It has been a frustrating trading range that continues to test the patience of investors – with not one, but two, sharp stock market corrections of 12%-plus since then.
In recent weeks the S&P began closing in on the highs once again. Will this time be different?
Will stocks finally vault to new highs; and then what?
Right now, most investors would probably answer: Another sharp downside correction will almost certainly come next.
After all, that has been the pattern recently. But don’t jump to conclusions just yet; here’s why:
|Uncertain times for stocks.|
Granted, you can see this pervasive pessimism reflected in negative investor sentiment nearly everywhere you look.
The so-called “dumb money”: Data from the American Association of Individual Investors shows the percentage of those who are bullish fell to just 27.5% last week, while the share of bears is higher at 27.8%, as has been the case for most of 2016.
Also, the ProShares Short S&P 500 ETF (SH), an easy way to wager on a stock market decline, has attracted $1.6 billion in new assets so far this year from retail investors and traders, even as the market has rallied relentlessly higher!
The so-called “smart money”: Institution asset managers have close to the smallest long position in S&P 500 futures than at any time since 2012. The only time they were less long was at the bottom in August 2015, and again in February 2016!
And the smart-money crowd was recently net-short the Nasdaq 100 Index (see chart above). That’s also about the most bearish they have EVER been over the past three years.
In short, investor sentiment is so BAD right now, that it’s probably GOOD news for stocks!
From a true contrarian’s perspective, it doesn’t get much better than this. When investor confidence turns this negative, usually the opposite happens from what everyone expects.
|“Mr. Market likes to fool most of the people most of the time.”|
Remember, Mr. Market likes to fool most of the people most of the time. Right now that would mean a new high for the S&P 500 followed by – not another correction as so many expect – but a further rally to even higher highs.
And historical precedent suggests that is exactly what may lie in store for the stock market.
You see, it’s been a long while since the S&P 500 notched a fresh 52-week high – and in the past that’s been a very bullish indicator.
History shows that whenever stocks take “a long pause” between 52-week highs and then finally manage to breakout to the upside, the S&P 500 goes on to post even bigger gains over the following year, according to Merrill Lynch research.
Their data show that whenever stocks go more than 300 calendar days without a new 52-week high, the S&P 500 is up 91% of the time over the next year, with average upside gains of 15.6%.
That’s far better that the average one-year gain of about 7.5% for stocks since 1929!
Such a bullish signal has only happened 23 times going back to 1929, and it has produced well-above-average gains for stocks 9-out-of-10 times in the past.
The market is very close to triggering another bullish signal right now!
The number to watch is 2,128.28 on the S&P 500 Index. That’s the most recent 52-week high.
If the S&P is able to close above that level, it could very well be just the start of an even stronger rally to S&P 2,400 or more, if history is a reliable guide.
Let me know what you think: Will new highs finally bring clear skies – and higher highs – for the stock market?
Or will it usher in yet another frustrating correction. Join the discussion below to give me your thoughts!
Welcome to China: Walt Disney Co. opened Shanghai Disneyland, its first theme park in mainland China, holding a major celebration featuring Communist Party leaders, Sleeping Beauty and other Disney characters. The park represents a $5.5 billion investment. “This is one of the proudest and most exciting moments in the history of the Walt Disney Co.,” Disney CEO Bob Iger said.
Analysts have said that Shanghai Disneyland could become the world’s most-visited theme park, attracting anywhere between 15 million and 50 million visitors a year. The park should generate $1.5 billion to $4.5 billion a year in revenue, according to Drexel Hamilton analyst Tony Wible, the Associated Press reported. Disney’s state-owned Chinese partner, the Shanghai Shendi (Group) Co. Ltd., which owns 57% of the park, will receive most of the revenue.
Premiums for health plans sold through the federal insurance exchange (better known as Obamacare) could increase more than at any point since the Affordable Care Act marketplaces began in 2013, the Washington Post reports. It cited an analysis by the Kaiser Family Foundation that shows that proposed rates for benchmark silver plans are forecast to go up an average of 10% across 14 major metropolitan areas.
Meanwhile, the White House is urging states to be more aggressive against health insurance companies to prevent such premium hikes. Customers are likely to get the notice regarding their new premiums in November, just before Election Day.
Sanford Wallace, a self-proclaimed “spam king,” was sentenced to 30 months in prison and ordered to pay hundreds of thousands of dollars in restitution for bombarding Facebook users, according to court records, NBC News reports. Wallace, 47 pleaded guilty in August to electronic mail fraud and to criminal contempt of court.
The contempt charge was leveled against Wallace for disobeying previous orders from one of his many court cases never to access Facebook in the first place. According to the 2011 indictment, Wallace illegally obtained Facebook users’ account information to lure them into clicking on a link that would download their friend lists and redirect them to other websites. Prosecutors said Wallace flooded more than 550,000 Facebook users with more than 27 million spam messages.
Soccer-related violence continued in France. Police used tear gas to disperse rampaging English fans after clashes on Wednesday. It was the fourth time English fans have been involved in violent incidents since the start of the European Championship tournament. Meanwhile, a Russian far-right agitator was among 20 fans to be thrown out of France as authorities try to maintain the peace surrounding the event, second only to the World Cup in importance to soccer fans worldwide. The troubles started Saturday, when violent clashes between Russian and English fans exploded in Marseille ahead of their match, which resulted in a 1-1 draw.
Add your views to Mike’s take on the market or any other issues below.
The Money and Markets Team