In “A Shift in Breadth” (July 17, 2024), we wrote that on July 11, 2014 a major change had taken place in the equity environment as seen by money flowing out of the large capitalization market leaders and into lagging financial and smaller capitalization stocks. The shift was so sudden that it was most likely due to professional traders using ETFs and futures to expedite a major portfolio change. Nonetheless, the move generated a solid improvement in breadth data and produced a perpendicular breakout in the Russell 2000 index carrying it well above the 2100 resistance level. Volume increased and the NYSE cumulative advance/decline line made a series of record highs confirming the gains in the indices.
Technicals Might Get Better
Technical confirmations of the advance continued this week and our favorite indicator — the 25-day up/down volume oscillator — is currently at 2.84. This is neutral territory, but close to an overbought reading of 3.0 or more, which in our view, deserves an upgrade from neutral to slightly bullish. However, a minimum of five consecutive trading days above 3.0 is required to confirm an advance in a bull market, which makes the market’s near-term action important. If this is the start of a major advance, this indicator should go to an extreme reading of 5.0 or more and stay overbought for much longer than five consecutive trading days. From a mathematical perspective, this indicator is a good barometer of buying and selling pressure. Since bull markets are characterized by strong and consistent buying pressure, this indicator should reach and remain in overbought territory for a long period of time. A lack of buying pressure, i.e., no overbought reading, is a sign of weak buying pressure or strong selling pressure. In other words, a rally without an overbought reading is a warning signal. See page 10.
Investors are becoming more bullish as seen in the AAII bull/bear sentiment readings where neutral readings declined, but bullishness reached 52.7% and bearishness also rose to 23.4%. This is moving toward a warning signal of more than 50% bullish and less than 20% bearish. However, the last important reading from this indicator was in January 2018 when bullishness hit 59.8% and bearish sentiment fell to an extreme low of 15.6%. In short, bullish sentiment is high, but not too high, and bearish sentiment is not nearly at the levels denoted as extreme. See page 12.
On a pure technical basis, the uptrends in all the major indices appear to be forming a third upleg in a possible 3-leg advance that began in 2022. See page 9. This pattern suggests further upside that could carry prices higher in the months ahead. But it also implies a significant correction or peak could materialize in 2025.
The last two weeks in the stock market environment has been dramatic, erratic, but clearly moving toward the view that a Fed rate cut is on the horizon and a soft landing is likely in 2025. We are not convinced. And no one should overlook the fact that the political environment has been equally dramatic and changeable in the last two weeks. Two weeks ago, we thought we knew who the candidates for US president would be, but one was nearly assassinated and the other has withdrawn. The Republican support around Donald Trump at the Republican Convention was palpable. Now, the Democratic movement around Vice President Kamala Harris’s candidacy is equally amazing. These two candidates have vastly different economic views and platforms which could impact the economy and the stock market. The next major political event that could impact the polls, and the markets, would be a presidential debate between former President Trump and Vice President Harris. Back in May, ABC News had announced that a debate between Republican nominee Donald Trump and President Biden would take place on Tuesday, September 10, 2024 at 9 pm ET. If that schedule stays intact, it means six weeks without meaningful polling data. In this vacuum, the equity market should respond solely to second quarter earnings results. But overall, it continues to be a fluid situation.
More Weak Housing Data
All components of the NAHB Housing Market Index (HMI) were below the key 50 threshold in July. The overall HMI index lost 1 point to 42, present conditions fell 1 point to 47, expected sales over the next 6 months rose 1 point to 48, and traffic of prospective buyers lost 1 point to 27. High mortgage rates and elevated rates for construction and development loans were the factors that continued to dampen builder sentiment. Recent housing releases also showed fragility. Permits were off 3.1% MOM and fell 1.3% YOY in June; housing starts rose 3.0% MOM but fell 4.4% YOY. See page 3.
Existing home sales were 3.89 million units in June, the lowest pace of the year, and represented a 5.4% decline year-over-year. Nonetheless, the median price of an existing single-family home was $432,700, up 2.4% for the month and up 4.1% YOY. In sum, June repeated the pattern of slower sales but higher prices. See page 4.
Home prices have been supported by a lack of supply. In June, existing single-family home inventory was 1.16 million homes, up 4% for the month and up 22% YOY, yet this was still low by historical standards. Months of supply rose from 3.6 to 4.0. But the market for newly constructed homes has been much weaker. New home sales were down 16.5% YOY in May and the median price of a new single-family home has been stagnant for the past 4 months. See page 5.
Industrial production for June rose 1.6% YOY, led by auto and truck production which grew 5.3% YOY. Auto production can be volatile, but durable consumer goods rose 2.3% YOY and nondurable goods production increased 3.0% YOY. Industrial production was strong in June; but note that July’s total US industrial production index was 103.994 and still below the 104.10 level reached in September 2018.
The Beige Book for the period ending mid-July showed economic conditions were rather mixed across the country with seven districts reporting some level of growth and the five others noting either no change or a decline in activity. Two districts were unchanged or down in the last report. Most districts reported little change in household spending and demand was also soft for consumer and business loans. Employment rose at a slight pace, on average, and inflation was modest in most districts. Looking ahead, most of those surveyed expected growth to slow in the second half of the year. Meanwhile, the Conference Board Leading Economic Index declined again in June, to its lowest level in four years when the economy was shut down during the pandemic. This week we get a first look at second quarter GDP, the University of Michigan Consumer Sentiment survey revision for July, and personal income, personal consumption expenditures, and the Fed’s favorite benchmark, the PCE deflator for June. These reports will give economists a sense of how strong the economy was as we head into the third quarter. This week will also include second-quarter earnings releases from 134 S&P 500 components. To date, 70 companies have released earnings reports and nearly 83% have reported earnings better than analysts’ estimates. This compares to the prior four-quarter average of 79%. The market is likely to focus on earnings season amidst this ever-changing political backdrop.
Gail Dudack
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
