Is the Negative Outlook on Stocks and Bonds Justified?
The recent drop in both stocks and bonds has caused additional stress for investors. Tom Aspray of The Viper Report analyzed the market data to see if the negative outlook is justified.
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The stock market's reversal on August 28th in reaction to Fed Chair Powell's comments from Jackson Hole was a clear warning that was supported by the technical evidence. I referred to this last week as a new verdict for the stock market and commented that "It would take a powerful rally early in the week to keep the daily A/D lines from moving into the corrective mode." The market's reaction to Powell's comments last week was a clear warning that something was wrong. The technical evidence supported this view, and I referred to it as a new verdict for the stock market. I commented that a powerful rally would be needed early this week to prevent the market's daily A/D lines from moving into a corrective mode.
The sell-off last week was extreme, with two days where over 90% of stocks on the S&P and Nasdaq 100 index declined. Many investors were expecting a rebound this week, but so far that has not materialized. The S&P 500 index is down 3.2% from Monday's open to Thursday's low. Even though there was a slight rebound on Thursday, it has not been enough to stem the losses.
The AAII's survey results indicate that investors are still skeptics about the stock market's recent rally. However, history has shown that when the bullish percentage is near 20% or lower, stocks have generally rallied, sometimes forming a significant bottom.
The bearish sentiment among investors is evident in the lack of confidence in the stock market. The bullish percentage has been below the long-term average for 41 consecutive weeks, and last week it dropped to 21.9%. This indicates that investors are pessimistic about the future of the stock market and are hesitant to invest.
The S&P 500 has been on a roller coaster ride over the past year, and the AAII bullish % has mirrored this trend. In October 2007, the bullish % peaked at 54.6%, coinciding with the S&P's highest point. By January 2008, it had dropped to 25.7%, and continued to decline as the S&P made new correction lows in March. The bullish % reached its bottom in May, at 20.4%, before rebounding to 53.3% by May 1st. The S&P 500 followed suit, peaking three weeks later. However, by July 2008, the bullish % had dropped again to 22.2%, indicating that the market may be due for another correction.
From my perspective, the most recent rally was much stronger than what occurred in 2008. I was more important from my perspective that the S&P 500 Advance/Decline line was able to surpass the five-month resistance, line c, at the end of July. There have been several instances, including 2016, 2018, 2019 and 2020 when similar breakouts identified the start of new uptrends for the stock market.
There is no question that the stock market has been weak lately, with more decliners than advancers on the NYSE for two weeks in a row. This has caused the S&P 500 Advance/Decline line to drop below its moving average, indicating that the trend is now downward. Unless we see a strong rally this week, it is likely that the market will continue to trend downward in the near future.
It is clear that the Invesco QQQ Trust (QQQ) is in a downtrend, as it has declined in value for the past three weeks. The most recent low was $295.17, which is below the weekly starc-band at $279.25. This suggests that further downside is possible in the near-term. Resistance is seen at $312.47 and the 20-week EMA, which is starting to turn lower.
It is positive that the Nasdaq 100 Advance/Decline moved through its near-term downtrend, line c, which confirmed the positive divergence at line d. However, the longer-term resistance at line b has not yet been overcome. The A/D line has dropped sharply below its WMA and is getting closer to the bullish divergence support at line d. A drop below this support would be an indication that the June lows may not hold.
The markets are getting oversold, but there are signs that they may stabilise or rebound in the near future. The key market tracking ETFs have been testing their daily starc-bands for most of last week, and this is consistent with some stabilization in the averages.
The S&P Growth Index declined last week while the S&P Value Index held up relatively well. This trend has been evident for several weeks, and the ratio between the two indices has dropped below its 20 period moving average.
It is clear that the rebound in growth is over, and that value is now leading the way. The long-term analysis indicates that while growth has led since 2009, this started to change in the fall of 2020. This confirms that the current market conditions are favoring value stocks, and that investors should be prepared to adjust their portfolios accordingly.
Even with the weekly and daily A/D lines both negative, I still favor having an allocation to stocks, especially with bonds declining. Once the market decline is over, I think the high-yielding value ETFs will be a good investment. Traders should consider taking light short positions but only on a rebound back to the 20 period EMAs and the monthly pivots where the risk can be better managed.
