Rough Seas Ahead

Markets are about to hit some rough seas in the month(s) ahead. I’m not calling for a bear market or major crash but more expecting some choppy sideways/slightly lower action. We’re going to batten down the hatches a bit (ie, reduce equity exposure). 

Here’s what I don’t like: 

  • Numerous measures of sentiment/positioning are now showing excessive bullishness and complacency
  • Our indicators suggest US GDP is about to roll over hard and that means lower earnings
  • Consensus earnings estimates for Q4 on are way too high considering
  • Market valuations are at levels that have acted as a brake on further gains in the past
  • I’m expecting earnings beats but bearish guidance this quarter

Starting with sentiment and positioning. 

Our Composite Sentiment/Positioning Index is back above the 50 level (red line) which marks excessive bullishness and complacency.

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Sentiment Trader’s “Dumb Money Confidence” indicator is near cycle highs. Forward returns for stocks have been weak following similar readings in the past. 

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Investors Intelligence Advisor Bullishness is near 60%. The market has dipped or traded sideways over the following month each time this indicator has crossed the 60% mark.

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And then our Total Put/Call 10-day moving average indicator shows that investors are complacent and are not hedging their downside relative to their bullish bets. 

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Now let’s look at economic growth. 

I’ve been talking about this one a lot, but our Philly Fed indicator suggests US GDP growth is headed for sub 2%.

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The Atlanta Fed’s GDP Now Forecast is tracking just 1.6% growth. 

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Our Business Conditions Diffusion Index points to the ISM entering contraction territory in the coming months. 

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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