June 4, 2019

Emotional gloom and doom enveloped investor sentiment last week, with the salt in the wound being the threatened tariffs on all Mexican imports into the U.S. if that country doesn’t tamp down the border crisis.

On the heels of rising tensions with the Chinese, deterioration in the European Union structure, and the combative rhetoric with Iran intensifying, the market lost some of its grit and deferred to an increasingly “risk off” posture that resulted in the S&P closing below its 200-day moving average last Friday.

At the same time, NASDAQ also closed below its 200-dma, which last occurred in the first week of March before it quickly recovered to a new high. When the stock market inhales hard, such as the present five-week correction that has shaved 6.8% off the S&P and 8.8% off NASDAQ, it pays to take into account those indicators that typically mark a point when seller exhaustion has peaked.

Every credible market pundit being interviewed by the financial media is asked to provide a prediction of when the “coast is clear” to allocate more capital. With the full understanding of the toll the sell-off is having on stock prices, the market is getting to a place where some technical indicators, contrary indicators, and real-time data points seem to suggest that a selling climax is near – if not already here.

While there is an intense focus on the major averages, more attention should be paid to the sectors that matter most – both to the stock market and to the economy itself – namely, technology and the consumer. When taking into account the charts of these most influential sectors to the market’s health, we see both the Info Tech Sector SPDR ETF (XLK) and the S&P 500 Consumer Discretionary SPDR ETF (XLY) maintaining their technical integrity. Both sector ETFs closed above their 200-day lines (orange line).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Other sectors that are also holding above their 200-day line include Utilities SPDR ETF (XLU), Real Estate SPDR ETF (XLRE), Communication Services SPDR ETF (XLC), and Consumer Staples SPDR ETF (XLP). Those trading below their 200-dma are Energy SPDR ETF (XLE), Financials SPDR ETF (XLF), Materials SPDR ETF (XLB), Healthcare SPDR ETF (XLV), and Industrials SPDR ETF (XLI).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The weakness in the energy, financial, and materials sectors reflects a net positive to the consumer and businesses in the form of cheap gas, diesel, and jet fuel; low interest rates; and low inflation. Chaos in the healthcare sector seems politically irreparable and will likely continue to depress the major averages.

U.S. Consumers Unfazed by Tariffs

If the consumer accounts for two-thirds of domestic GDP, then we should all take note of the spike in last week’s Consumer Confidence report for May, which came in with a reading of 134.1, the highest reading since November 2018. In both months, the market was in full-throated decline! Adding to this data point, the Present Situation Index increased from 169.0 to 175.2 and the Expectations Index rose from 102.7 to 106.6. The key takeaway is that consumer confidence has not been impacted by increased trade tension between the U.S. and China and the implied threat of prices on imports being passed on to the consumer.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Another noteworthy development was how the emerging markets suddenly diverged from the unrepentant selling in the U.S. and European markets. The iShares MSCI Emerging Markets ETF (EEM) spent the past week trading higher in what many market pros are calling a completely counterintuitive move. The five-day chart of shares of EEM (below) shows crucial support at $40, trading up thereafter on heavy daily volume averaging over 80 million shares.

Is this an “oversold bounce” or something in the tea leaves that suggests something better? It’s very hard to say when the negative noise level is turned up so high. But here, too, one would expect emerging markets to be taking it on the chin much harder than the current 10% slide EEM shares have endured.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

One group that tends to be a quintessential contrary indicator in accurately calling market tops and bottoms is the American Association of Individual Investors (AAII) sentiment poll. The latest survey shows bullish sentiment in the last two weeks to be at its lowest reading, by far, for all of 2019, and the bearish sentiment is at its highest level since January 3, right before the market soared.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This table of the year-to-date AAII sentiment surveys shows how in just the past three weeks, bullish sentiment was cut by almost 20 points (43.12% down to 24.79%) and bearish sentiment almost doubled (23.19% to 40.08%). I can’t remember seeing this radical a sentiment change among what are mostly retired investors, and it’s a major departure from the consumer confidence data that better represents the strong labor market and perceived job security of those not watching CNBC every hour of every day.

I’m not saying this compilation of data points is a green light for a major market reversal, but I’m simply taking note of historically pivotal market trends, both here and abroad, that have bent but are not broken.

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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