E Market Sentiment Has Improved; Q1 EPS Forecasts Still Fall

Others such as risk-parity funds, which adjust their asset allocations based on price swings, have slowed their equity buying, according to Nomura. Commodity trading advisers -- trend-following quants -- will likely stay on the sidelines until the S&P 500 is safely above 2,900, a level the index breached today for the first time since October.”

 Market sentiment has dramatically improved through the Q1 2019 period and into the first 2 trading weeks of April. Remember, April tends to be the best month of the year for the S&P 500.  What else might investors be asking as the market trek’s higher without positive fund flows and seemingly stubborn CTAs and hedge funds whom are willing to wait this rally out? How’s market sentiment? Goldman Sachs (GS) sentiment indicator is also at extreme highs. 

This Goldman Sachs Sentiment Indicator says that an extremely positive reading +90 suggests the S&P 500 has a high probability of falling by ~3% during the following 6 weeks. When coupled with the extreme breadth thrust that has excluded a 3% decline during the current market rally, this combines to further validate the bearish slant when it comes to the overall risk/reward equation presently, given current S&P 500 levels. Keep in mind, the all-time high is only 1% away folks, that’s 1% upside probability near-term juxtaposed with many other variables at play that could elicit a market pullback. Weigh your risk appetite for the next 30-day period and review your current positions for the purpose of risk management.

Spotting fear or complacency is easy, but spotting tops and bottoms are extremely difficult.  In congruence with the latest GS Sentiment Indicator reading, the latest E-Trade StreetWise study showed improved bullish sentiment among respondents.

  • Bullish sentiment returns. Bullishness rose 12 percentage points since last quarter to once again represent the majority of investors at 58 percent.
  • Investors believe there’s more room for the bull market to run. Two-thirds of investors say they think the bull market has a year or more to go (66%), up seven percentage points from last quarter.
  • The majority gave the US economy a passing grade. Investors who gave the economy an “A” or “B” grade rose 9 percentage points this quarter, to 64%.
  • Volatility concerns remain. Investors who believe volatility will stay the same was up by 8 percentage points from Q1.

“It’s been a great start to the year for the market,” said Mike Loewengart, VP of Investment Strategy at E*TRADE Financial. “While economic data has shown some slowing, many encouraging data points remain, particularly in the labor market. Investors have shown their resilience and, at least for now, seem to have shrugged off growth concerns from the Fed, as well as auxiliary geopolitical concerns from Brexit, Iran, and Latin America. Hopes of a trade deal with China spring eternal, and any clarity on that front could serve to further drive investor confidence.”

It’s clear that even with light market positioning and outflows, sentiment has improved, but only as of late.  Are these the telltale signs of a near-term pullback? Sentiment indicators tend to be viewed as contrarian indicators after all. 

Economic Data Improves

Just as the title of this segment suggests, economic data has improved, as the Q1 period turns a new quarter. From the previous weeks Nonfarm Payroll report to this past week’s Initial Jobless Claims, the economy is showing signs of having trough through Q1 and reemerging in Q2.

Some of the lesser valued economic data was released last week and mostly proved to meet economists’ forecast/expectations. (Table from MarketWatch)

The JOLTS survey showed a decrease of nearly 500K, but came down from record levels and still remained above 7mm and remains at elevated levels.  Core CPI cooled more than expected

Even when accounting for food and energy, CPI came in as expected and is proving out the trend of disinflation since the summer of 2018. And then Initial Jobless Claims hit their lowest levels since 1969…. again!

Jobless claims, a rough measure of layoffs, fell by 8,000 to 196,000 in the seven days ended April 6, the government said Thursday. Economists had been expecting a reading of 210,000. Jobless claims have fallen four weeks in a row to the lowest level in 50 years, just a few months after spiking to as high as 244,000. The more stable monthly average of claims, meanwhile, declined by 7,000 to 207,000. That was also the lowest mark since 1969.

Last week was a rather light week for economic data, but next week is anything but light. (Table from MarketWatch)

The week will not only begin with bank earnings on Monday but also the Empire State Manufacturing Index. The Beige Book will be released on Wednesday only to be followed by the all-too-important monthly retail sales and Philly Fed Index on Thursday.  Recall the prior month’s Philly Fed Index had a strong uptick. Many market participants will desire to see some follow through in order to confirm the worst of the economic slowdown is in the rear view window.

While the composite Philly Fed Index rose, some components within the index didn’t prove as favorable. The survey’s component on new orders increased only slightly to 1.9 in March from -2.4 in the prior month, which was the lowest figure since May 2016. Shipping in the region rebounded strongly into positive territory to 20 from -5.3 in February. The survey’s employment barometer slipped to 9.6 in March from 14.5 in the prior month.  The six-month business condition outlook dropped to 21.8 in March from 31.3 in the prior month. We’ll be looking for improvements in all of these components to certify that manufacturing green shoots are turning into bamboo stalks.

Thursday will also bring with it the latest Leading Economic Indicator results. The week will conclude without trading Friday, but with the release of Housing Starts and Building Permits data.

It should be noted that much of the equity market rise has been predicated upon a belief that the U.S. returning to trend growth correlates and coincides with a rebound in China’s economic activity. On Friday, Exports jumped 14.2% in March from a year earlier while imports fell 7.6% in dollar terms, the customs administration said Friday. That left a trade surplus of $32.65 billion, with the bilateral surplus with the U.S. rising to $20.5 billion in the month from $14.7 billion in February.

Fund Flows, Still Stink

Year-to-date through the Lipper fund-flows week ended April 10, 2019, equity funds (including ETFs) handed back some $2.8 billion despite the average equity fund posting a 14.94% return.

As shown in the screenshot above, equity fund flows continue to be negative, with outflows continuing last week, but for the 2nd consecutive week equity, ETFs saw inflows. (See table below)

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