sense since the Singapore Aviation sector takes off with SIA & SATS leading the pack.
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8. Clients who have onboarded my curated Bond Portfolio solution should also consider increasing their allocation to this investment-grade Bond Portfolio.
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Live Long & Trade Well!
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Thank you & regards,
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Thomas Ng, CMT
Principal Trading Representative
首席股票经纪
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#plsreaddisclaimer #chartforillustrationonly #spx28feb24 #BTC28feb24 #showmethechart #tellyouthenews #befluid #wytant #livelongandtradewell
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Chart source: Tradingview
Image Source: Twitter'
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