Can the stock market rally sustain into the end of the year and possibly carry over to the New Year (2020)? Data suggest the demand for stocks remain strong and most important, the market is not overly extended, at least from a longer-term technical perspective. The following are some of the reasons to suggest SPX can still trend higher to our technical targets: 3,250 (short-term), 3,350 (medium-term), 3,500-3,600 (intermediate-term), and 4,000+ (long-term).
1. Favorable seasonality factors and strong price momentum – December is one of the stronger months of the year. US stocks tend to return positive gains and have ended higher in December, more than any other month of the year. SPX year-to-day return of 25% is currently on pace for the best year since 2013. This strong SPX price return tends to carry over into the following year (2020) which also coincides with the favorable fourth year of the US Presidential Election Year cycle.
2. AAII Survey is not overly bullish – Individual investors are not overly bullish on the market’s outlook six months from now. For the week ending on 12/4/19, the percentage of individual investors that expect stock prices to rise over the next six months are at 31.7%. This is below the historical average for bullish sentiments of 38.0% (since 1987). Expectations by retail investors that stock prices will remain unchanged over the next six months has risen to 39.2% as compared to the historical neutral sentiment average of 31.5%. The Bearish sentiment, or individual investors negative on stocks over the next six months is currently at 29.1% or just below its historical average of 30.5%. In summary, since peaking along the 40% level bullish sentiments has fallen. Bearish sentiments remain in a tight trading range over the past few weeks between 28.3% and 30.3% during the last five of seven weeks. Neutral sentiments are trading near the upper end of its historical range. This statistic is unusually higher than normal. Collectively the AAII survey suggest individual investors are overly bullish. Rather it hints of a neutral or an even defensive bias from this market participant. From a contrarian perspective this suggests retail investors may not be fully vested in the stock market. If they return to stocks this may be the fuel that helps to ignite the next major SPX rally.
3. Expected demand for US stocks continue to come from corporations and to lesser extent foreign investors. Pension Funds, Mutual Funds, and Institutional Investors have not been as strong of buyers in US stocks as in previous major US bull rallies. Net cash flow of money market funds has also been rising rapidly and it challenges its 2009 highs. US corporations via corporate buybacks and dividend payouts have been one of the key drivers to US stocks rallying to yet new all-time highs. For instance, the S&P 500 Buyback ETF (SPYB) tracks the top 100 companies in S&P 500 Index with the highest stock buyback ratio. SPYB continues to trend higher suggesting the corporate buybacks may have been fueling the stock market rally since 2009. Invesco Buyback Achievers ETF (PKW) is also trending to record highs as this ETF that is comprised of companies such as AAPL, AMGN, C, ABBV, ORCL, UNP, CSCO, CHTR, SBUX, and QCOM. The iShares US Dividend and Buyback ETF (DIVB) is comprised of US companies that return capital to shareholders through paying dividends and/or buying back their stocks. They currently include companies such as: AAPL, JPM, MSFT, BAC, WFC, C, CSCO, ABBV, ORCL, and AMGN.
Sir John Templeton famously said, "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria." If you believe, as we do, that investment sentiments are a crucial driver of the stock market then the current neutral to defensive sentiments would imply the current bull market rally could have more room to run, at least from a near-to-intermediate term perspectives.