Market Insights: Bullish-Bearish Sentiment Provides Positive Signal

Milestone Wealth Management Ltd. - Apr 29, 2022

Macroeconomic and Market Developments:

  • North American markets were lower yet again this week, finishing off a negative month for the overall markets. In Canada, the S&P/TSX Composite Index was down 2.00%. In the U.S., the Dow Jones Industrial Average was declined 2.47% and the S&P 500 Index fell 3.27% this week.
  • The Canadian dollar was down this week, closing at 77.75 cents vs. 78.66 cents last Friday.
  • Oil prices were positive this week. U.S. West Texas crude closed at $104.69 vs. $101.16 USD last Friday, and the Western Canadian Select price closed at $91.64 vs. $89.18 last Friday.
  • The price of gold declined this week, closing at $1,897 vs $1,933 USD last Friday.
  • Elon Musk’s $44 billion takeover offer of Twitter (TWTR) was accepted by the company’s board of directors on Monday. This paves the way for the world’s richest person to take the company private. In a related move, Tesla (TSLA) stock price dropped by 12.18% on Tuesday on concerns that Elon Musk’s attention might be divided between the companies and that Musk might need to sell Tesla shares to fund the purchase. It was revealed later in the week that he did in fact unload roughly $8.4 billion worth of Tesla stock this week.
  • Transportation stocks were in focus in Canada this week. Air Canada (AC) reported a bigger than expected loss of $143 million vs $71.3 million expected. Revenue was also below expectations at $2.57 billion vs $2.70 billion expected. Also, Canadian National Railway (CNR) reported lower than forecasted earnings of $1.32/share vs $1.39/share expected, on revenue of $3.71 billion vs $3.67 billion forecasted. And finally, Canadian Pacific Railway (CP) disappointed with earnings of $0.67/share vs $0.73/share expected on revenue of $1.84 billion vs $1.94 billion anticipated.
  • Earnings releases from big tech companies drove significant volatility in the markets throughout the week.
    • After the market closed on Tuesday, Alphabet (GOOGL) reported disappointing earnings of $24.62/share vs $25.91/share expected on revenue of $68.01 billion vs $68.11 billion expected.
    • Also on Tuesday, Microsoft (MSFT) beat earnings expectations with earnings of $2.22/share vs $2.19/share expected on revenue of $49.36 billion vs $49.05 billion expected.
    • After the market closed on Wednesday, Facebook’s parent company Meta Platforms (FB) released better than expected earnings of $2.72/share vs $2.56/share expected on revenue of $27.91 billion vs $28.2 billion expected.
    • After the close on Thursday, Amazon (AMZN) announced a surprise loss of $7.56/share on revenue of $116.44 billion vs $116.3 billion expected. The company recorded a $7.6 billion loss on its investment in EV maker Rivian (RIVN), resulting in a total net loss of $3.8 billion. Amazon was down 14.05% on Friday as a result.
    • Also on Thursday, Apple (AAPL) released impressive earnings of $1.52/share vs $1.43/share estimated on revenue of $97.28 billion vs $93.89 billion estimated. iPhone revenue came in at $50.57 billion vs $47.88 billion estimated, up 5.5% year-over-year.
  • Calgary based Cenovus Energy (CVE) reported better than expected earnings of $1.30/share vs $1.09/share anticipated with better than expected production of 798.6 Mboe/d vs 796.2 Mboe/d expected. Also, the company’s board has approved tripling the base dividend starting with Q2 2022.
  • U.S. Real (above inflation) GDP surprisingly declined at a 1.4% annual rate in Q1, widely lagging the anticipated +1.0% rate. The largest negative drag on the real GDP growth rate in Q1 was net exports, with inventories and government purchases also holding real GDP down.
  • Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Lots of Fear But Not Quite Clear: DWYER VLOG

Weekly Diversion:

Check out this video of an Orangutan stealing a visitor’s sunglasses.

Chart of the Week:

We continue to see historical extremes in investor sentiment, as well as the strongly negative performance of aggregate bond indices continuing to put pressure on traditional balanced portfolios. It is in these times where non-traditional asset classes that form part of Milestone’s asset mix can provide drawdown protection, especially during these high bouts of volatility. We wanted to highlight one more sentiment survey that came out this week, which provided a signal that has historically provided extremely positive intermediate-term forward-looking returns. As always, past performance does not guarantee future results.

Two weeks ago, we showed that the American Association of Individual Investors (AAII) Bullish Sentiment Index in the U.S. hit a 30-year low at just 15.8%. This association also has a Bearish Sentiment Index as well as a Bull-Bear Spread which is the difference between these two surveys. This past week, the AAII Bull-Bear Spread Index hit its lowest reading since March 2009, at the bottom of the Great Financial Crisis (after the market bottomed on a generational basis), with the survey coming in at -43% (bullish sentiment at 16.4% and bearish sentiment at 59.4%). Incredibly, this means that bearish sentiment outweighs bullish sentiment by a ratio of 3.6:1. This level of bearishness has only been witnessed three prior times, in August and October 1990 and March 2009. We now know that after those points in time, markets went on to two of the biggest bull markets on record. Also, it is only the seventh time on record where this weekly spread has dropped below -40%. The table below shows how markets have fared after each range of this AAII Bull-Bear Spread over the next year. The top highlighted row is the current range, and as you can see, forward-looking returns for the S&P 500 in these past instances have been historically strong, with an average forward one-year return of almost 30% with a positive rate of 86%. The 3-month and 6-month average forward-looking returns have been even stronger on an annualized basis. There is no way to predict future returns but suffice to say that markets have already priced in a significant amount of negative information, and that any surprise could potentially come to the upside. With Milestone’s current forecast of a stronger second half than first half for equity markets, this could present a great long-term opportunity.

Source: Bespoke Investment Group

Sources:, Globe and Mail, Financial Post, Connected Wealth, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group