From the desk of Willie Delwiche.
Key Takeaway: It’s been bears on parade all year, starting with significantly less optimism coming into this year than was seen at the beginning of 2021 or 2020 and continuing through lengthy stretches of more bears than bulls on both the II and AAII surveys. Persistent pessimism among advisory services has now been broken and it’s time for the bulls to show what they’ve got left in their tank. The clock is ticking, though, as they’ve used so much of their limited firepower and yet we continue to see more stocks making new 52-week lows than 52-week highs. Bulls have put together two days of better than nine-to-one upside volume (on July 15 and again on July 19). That checks off one box (out of five) on our bull market re-birth checklist, but there is more work to be done before concluding that any uptick in optimism is well-placed.
Sentiment Report Chart of the Week: Recession Fears Misplaced?
High yield spreads moving higher tends to be a reliable sign that liquidity conditions are deteriorating and economic prospects are worsening. This usually means more stress in the financial system. There is plenty of evidence of that in the current situation as incoming data shows activity is cooling rapidly and conditions that are consistent with (or may lead to) recession are more widespread. Pushing back against all that is the Fed’s Financial Stress Index, which is actually below where it was when the Fed began raising rates in March. It may be that the Fed’s index moves more slowly than some of the other indicators (like high yield spreads) or it could also be that the fear reflected in widening yield spreads (and the inversion between 2-year and 10-year Treasury yields) is misplaced. The burden of proof is on the bulls to prove that it is the later and not the former.
