In The Know - October 2019
“History has shown that in every age and in every field of human knowledge, many of the views which almost everyone accepted as true and never bothered to think about further, were in time proven completely wrong.” – Philip Arthur Fisher
Market Condition: The current market uptrend is under pressure, as the S&P 500 battles to get back above the 3000 level. However market breadth (a gauge of the direction of the overall market) continues to improve. Furthermore while at the surface the market appears “volatile” the selling is diminishing with each subsequent correction since December of 2018, a very encouraging sign. In my view one of the most historic events happening now is that Microsoft (MSFT) and Apple (APPL) are each trading above 1 trillion dollar valuations. These are large numbers and historically significant. As institutions (which control 80% of the price movement in markets) are willing to hold and accumulate shares of these widely held stocks - indicates a “demand” for shares. If these same institutions, with their team of analysts and strategists foresaw Armageddon on the horizon they would be using this as a liquidity event and selling into these levels to get out before the bear market hits. Naturally, if any of the above were to reverse, my outlook on the current bull market would change.
Market Psychology: I am going to ignore recent headlines, because there is nothing really new just the same old fear mongering. So let’s take a look at investor psychology: Investor sentiment serves as an excellent contrarian indicator, since collectively “the crowd” is usually wrong. The American Association of Individual Investors (AAII) sentiment survey recently showed bulls at 21.4%, the bears at 39.4%, neutral at 39.2%. These percentages are very pessimistic and are the type of ratios we see at market bottoms much like December of 2018. The put/call option ratio has been spiking in the 1.2-1.4 range, indicating investor fear as they buy more puts (betting market goes down) vs. calls (betting market goes up), again the type of levels we see at market bottoms. The National Association of Active Investment Managers (NAAIM) Exposure Index is in the 57% range, again indicating underinvestment due to fear, the type of levels we see near market bottoms. The point here is that there is no euphoria while the market flirts with record high levels, overall a very good sign.
The Economy: Generally speaking most of the data is very positive, although some softness from the manufacturing sector, the ISM Manufacturing Index declined below 50 for September signaling a slowdown. The ISM Non-Manufacturing Index came in at 52.6 signaling expansion. The Conference Board of Leading Economic Index (LEI) for the U.S. was unchanged in August following a 0.4% increase in July and no change in June consistent with a growing economy. The unemployment rate fell to 3.5% in September, (lowest rate going back to the 1960s), while the Hispanic unemployment rate fell to 3.9% and African American remained at 5.5% both at record lows.
Summary: Market is moving sideways, grinding higher, as market breadth is improving. Earnings season is upon us again, and this perhaps will give us a more definitive path the market wants to take.
“Do not pray for an easy life, pray for the strength to endure a difficult one” – Bruce Lee