This week, the S&P 500 made an all-time high (the Nasdaq Composite and Dow Jones Industrial Average did not make all-time highs, but more on that later). Since the low on October 3rd, we’re up about 7%, which was expected given the historical context expanded upon in on our last blog post, State of the Union.
When overtaking an important price level, generally there needs to be a catalyst to promote a more confident buying environment (this is the fourth time the Dow Jones has attempted to breakout above it’s trend line dating back to January of 2018).
While we expect the rally to continue into year-end, it’s very possible that we see a pullback prior to a more traditional “Santa Claus rally”. As far as sentiment (future expectations) is concerned, the market is overbought. CNN’s Fear and Greed Index topped out at 76 yesterday (classified by them as “extreme greed”) and the 5-day moving average of the put/call ratio (a measure of how many people are buying protection vs. how many people are betting on further advances) is the lowest it’s been since July 29th when we proceeded to go down 7% in the next five trading days. The classic non-confirmation (when one index makes a high, but it’s not accompanied by the others) is always a signal to watch as well.
While I don’t think we’re going to see that type of downward selling pressure in November, the overall fundamentals of the economy just aren’t setting any records. For the half of the S&P 500 companies that have reported, earnings growth is down about 1% from last quarter, while on average, revenue has increased slightly.
It may get a little spooky out there for the next few weeks, but just like always it will be Thanksgiving before you know it.
– Adam
