Market Insights: Bullish Sentiment Plummets

Macroeconomic and Market Developments:

• North American markets were down slightly this week. In Canada, the S&P/TSX Composite Index was down 0.67%. In the U.S., the Dow Jones Industrial Average was down 0.07% and the S&P 500 Index down 0.58%.
• The Canadian dollar was also lower this week, closing at 78.40 cents vs 78.87 last Friday.
• Oil prices were strong this week. US West Texas crude closed at $71.96 vs $69.58 last week, and the Western Canadian Select price closed at $59.90 vs $57.90 last week.
• Gold prices were down this week, closing at $1,753 vs $1,788 last Friday.
• Standard & Poors announced changes to the S&P/TSX Composite Index. Additions to the index are Birchcliff Energy (BIR), Bombardier (BBD.b), Converge Technology Solutions (CTS), Docebo (DCBO), K92 Mining (KNT), MTY Food Group (MTY), TELUS International (TIXT) and WELL Health Technologies (WELL). The only company to be removed from the index is Trillium Therapeutics (TRIL) which is being bought out by Pfizer (PFE). In the more concentrated S&P/TSX 60, FirstService Corporation (FSV) is to replace Inter Pipeline (IPL) as it is being taken over by Brookfield Infrastructure Partners.
• Crescent Point Energy (CPG) has approved an increase to the company's quarterly dividend to C$0.03 per share, payable January 4, 2022. The company said that this is a result of significant progress made on improving its balance sheet strength and sustainability and also provided a preliminary 2022 outlook. As a result, the stock traded up 15.6% on the week, closing at $4.97.
• U.S. tech company Intuit (INTU) will acquire Mailchimp which operates a marketing platform for small and mid-size businesses for $12 billion in cash and stock. The company, known for its tax software TurboTax, says the acquisition will target growth among small business clients. It marks Intuit’s largest acquisition-to-date and follows its purchase of Credit Karma last year for $8 billion.
• In the International Energy Agency’s monthly Oil Market Report, the agency believes that as a result of Hurricane Ida, the globe will have to wait for more oil. The IEA forecast a robust rebound in the market for the fourth quarter of the year citing “strong pent-up demand and continued progress in vaccination programmes”. However, due to the Delta variant, the agency trimmed its forecast for demand growth for the year overall by 105,000 bpd, while it raised its estimate for 2022 by 85,000 bpd.
• Inflation data was released this week. In the U.S., the Consumer Price Index (CPI) rose 5.3% year-over-year in August and 0.3% from July. Both totals were slightly below market expectations which were looking for 5.4% annual rise and 0.4% on the month. Stripping out food and energy, the core CPI was up just 0.1% for the month, below the 0.3% expected. In Canada, Statistics Canada reported August CPI rose 4.1% year-over-year, up from 3.7% in July and slightly above expectations for a 4.0% increase. CPI rose 0.4% month-over-month, also ahead of the 0.1% increase expected.
• U.S. Retail Sales rose 0.7% in August (0.2% including revisions to prior months), easily beating the consensus expected decline of 0.7%. Retail sales are up 15.1% compared to a year ago. Sales excluding autos increased 1.8% in August (1.3% including revisions to prior months) and are up 16.2% in the past year. Excluding gasoline, sales rose 0.8% in August, and are up 13.6% from a year ago.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled DC and China Causing Indigestion: DWYER VLOG

Weekly Diversion:

Messenger RNA has proven itself during the COVID pandemic, but has also shown promise in many areas of medicine. Here is an interesting article entitled BioNTech mRNA Cancer Treatment Enters Human Trials.

Charts of the Week:

Before we get to the subject of this commentary, we wanted to highlight the positive news on the retail sales front in the U.S. These sales are an important component of GDP, and therefore a widely followed monthly data point. As noted above, retail sales crushed expectations for August, coming in at a +0.7% (0.2% including revisions to prior months) vs. an expectation of a decline of 0.7%, with 10 of the 13 categories rising with non-store retailers (online and mail-order) leading the way followed by general merchandise stores as back-to-school shopping was in full effect. They are now up 15.1% over the past year.

