OVERVIEW
After a volatile week that saw a lot of intraday price swings, the U.S. stock market ended the week with moderate gains. The S&P 500 rose 0.77%, the Dow climbed 1.34%, and the Nasdaq remained roughly flat with a 0.01% gain.
International stocks, however, did less well. Developed country stocks slumped 3.62%, and emerging markets plummeted 4.27%.
Bonds had a poor week, as well. Short-term Treasuries fell 0.02%, intermediate-term Treasuries dropped 0.29%, and long-term Treasuries fell 0.35%. Investment-grade bonds declined 0.86%, and high-yield bonds lost 1.28% for the week. Municipal bonds also fell around 0.93%, but TIPS rose 0.17%.
Real assets were mixed in performance. Real estate dropped 0.27%, whereas commodities gained around 1.7% overall. The U.S. dollar had a big gain, rising about 1.7% for the week.
KEY CONSIDERATIONS
Slaughtered Sentiment – I feel like I need to purchase a neck brace after getting whiplash from the stock market’s roller-coaster ride last week.
On Monday, the S&P 500 fell nearly 4% at one point during the day before rallying to end with a slight gain. As for the whole week, the market flirted with correction territory—a 10% decline from its highs—before rallying to end the week with a moderate gain. All told, all that volatility left the index about 7.5% down from its all-time high set near the beginning of the year.
How has all this affected our indicators? Well, for one, it’s clear that the price movement component of our primary stock market risk model has weakened considerably as the new year has progressed. What you might call the trend—or momentum—of stocks is mostly neutral now.
But the good news is that investor sentiment has collapsed alongside the price action. In other words, bearish sentiment has risen sharply, which is a bullish development from a contrarian perspective.
For example, the chart below is an ETF Speculation Index. It’s basically a measure of traders making big bullish bets on the stock market relative to traders making big bearish bets on the market. This produces a ratio (the orange line on the chart) that rises when investors are more optimistic and falls when investors are more pessimistic.
As you can see on the chart, the ratio has absolutely collapsed in recent weeks. It has nearly fallen to the same levels reached during the bottom of the selloff in March 2020. Since this is a contrarian indicator, this development is bullish for stocks. Historically, stocks have tended to do well after sentiment has plummeted to such pessimistic levels—something to keep in mind.
The primary source of all this market volatility and low investor morale is the Fed, which is flogging the stock market with the prospect of tighter monetary policy. As investors digest this message, it wouldn’t be surprising to see more volatility in the coming weeks and months.
However, low morale can be bullish in the short term, as our indicator above reveals, so if the price action component of the market starts to improve a bit, it would be a sign that things are looking more bullish for the stock market.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.
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