Weekly Market Guide
Equities continue to undergo a consolidation phase, as they digest some of their very strong gains to all-time highs. Investor sentiment and positioning had gotten overly bullish and complacent- trends that are now receding as inflation concerns creep higher. We note bullish sentiment is now back to its average (though bearish sentiment is still slightly below average). Additionally, the equity put/call ratio 10-day moving average is now at its highest level since November. These levels are far from a “wash out” but are constructive for building the next up-wave in the market. Also, despite the equity market volatility lately, the bond market has not acted as anxiously with corporate credit spreads remaining very narrow- supportive of equity market trends.
Tactically, we are monitoring very short term technical resistance at ~4188 on the S&P 500, along with technical support at ~4056-4086. The 50 DMA (4086 currently) has been able to hold as support since the positive vaccine news in early November. Yesterday’s intraday reversal from it (and today’s follow through so far) are positive indications that this level may hold again. If the S&P 500 breaks the 4056-4086 area to the downside, it indicates that the index will probably test the 3934-3974 level (prior break out) in the short term.
Longer term, it is common for the rate of market ascent to slow in year two of a bull market. And as this occurs, short term pullbacks may become more frequent over the next several months. However, the intermediate-term fundamental and technical backdrop remains strong in our view. Market participation remains broad with 90% of S&P 500 stocks above their 200 DMA and the “average stock” driving performance. Also, forward earnings estimates continue to get revised higher- a trend that we believe continues. The market positives of robust economic and earnings growth (supported by enormous stimulus and an accommodative Fed) continue to outweigh the negatives (i.e. potential inflation, tax changes, valuation normalization).
During bullish environments (such as now), accumulating during the basing phase is warranted. For those looking to put new money to work, we recommend the recent winners- i.e. industrials, financials, materials, energy- as they become short-term oversold within uptrends.
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
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MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.
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