Sentiment Nearing Oversold

Frequently our reports focus on the big picture of  fundamental macroeconomic factors to forecast the economic risk of a contraction or acceleration. Readers know we create a plethora of proxies to determine intrinsic value based upon history, looking at loan defaults, bond spreads, labor trends, credit standards and various surveys of consumers and businesses. Today’s report will be a brief technical analysis which concentrates on more precise time frames of stock market timing. This chart contains comments from past forecasts as well as some of the primary technical indicators we model. In late July we shared our technical outlook for a correction in August that would be part of a 2 to 3 month trading range. Our primary indicators all fell into the Buy zone in August near the lows from which the forecasted trading range has continued into its third month. The ease with which our oscillators reached oversold Buy zones after a minor 8% correction indicates that further declines below the August lows will be minor should they occur. 

The American Association of Individual Investors (AAII) measures Bullish and Bearish sentiment. Last weeks reading of 21% Bulls was the weakest degree of optimism since the 20% correction lows last December. Over the past few years any Bullish sentiment reading in the mid 20’s or lower was a good time to Buy. There may be an opportunity to have all of our tools in sync for Buying from lower levels over the October – November earnings season, but we are encouraged as a contrarian by the downbeat attitude by CFO’s, small investors and economists as they are always most negative at economic and market cycle lows. Given the length of this correction as forecasted and the degree of pessimism pervading sentiment measures we are encouraged that October will be a good month to look for oversold levels to invest in stocks potentially in the 2730 to 2890 range on the SP 500 Index.

We expect the smooth confines of this 10 week corrective pattern to be pierced before year end as clarity on the proposed China tariffs and third quarter earnings are determined. The odds of a Trade Deal remain low and unknown risk will linger. Our bias favors a shift from defensive stocks to pursuit of higher risk sectors as we move into 2020 as the economic cycle bottoms. 

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