US Equities - Mid-Month Update, September 2019

Our Asset Allocation Framework score for US equities was +3 at the end of August 2019. The S&P 500's positive performance over the last week has seen the trend score increase from = to +1, bringing the overall score to +4. Importantly, sentiment has yet to become over-optimistic.

Here's a summary of the changes in trend since the end of August.

From top to bottom:

  • S&P 500 is back above its 50-day moving average (positive). It has also broken through resistance around the 2950 level (positive).

  • Slope of the 50-day moving average is negative (negative) but it appears to be flattening out (positive).

  • Slope of the 200-day moving average is positive (positive) and it looks like it's begun to rise again (positive).

  • Almost 60% of S&P 500 stocks are trading above their 50-day moving average (positive).

  • Over 65% of S&P 500 stocks are trading above their 200-day moving average (positive).

  • The NYSE Cumulative Advance Decline index is at all-time-highs. The S&P 500 has yet to reclaim its all-time high. Thus we have a bullish divergence between the NYSE A/D index and the S&P 500 (positive).

  • The high-low logic index is flashing a warning signal. A lot of stocks are making new highs and new lows at the same time. This sort of bifurcated market usually accompanies changes in trend (negative).

In summary, the market has broken through an important technical resistance level, resumed its up-trend and breadth is OK.

Sentiment indicator played an important role in focusing my attention on the possibility that the S&P 500 was over-sold in early-August. The signs of extreme pessimism that were present at the time are now gone.

We haven't reached a point of extreme optimism. Investors appear to be slow to trust the recent rally. This suggests that it has further room to move.  

From top to bottom:

  • Registered Investment Advisors (RIAs) are still suspicious of the rally. Equity allocations are approximately 15% below their 200-day moving average (positive).

  • Retail investors are gradually becoming more sanguine, but the bears still dominate (positive).

  • Investment in "bear" funds (i.e. mutual funds that do well in falling markets) continue to increase (positive).

  • The 10-day moving average of the Put/Call ratio remains above 1, indicating that investors are still cautious (positive).

  • The VIX has fallen but remains above the 10-12% level usually associated with investor complacency (neutral).

In summary, investors are not as bearish as they were a few weeks ago. Sentiment measures have yet to reach the levels of over-optimism usually associated with market declines.

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