Broker Check

Good News is Good News

| April 29, 2024

Following a rough two weeks of market volatility, consolidation, and capitulation, the S&P 500* and other equities rebounded on three of the five trading days last week, rising solidly above the critical technical level of 5,019.02 to end the week around 5,100.00.

This is indicative of a flip in the risk/reward analysis for equities resulting from a handful of factors in our opinion:

  • The S&P 500 and Nasdaq 100# hit oversold levels, where historically bounces ensue.
  • The CBOE Volatility Index (VIX) – the market’s “fear gauge” – hit its peak and then dropped precipitously:

  • The first quarter earnings season remains solid, potentially creating the foundational catalyst for last week's reversal:

  • Despite media headlines, the median core consumer price index, which excludes volatile energy and food prices, remains 1.76% below its long-term average.
  • Short seller interest surged, which is always a sign of deleveraging nearing its end.
  • The trading week that ended on April 19 appears to be a technical turning point, suggesting a potential market low was put in place, with the next key technical level for the S&P 500 being 5,400.

In the near term, no one knows what the actual market reaction will be. That said, we see two catalysts for further strength in equities.

First, earnings are strong. As of this writing, FactSet shows 79% of S&P 500 companies beating their earnings estimates, with the median beat being 7.2%:

Apart from a few sectors, earnings are growing:

Second, the March core personal consumption expenditures (PCE) index deflator, a measure of changes in consumer costs and the Federal Reserve’s preferred inflation metric, was released last week. It showed a 0.3% month-over-month rise, which was minimally higher than the consensus expectation of 0.29%.

Per the PCE report, inflation increased 2.7% in a year (2.8% when excluding volatile energy and food prices), which was also just a touch above economists’ expectations. The fact that stocks rose after the slightly hot report indicates the market had likely already priced in any bad news.

So, it's clear that we're less overreaction by stocks compared to earlier in April. In other words, good news is good news.

This is a sign that earnings could continue to be the foundational positive catalyst we anticipated. If this theme continues, it will be a strong indication that the 3% decline over the previous two weeks actually did price in most of the bad news.

Still, even with the earnings-driven rally of the past week, we expect many fearful investors to remain cautious. That’s not necessarily a bad thing though because that fear would create an opportunistic environment.

Arguably a Much-Needed Pullback

Diving deeper into data and “big money” investor activity, we turn to our friends at MAPsignals for more context. At the beginning of last week, markets were at levels last seen around mid-February. Thus even with the recent decline, stocks are still up 22% from October lows.

As such, it may be prudent not to worry about what is arguably a much-needed pullback.

On April 11, the Big Money Index (BMI), a 25-day moving average of netted “big money” investor buys and sells, broke support levels and fell hard. However, the index appears to be stabilizing somewhat around 53% for now:

This indicates a quick change as the increase in unusual selling that picked up for a couple weeks lessened in both stocks and exchange-traded funds:

This slowdown is even more evident when looking at the overall distribution of selling versus buying. From April 9-23, selling outweighed buying by a more than three-to-one ratio:

But that flipped on its head last week as buying once again overtook selling:

While fear and caution took over for a bit, the most recent data appears to now be running contrary to the global issues dominating headlines, albeit we will most likely continue to see some short term choppiness. Interestingly, both the BMI and the S&P 500 fell in tandem for five consecutive days recently. That may seem like a common occurrence, but it’s not.

Our friends at MAPsignals conducted a study that found only 39 instances of tandem drops taking place over the course of the last 34 years. That’s just 0.5% of all trading days in the data set. Put another way, 99.5% of the time such drops do not happen.

When we see these types of ultra rare events, we think it’s extraordinarily important to dig into the historical data. The MAPsignals study on BMI/S&P 500 tandem declines showed how stocks go up after one month, three months, six months, nine months, one year, and two years, a stunning 80% of the time, on average:

Looking over the full study, it’s clear that the few instances of stocks not recovering quickly occurred after catastrophic financial events like the bursting of the dot-com bubble and the Great Recession:

Putting this all into perspective, it seems both last week's catalyst as well as historical data indicate it's prudent to not freak out. The better strategy is to patiently ride out this overdue volatility and be prepared to get greedy while others are busy being fearful.

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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

# The Nasdaq 100 Index represents the 100 largest, most traded, non-financial U.S. companies on the Nasdaq Stock Market.