The recent price action has shaken investor psyche and has many wondering whether this Bull Market is already over. We still think there are higher levels to be had for the S&P and DOW after this corrective action runs its course. We are studying it very closely. October is known for its volatility. It is certainly living up to its reputation. The Dow has seen ten 500-point daily moves this year. That ties 2008 as the only other year that has occurred in recorded history. Keep in mind, 500 points don’t mean as much today with the DOW at 25K as it did back at 10K in 2008. But it still registers as significant. This is a pivotal point for this Bull Market. It is being tested. This is a big shakeout.
There is no question in our minds that after nearly 10 years of a historic rally, the US Stock Market is running out of momentum and is nearing a meaningful top. We had anticipated the S&P to reach 3,000 within the next 6 months or so; call it by next Spring. That would translate to a 10% rally, minimum, from current levels. That projects to DOW 28K. However, there is the chance that the 2940 high reached last month was it. We still don’t think that is the case because top formations are a process and are generally quite extensive in time. Our sense is that 2940 level was a meaningful high, and this corrective price action is clearing the decks for another run to record highs. We continue to reduce our exposure to stocks and have been building up our defense mechanisms because it feels like the Market is squeezing the last bit of toothpaste out of the tube.
Market turbulence spooks psychology. It always does. That’s generally a good sign as a contrarian. It sure doesn’t feel good though. Investor sentiment continues to get whipsawed. How can you blame it? Trade tensions have been taking their tolls on the global economy. Our nation is divided like few times in its history and the midterm elections are less than 3 weeks away. Cable news and social media are fanning the flames of discontent, which permeates the social culture. The American Consumer represents 70% of the US Economy. It’s still in great shape. But negative psychology and higher interest rates tend to slow things down. The recent Investor Sentiment study now shows more Bears than Bulls. 35% surveyed were Bearish about the outlook for the US Stock Market, while 33% were Bullish. This was a slight increase from last week’s 30% Bullish reading. For perspective, 38% Bullish is average. It was 60% in January, the highest since the Dotcom bubble, which recorded a 75% Bullish survey at the top. It burst in euphoria immediately after. January was the closest we’ve seen to Euphoria in this 10-year cycle. The correction went a long way to address excess optimism. You can see that any hint of Euphoria has completely evaporated.
There’s a great deal of confusion going on around the world with Brexit, Iran, Italy, Russia, Saudi Arabia and global alliances in general. Stocks decelerated to the downside on word that Treasury Secretary Steve Mnuchin canceled his trip to Saudi Arabia for a high profile investor conference. This has been a very controversial issue with the murder allegations of the Saudi journalist at the hands of the Saudi kingdom. Corporate executives, like JP Morgan CEO Jamie Dimon, already bowed out. It is creating severe tensions for the Saudi’s which complicates US relations after forming a strong bond in trade and an alliance against Iran. Saudi Arabia is the largest producer of Oil and has threatened retaliation with its biggest asset. Strong growth in earnings and economic data has masked many global issues all year. But once growth is threatened, the Market pays attention. It’s paying attention.
The S&P 500 is just 6% off those all-time highs reached in September. It is still up over 300% during this record Bull run. But there are many stocks that are already in correction mode again, meaning down 10% from highs and some are even in Bear Market mode, having fallen over 20%. Strength is not broad based right now. The recent selloff has done some damage. Some of the declines are the result of programmed selling. As volatility goes up, many of these algorithms force sales. Over 70% of trading volume these days is machine driven programmed trading. It comes with the territory. The human element still matters, particularly playing defense. Earnings season is also underway, which may cause more sudden moves as investors look for the facts of revenues and earnings as well as the outlook for growth. Corporate America is in good shape. Earnings growth has accelerated this year. Global trade tensions have made things more difficult. Earnings Season is generally a catalyst for higher levels. The S&P 500 has risen in 7 of the past 9 earnings periods.
Small caps have been leading the declines. Tech has been choppy with a downward bias too. Both have been long-term leaders for this Bull. Leadership continues to rotate. Health Care is holding in very well. We are prepared for the lows from last week to be tested, and perhaps undercut. Support levels need to prove their worth. The February lows were tested and held in April. Our feeling is that a similar scenario plays out, and this time might be a quicker process. Previous Market tops experienced a high, followed by a selloff which led to a re-test of the previous highs 4-5 months later. They also have come with much more enthusiasm. This is a strange and unique scenario for the ultimate top and the end of the Bull Market. That’s why we don’t think it is over yet and believe weakness will be buyable. We do expect this volatile price action to continue through the election before setting up what could be a powerful rally to year-end. We are staying defensive for now while we navigate through this choppiness.
Have a nice weekend. We’ll be back, dark and early on Monday.