The weekly market reports include a market position update, a stock market forecast, and an analysis of capital markets. To access the full report, you must subscribe to Premium Articles, Weekly Premium Articles, or an All-in-One subscription.
Included in this report:
- Weekly summary.
- Reformed Bears.
- Market positioning update.
- Stock market forecast.
- Capital markets analysis.
1. Weekly Summary (July 8–July 12, 2024)
- Due to a lower-than-expected CPI, stocks (SPY) gained 1% to new all-time highs and have become overbought again.
- Market breadth improved, with the equal-weighted S&P 500 index rising 2.9% for the week.
- The rebound in bonds (TLT) continued with a gain of 1.5%, following an increase in the odds of a rate cut in September.
- Commodities (DBC) fell 2.1% amid a broad-based sell-off. For the week, gold gained 1%.
- The US dollar index (UUP) ended the week down 0.7%.
- Gold (GLD) has outperformed stocks (SPY) since January 3, 2022, with a return of 30.5% versus 22.4%, respectively.
- Since January 3, 2022, bonds (TLT) have been down 31.5%, while large-caps (SPY) have gained 22.4%.
- The equally weighted magnificent six stocks fell 2% for the week but are up 50.7% year-to-date.
- The real estate sector (XLRE) gained the most this week, by 4.4%. Only the communication services sector (XLC) fell by 1.7%
- Overall, all assets experienced an increase due to the declining US dollar, the sell-off in commodities, and rising expectations of rate cuts in September.
Year-to-date, all assets are up except bonds (TLT), which are still down by 3.1%. Gold (GLD) is in second place with a 16.7% gain after large-cap stocks (SPY), which are up 18.6%. Emerging market stocks (EEM) are up 11.5%, and international stocks (ex-US) are gaining 10.2%. The US dollar (UUP) and commodities (DBC) are up 5.9% and 5.7%, respectively. Persistent inflationary pressures have been the main driving force behind higher asset prices and bond losses. The performance since 2022 makes this point clear.
Gold has outperformed all assets since 2022, with a gain of 30.5%, although inflation has not been the only driver but also geopolitical uncertainty. Stocks have received a generous repricing, with large caps (SPY) up 22.4% since 2022. Commodities have gained 18.3%. A strong US dollar and ongoing inflation had an impact on emerging market stocks (EEM) and long-duration bonds (TLT). In the event that disinflation continues, those two assets could benefit the most and we will be looking at narrower spreads between US large caps (SPY) and emerging market stocks, as well as gold (GLD) and bonds (TLT). However, although the odds of continuing disinflation have improved significantly, a resurge in inflation cannot be ruled out, especially if the central bank succumbs to pressures to cut before elections and before there is conclusive evidence that inflation will fall near the 2% target.
2. Reformed Bears
A large number of notorious social media bears have turned into bulls recently. This is an interesting phenomenon: these individuals are extreme bears during the onset of an uptrend in stocks, and they consistently maintain this sentiment until the rally reaches an overextended level. Their motives are unclear.
Some of those “reformed bears” think they will gain fame if they predict a sharp market downtrend. They made numerous attempts to predict a sharp market downtrend after the GFC, but if we disregard the random event of the pandemic drop, their predictions have consistently been incorrect. They continued publishing ominous scenarios of a market collapse, and only very recently did they turn into bulls. These bears employ methods that are worse-than-random and have a notoriously high failure rate. If they were wrong about the market uptrend for 15 years, they are probably wrong now too. This is unless they gradually return to their typical approach of forecasting a market downturn. However, some of them are doubling down on their high estimates for S&P 500 targets.
As shown in the above chart, since 2009, a simple 12-month long-only strategy (buy the SPY ETF when the price is above the 12-month moving average and sell when it falls below) has generated an annualized return of 8.8% at a 22.6% maximum drawdown and a Sharpe ratio of 0.68. Why be a bear when one could have made 8.8% annually with a very simple strategy that minimizes losses due to corrections?
An explanation is that those “reformed bears” are actually trying to impact market bullish sentiment and drive it to levels that will cause a market correction. No one knows their true positions. Long positions are usually allergic to them, and they like short positions in the form of puts, short stocks, and short index futures. However, at a higher level, these “reformed bears” are dumping “irrational exuberance,” a phenomenon that social media has amplified and was not possible in the late 1990s. Therefore, their over-optimism actually prevents an accelerated meltup, which would be a sign of caution.
We do not worry about when some notorious bears turn into bulls, but when some famous bulls become bears. This has not yet happened, and the stock market remains on an uptrend, absent any serious selling pressures.
3. Market positioning update
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Charting and backtesting program: Amibroker. Data provider: Norgate Data
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