Stock Market Sentiment: It Won't Get Much Worse

Jeff Miller, (www.dashofinsight.com) had a great title to his blog post this weekend “Get Out, Hide Out or Ride it Out.” It sums up the current market environment perfectly. This blog has always been fortunate to be picked up by The Dash on a regular basis, mainly on the topic of S&P 500 earnings.

From Gary Morrow, an excellent technician, quoting Ryan Detrick and LPL Strategist, this weekend, August 10, 2019:


Finally, a bigger picture article from Helene Meisler at TheStreet. TheStreet is best known for Jim Cramer, who founded the blog in the late 1990s before blogging became what it is today. While it’s a very tough business model, TheStreet has a ton of talent that can be read daily including Jim Cramer, James “Rev Shark” DePorre, maybe one of the best bloggers that can be read on a daily basis if you are a frequent trader, Bob Lang, who does a good job with the options market, and Helene Meisler on the market technicals. For full and fair disclosure, I used to write for what was back then, “TheStreet.com” from early 2000 through 2008 or so. Jim Cramer was very good to me, and I thought the site was a great aggregator of a multitude of investment talent including Jeff Miller, Norm Conley of JAG Capital in St. Louis, Jeff Bagley, Vitaliy Katsenelson, and editors like Rob Martorano. Many friendships and professional contacts were made on the site and still maintained. Many investment pros have binary feelings about Jim Cramer – you either love him or hate him – but he gave me United Health (NYSE:UNH) at $48, Texas Instruments (NASDAQ:TXN) in the low $20s after the large-cap growth collapse in the early 2000s and a bunch more.

Here is Helen’s article on sentiment and the S&P 500 technicals from this weekend:

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And what of sentiment? Much will be made of the big moves in the American Association of Individual Investors’ (AAII) weekly survey. The bulls plunged by 16 points, while the bears were up by 24 points. Even for these day traders, that’s a lot. And for the most part that’s bullish on an intermediate-term basis.”

So let’s take a look at some other times we’ve seen bulls plunge by this approximate amount. In 2009, they pulled in their horns in mid-January. We did rally a bit, but then, you might recall, we plunged into the March low. Turns out they were right. This is not shown on the chart.

Since November 2017 they have done this five times – they jump around a lot, you see. For four of those times, there was in fact another move lower, before we rallied again.

One final note on sentiment: The put/call ratio for the Volatility Index, which I spent an inordinate amount of time discussing two weeks ago when it plunged to readings under 20% for four straight days, has now shot up to 119%. That’s a whole lot of folks betting on a lower VIX now. The odd thing is the last time they did this was July 10. Stocks didn’t much care for a while, but the VIX never really went much lower than that.

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Helene’s point is that after a plunge in the S&P 500 as we saw Thursday and Friday, 8/1 and 8/2 and then 8/5 usually we get the rally and then another move lower.

Helene’s bigger picture point was that with sentiment the way it is “that’s bullish on an intermediate-term basis” (presumably for the SPX).

Summary/Conclusion: President Trump’s tweet policy around China is confounding the market since the President is ignoring a lot of advice, and seems to be acting unilaterally in terms of China trade tariffs and policy, hence the market gets surprised regularly. There is another heavy round of corporate bond issuance coming this week, per Bloomberg, so with high yield spreads widening last week and the Fed easing monetary policy, I do think high yield credit spreads work lower into year-end 2019, but a supportive equity market might be needed.

It’s a tough environment in which to trade, but I still think the S&P 500 works higher into year-end 2019, and the poor sentiment and the plunge in sentiment last week should help those who remain long.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.