The graph below from Bianco Research shows a stunning change in sentiment among stock market newsletter writers. The top graph shows that on July 23rd, newsletter writers were extremely bullish. In fact, such a high level of bullish optimism has only been recorded twice since 1990. The Investor’s Intelligence survey of newsletter writers fell to its long-term average in only two weeks. Accordingly, such a decline in such a short period is one for the books.

The second graph charts two-week changes in newsletter writers’ bullishness. The recent decline was the sharpest since the crash of 1987. That is stunning, considering that on Black Monday in 1987, the S&P 500 had its largest one-day decline in history, falling over 20%. The recent decline was 8%, but over two weeks. Jim Bianco summarizes newsletter writers’ sentiment over the last couple of weeks as follows:

Did the world end in the last 14 days and I did not get the memo? This metric suggests that investment professionals who get paid to write newsletters freaked about the stock market over the last 14 days to a degree not seen in the last 37 years.

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What To Watch Today

Earnings

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Economy

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Market Trading Update

As noted yesterday, patience pays in a volatile market. Often, during sharp market corrections, our initial reaction is to “do something.” However, as is often the case, remaining calm tends to be more prudent. Stocks have essentially wiped out all the losses from last week’s market meltdown, and traders await key inflation data that will help shape the outlook for the Federal Reserve’s next steps.

We continue to suggest using near-term rallies to reduce risk and rebalance portfolios. This week’s economic data will very likely instill some volatility into the markets between PPI, CPI, and Retail Sales. Don’t sleep on this morning’s NFIB report, which is highly correlated to the annual ROC for the Russell 2000.

The most likely path for equities remains a restest of recent lows at some point. However, there is no guarantee of that, which is why we continue to navigate markets from one week to the next. For now, markets remain oversold enough to elicit a further rally, and the MACD has turned towards a “buy signal.” However, overall market action remains weak, so we suggest caution. For now, do not try to anticipate what the market will do next. Just respond tactically to the changes as they come.

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