“Sometimes you just have to let art flow over you.” . . . Nick from “The Big Chill” (1983)
We have always liked the movie “The Big Chill” probably because it is about our generation. That would be the boomers, or the flower children of the 1960s. Yet this morning we should be talking about The Big Stall because last week we wrote, “The stock market feels like a big stall into next week.” So far that has been a pretty good call given Monday, Tuesday, and Wednesday’s trading action. In fact, if one would have gone on holiday after last Thursday’s close (SPX ~2723), and come back after Tuesday’s closing bell (~2720), one would have seen that the SPX (2733.29) had barely changed. However, it was a pretty wild few sessions between then and now. Still we think the indices are rebuilding enough internal energy to breakout and make new all-time highs. Obviously our pal Leon Tuey agrees. Now we can’t remember quite how we met Leon, but meet him we did and it was much to our good fortune. Recall that Leon was an all-star technical analyst in Canada until he retired a number of years ago. He now favors a few of us with his keen insights via email. Recently he wrote:
“In recent months, pundits feel that the bull is getting long on the tooth; the high for the year has been witnessed; and some predict that a bear market has begun. They point to overvaluation, inflation, Fed tightening, geo-political risks, the mid-term election, etc. Long on the tooth? In fact, of the six major market factors that I monitor, monetary, economic, valuation, sentiment, supply/demand, and technical factors, three are saying that this bull market remains much of a calf. Take a gander at these three major factors:
SENTIMENT FACTORS: Sir John Templeton accurately observed that “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”. Despite the longevity and power of this great bull market, investors are far from euphoric. In fact, in early February, investors panicked globally as fear skyrocketed, most unusual as this is the sentiment evident at major market bottoms, not at market tops.
SUPPLY/DEMAND FACTORS: Typically, at important market tops, investors are heavily invested in equities and hold very little cash whereas at major market bottoms, investors hold little equities and sit on a mountain of cash. What is unusual about this bull market is that despite the spectacular gains already achieved and the longevity of this bull market, investors are still sitting on a mountain of cash and very little equities. In my more than 55 years of experience in this business, I have never seen such supply/demand imbalance, so much money chasing so few stocks.
The supply/demand condition can’t be more bullish. Note the following. For years, stock listing on the NYSE has been plunging. At one time, over 8,000 issues were traded and today, less than 4,000. [Moreover] helped by the tax cut, share buybacks have skyrocketed. The IPO market is quiet as a mouse as firms are flush with cash. Investors, big and small, have been exiting the market. In the first quarter of this year, BAML reported that “investors yanked $29.4 billion out of exchange traded funds and mutual funds, the most for a three-month stretch since 2016.” While supply has contracted significantly, potential demand has surged. Individual and institutional managers are sitting on a mountain of cash. Amazing!
TECHNICAL FACTORS: Typically, at important market tops, the various Advance-Decline Lines would peak three or more months before the major market indices. Dragged up by the late-cycle sectors, the major indices would keep posting new highs. Meanwhile, led by the early leaders, the broad list of stocks would head south. This week, however, the Advance-Decline Line for the NYSE Common Stock Only, the S&P Mid-Caps, and the S&P Small-Cap reached new record highs. Also, the NYSE Advancing Volume-Declining Volume Cumulative also reached a new record high. The bullish action of these internal measures are telling investors that the bull is still full of vim and vigor.
In conclusion, three of the six major market factors, sentiment, supply/demand, and technical strongly suggest that the bull market is far from long on the tooth. In fact, they suggest that this is no old bull and it’s a calf. Clearly, the most unloved bull market will continue to surprise investors on the upside. Hence, stay invested.”
So, as of yet, the anticipated “stall” has only led to a pullback to roughly the 2700 level, and not what we thought would be major support in the 2670 – 2685 level so often mentioned in these missives. There is still another week of potential downside attempts that we think will not gather much downside energy, but time will tell if that is the case. This morning all is quiet on the western front as we look at the nation’s capital.