S&P 500 Rallies To New High Last Thu; Tech’s Participation Should Help Build On Momentum

As a matter of fact, this phenomenon has been going on since stocks reached major lows in March last year. In the week to March 18, 2000, these funds held $3.94 trillion in assets; the S&P 500 bottomed on the 23rd that month and went on to rally 82 percent. These assets, however, rose by $561 billion during the period (arrow in Chart 3).

This is not exactly a vote of confidence equity bulls would like to see. That said, after peaking at $4.79 trillion in the week to May 20 through mid-December, these funds did contract by $503 billion, before rising again. A similar contraction could potentially help stocks.

Or take investor sentiment, for that matter.

Early this year, sentiment was effusive. Through the week to January 27, Investors Intelligence bulls were north of 60 percent for 10 weeks in a row. Sentiment decisively perked up after November. Similarly, between mid-November and mid-February – that is, 14 weeks – the NAAIM Exposure Index stayed north of 100 for nine weeks. Readings above 100 are rare. Going back to July 2006, there have been 29 100-plus readings.

Sentiment has cooled off. As of last Wednesday, the NAAIM index, which measures National Association of Active Investment Managers members’ average exposure to US equities, stood at 52. As of last Tuesday, newsletter writers, as measured by Investors Intelligence, were 54.4 percent bullish. This is not exactly a panicky territory as was seen during the lows of March last year (arrow in Chart 4) but suppressed enough it can swing back up.

At least that is what equity bulls are hoping for, particularly given last week’s breakout in the S&P 500.

One thing going for them is the earnings revision trend.

First of all, sell-side analysts are notorious for starting out optimistic and then lower their numbers as the year progresses. This was also evident last year.

In March 2019, they had penciled in $186.36 in 2020 operating earnings estimates for S&P 500 companies. Then the knives came out. Estimates gradually trended lower, reaching $173.04 at the end of February last year, before the bottom fell out as COVID-19 hit; in early July, this year’s estimates were down to $108.86. It turns out they were too pessimistic at that point in time, with the year ending in $122.38 (Chart 5). Around the same time, estimates for this year began to hook up – from $160.89 mid-July to $172.46 at the end of March this year. If this year’s estimates come through, earnings would have shot up 41 percent, followed by another 16 percent increase next year, to $200.

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