Retail Sales Miss Can’t Support The Recent Rally

Market Sentiment Neutral

It’s worth reviewing the market sentiment because we are in an uncertain moment in the near term for the stock market. The S&P 500 was able to exit the streak of lower lows. By doing this, it became fairly overbought in the past week. The hope was that this rally wouldn’t fade so easily because that would reinforce the notion that the market will remain stuck in this range for an extended period.

The table below shows a few sentiment indicators. The VIX, put to call ratios, AAII survey, Investor's Intelligence survey, NAAIM, and the Ned Davis sentiment poll all show the sentiment is neutral. The stock market is in quick sand as the great earnings results can no longer justify the market ignoring the global economic weakness especially in Europe. While America could gain investment capital at the expense of other advanced markets, it’s still not good for S&P 500 earnings for Europe to be weak as it is a big market for many internationally focused firms.

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The chart below, which shows the Investors Intelligence ratio, contextualizes the period we are in now. The market went from being extremely extended in January, as there was record bullishness, to being modestly oversold as bearishness became more popular. The bearishness never hit the levels seen in 2008 and 2016, so the rebound from it hasn’t provide much momentum for stocks, which is why we are stuck in the current range. You don’t want to sell stocks when they are oversold since we just witnessed a great earnings season. However, it’s a fool’s game to bet on the sentiment reaching another record high. Stocks need improved fundamentals to get back to the levels seen in January.

The 18 PE multiple in January shows there was froth in the market. It takes time for the fundamentals to catch up to stocks. There needs to be verification of the high GDP growth rate expected in Q2. It’s a weird situation where the GDP consensus is very optimistic, but there’s not much data to back it up. Furthermore, I don’t think the stock market believes GDP growth will be above 3%. If investors were certain GDP growth will accelerate to between 3% and 3.5% in Q2, the market would be near the January high. There’s a lot of data which needs to come through to support that expectation.

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