top of page

Mixed Readings

Heading into September, many stocks are trading at or near record highs. However, concerns about the highly infectious Covid-19 Delta variant continue to create anxieties for investors as fall approaches.

Various technical indicators, economic numbers, sentiment studies, investor and consumer surveys suggest an increase in market volatility or possibly an impending market correction. There are technical signs to suggest investors may be shifting into defensive plays, at least from a near-term perspective.

It is reasonable to expect defensive areas to be more stable and less prone to swings if the global economic cycle slows or suffers heightened volatility. Also, high-growth areas such as large-cap Technology have begun to reassert their leadership roles once again.

Main Street Versus Wall Street

Main Street and Wall Street continue to diverge. The University of Michigan Consumer sentiments (70.20) or Main Street has recently fallen below its March 2020 pandemic bottom (71.80). It is one of the widest discrepancies between Wall Street (SPX) and Main Street (University of Michigan Consumer Sentiment Index) in the past 10-years.

The person on the street is much less optimistic than Wall Street as the closely monitored U.S. consumer sentiment index has quickly fallen below its March 2020 pandemic low and is now trading at a decade-low.

The question then becomes who is correct? Will there be a collapse in SPX earnings in the months ahead as the Delta variant again shuts down the US economy? Or will we experience another strong rebound from the consumers as the U.S. achieves herd immunity?

Market Breadths are Mixed

Record highs may have attracted widespread attention from the press and media. However, market breadth indicators such as the advance minus decline lines are mixed. It would imply the recent rallies to new all-time highs came from a handful of stocks, sectors, and markets. Broad participation in the rally indicates a healthy and sustainable uptrend. Narrowing breadth warns of a maturing trend.

A ratio analysis between SPX Index and the SPX Equal Weight Index also shows negative divergence. A lower-high pattern in the ratio implies narrowing market breadth and less participation.

Value (Reflation Trade) versus Growth (Stay-at-Home and Work-from-Home)

Reflation trade dominated the mindsets of investors during the first half of the year, which lead to investors purchasing many of the reopening sectors and stocks such as travel, entertainment, banks, energy, retailers, and industrials. Leadership is in predominately value-related sectors. However, since May 2021, there has been a shift back toward technology and growth stocks.

The following analysis shows a battle developing between the two investment styles despite the S&P Value (SVX) and S&P Growth (SGX) setting record highs. It appears rotations continue to form below the surface. Since May-Jul 2021, SVX has relatively underperformed its growth counterpart. However, the SVX/SGX chart has traded sideways over the past month, suggesting another battle for market leadership. The outcome of this battle can help decide the state of the U.S. economy and possibly the extent of the SPX rally?

Mixed Sentiment Readings

You would expect investors are more defensive because of the Covid-19 Delta variants, inflation, Fed taper, and weak seasonality factors. However, the Put/Call ratio, currently at 0.800, signals investors are overwhelmingly bullish on the stock market outlook.

As a contrarian indicator, this is a bearish indication and warns of excessive optimism in the stock market. Will the Put/Call ratio decline further, leading to even higher optimism and higher stock prices? Or will the Put/Call ratio reverse direction and trend higher, leading to a market correction?

Another sentiment indicator, the AAII survey, which measures individual or retail investors' sentiment, is trading at a neutral range, suggesting neither a bullish nor bearish tilt. However, the Wall Street Bull/Bear sentiment survey shows Wall Street professionals shifting toward the bearish side.

The Put/Call ratio shows a decisive bullish spin. The two investor surveys convey a mixed reading - a neutral reading from the AAII individual retail survey and a bearish reading from the Wall Street sentiment survey.

Why are the professionals so much more defensive than the individual investors? Who is right?

In summary, do the confusing sentiment readings, mixed market breadths, and uncertain leadership shifts in key sectors imply a more volatile market heading into the seasonal weakness period?

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

Source: Courtesy of

43 views0 comments

Recent Posts

See All

Closing of the Newsletter

Dear clients, After four rewarding years, the time has come for me to close the Lee Technical Strategy Newsletter, effective today. I want to take this opportunity to let you know what a great honor a

Technical Review of the Top 25 NDX 100 Index Stocks

NASDAQ 100 Index (NDX) – NDX is a modified market capitalization-weighted index comprising 100 of the largest non-financial companies on the NASDAQ Composite Index (COMPQ). NDX is heavily weighted tow


bottom of page