Investors were gearing up for weakness in this report after a string of weaker economic data of late, but thankfully they were dealt a bit of a sigh of relief. Although there were negative revisions to past months offsetting about half of this month’s upside surprise, the overall net result was still positive. What we can say is that the last couple months of large swings in the data both ways are a good representation of just how unprecedented the moves in retail sales have been over the past two years. Here is a long-term chart (top) of retail sales going back to 1992 along with the year-over-year rate of change (bottom). Other than a pullback during the Great Recession (2008-9), it has been a steady ride until COVID hit early last year. To put some perspective on how wild this ride has been, in the last recession it took 40 months for retail sales in the US to get back to its pre-recession peak. This time, it took only five months to get back to the pre-recession level. Now, 20 months later, just half of the 40 months previously mentioned, it is not only higher than the pre-recession peak but over 17% higher.

Source: Bespoke Investment Group

Never have we seen rates of change, down or up, like this in the past. As one can probably tell, however, the upside yearly rate of change has slowed significantly of late. This tapering is likely not a huge surprise given the much easier year-ago comparable from a few months ago. However, even after easing substantially, retail sales are still up 15.1% year-over-year which is more than three times the pre-COVID average rate of 4.3%. We expect the year-over-year rate of change to continue to ease in the months ahead as the impact of stimulus payments starts to wear off. Although this growth rate will continue to slow, we still expect reasonably strong economic growth overall over the coming months.

On to the topic of market sentiment, the American Association of Individual Investors released their widely followed weekly sentiment report this week and did we ever get a massive drop (see charts below). The AAII Bullish Sentiment Index has plummeted from a recent high of 43.4% just two weeks ago to 22.4% for the week ending September 10th. This dive is the lowest level since June 2020, a few months after COVID hit, and is in the bottom 5% of all readings since this survey began in 1987. Most notably, the 16.5% drop this past week is in the 1.9th percentile of all week-over-week moves, and the largest week-over-week decline since August 2019 when it dropped 16.8% percentage points.

Source: Bespoke Investment Group

On the other hand, as one would expect, the AAII Bearish Sentiment Index climbed significantly, spiking 12.1 percentage points up to 39.3% which is the highest reading since October of last year and the largest one-week increase since the 24-percentage points spike in August 2019. As a result of both moves, the AAII Bull-Bear Spread crashed back into negative territory (next chart) at -17.2%. Again, since August 2019, this is the first time the spread has been as negative as it is now.

Source: Bespoke Investment Group

One may think this is a negative signal, but from our perspective, we are mostly relieved to see such a low level of bullish sentiment when the markets are not far off their all-time highs (currently off about 2-2.5% for Canada and US). It indicates to us that most of the bullish sentiment has subsided, which from a contrarian perspective is a positive, and that markets are very resilient holding their ground near their highs. This rush of bearish sentiment could certainly pose a threat to markets in the very near-term, however with still unprecedented levels of cash and stimulus in play and low interest rates, the outlook remains positive for risk assets in general and perhaps even more so for risk assets that benefit from rising inflation.

As we noted, a low bullish or high bearish sentiment is a positive contrarian signal. We tend to see low absolute levels of bullishness and large week-over-week declines in bullish sentiment closer to important lows than highs. As the following table shows, we are in the 20-25th bullish percentile right now and perhaps after this second consecutive down week in the markets, it could drop even further. On this ‘heat’ map, the darker the green the better, with historical forward-looking returns being more positive. What is rare this time around though is that we are not much more than 2% below recent highs, but perhaps we are simply seeing more of a consolidation and sector movements than a correction, which could bode well as a set up heading into what is historically a stronger period for equities from late October to early May.

Source: Bespoke Investment Group

 

Sources: CNBC.com, Globe and Mail, Financial Post, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group