Investors’ feelings toward stocks (market sentiment) remained positive in July. A drop in inflation and resilient GDP data buoyed those feelings – maybe overly so. Stocks did well across styles and around the world. The 3.21% gain in the S&P 500 Index was beaten by large and small caps domestically, and International Developed and Emerging Markets abroad. Bond prices ended the month mostly unchanged – small gains internationally and small losses domestically. Commodity prices reversed some of their year-to-date losses with the broad Bloomberg Commodity Index rising 6.3% for the month, which is raising concerns about inflation popping back up in the weeks ahead.
The amount of time an investor spends thinking about how the market “should be” acting rather than the way it “actually is acting” accounts for most of the anxiety in an investor’s lifetime. Technical analysis is the study of how the market is acting, and that is why it is one of only four analytical tools in our Technical/Quantitative Analysis methodology. The other three are Fundamental, Macro-economic, and Behavioral analytical methodologies. “Don’t Fight The Tape” is the cardinal rule of technical analysis but by degree that rule is influenced by the message from the other three methodologies. For example, following large declines in stock prices before a recession, when the Tape turns positive mid-way through a recession and the Fed begins to cut rates and investors are swearing off stocks for good (ultra bearish sentiment is a bullish signal for stock prices) – it has historically been the best time in an economic cycle to buy stocks.
But what has happened historically when one of these indicators is opposite of the other. Today the tape is understandably positive (see Y-T-D column above) but sentiment is ebullient (bearish indicator for stocks). The results have been very mixed and choppy.
This is exactly what is implied by the cycle composite below.
Be well,
Mike
Sources: Addepar, Bloomberg, JP Morgan Asset Management, Ned Davis Research
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