Market Strategy Radar Screen Weekly December 17, 2018

Everyday, Everyday I Have the Blues

Equity market continues to ignore good news and supportive economic data

A bias for downside market performance since stocks reached record peaks on September 20th has the markets singing the blues even as news on the trade front has begun to show some progress and while economic data (e.g. retail sales and CPI inflation, which we discuss on page 5 of this report) remain supportive in our view for future growth in the New Year.

The S&P 500 as of last Friday’s close had posted seven weekly losses in the 11 weeks since the start of October, falling 10.2% since the start of last month and 11.3% from its record high on September 20th.

Over the course of the past 11 weeks, sentiment has soured toward stocks driven by negative projections for economic growth and corporate earnings growth in the year ahead. Traders and investors pretty much ignored a solid third-quarter earnings season wherein S&P 500 earnings grew nearly 26% on the back of 8% revenue growth as well as improvements in manufacturing reports, consumer sentiment, retail sales, wage growth, continued low unemployment and plenty of jobs for qualified takers.

With only 10 trading days left for stocks on the stateside calendar chances for a Santa Claus rally from h ere to the end of the year appear less than slim. For now fourth-quarter 2018 looks to be more like an assortment of lumps of coal than brightly decorated wrapped holiday packages.

We’ll remain open to something fabulous and unexpected happening between now and the last day of trading at the end of the month but for now we consider it more practical to right-size our expectations near term and consider the opportunities that may lie ahead in the New Year.

2018 has been a year characterized by irony as fundamentals stateside showed enough strength to weather some slowing domestically and from abroad. Yet recession predictions continue to litter the economic landscape even as fundamentals don’t appear to show deterioration or signs that a recession is imminent.

Meanwhile Trade Negotiations Continue

Last week China announced it would reduce tariffs on US-built automobiles sold in China from 40% to 15% and that it would begin to buy corn and soy from the US again. The equity market seemed once again to ignore these positive developments.

The headline news that gathered considerable interest by near the end of the week was that the AAII (American Association of Individual Investors) survey of Bullish Sentiment had fallen to a level of 20.9—a level considered pretty bearish (see figure at right).

The last time that the AAII Bullish sentiment was lower than where it was last week was in 2016. That year the gauge hit a five-year bull sentiment low of 17.75 on May 26th. Our deeply embedded contrarian roots pushed us to check out what the S&P 500 did from that prior low on the Bull market gauge to the end of 2016.

When we checked, the S&P 500 moved up a little over 7% from May 26th through the end of the year in 2016 (see figure at right). Curiously China was in the news that year as well after having devalued its currency a second time in five months in early January.

Oil prices were also in the news in 2016, as West Texas Intermediate light crude dipped to $26.21 on February 11, 2016. In 2018, the price of crude oil has fallen 33% from a high on October 3 through last Friday’s close (see figure at right).

Negative projections abounded in 2016 as now. Time will tell if this year’s low on the AAII Bull gauge serves as a similar contrarian indicator in the months ahead.

This year we have delayed the release of our projections for S&P 500 earnings and the closing high for the New Year (2019) to allow the current correction to run its course.

We expect to complete our projections before the end of this week and thank our readers for their patience.

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