Stocks Begin Sentimental Journey Higher

 The stock market is two days into a ‘Sentimental Journey’, rallying from deeply oversold AAII investor sentiment levels. It’s surprising how frequently AAII’s small investor sentiment survey captures investable bottoms in the stock market. Such negative sentiment only occurs after or deep into market corrections. While it can be moderately premature, it’s rare that stocks fail to have a rally within a few weeks of the current reading. Bullish investors comprised just under 16% in last weeks compilation, the lowest consensus since 2005. The last time the Bull ratio [Bulls/(Bulls+Bears)] reached this level of pessimism was the week of the Bear market low in March 2009. Conditions are far less dire today than the nadir of the Great Recession, but shrinking inflation adjusted real wages and tremendous economic uncertainty surrounding the Ukraine War are weighing on the minds of small investors.

Our fear gauge and put/call option sentiment measures did not provide oversold signals, as they did at “the” March lows, but our sentiment proxy below (light blue line) indicates a notable rally is due. Normally we would look for a move to record highs with such prevailing pessimism, but with the unpredictability of the Ukraine War and energy sanction rhetoric, along with escalating Fed rate hike speculation, we will simply say that current conditions warrant at least a tempered stock market rally in the weeks ahead. An SP 500 Index under this week’s 4350 low would indicate that more negative sentiment is still required to establish a firmer foundation for investors, possibly at new 2022 lows.

Post tax season buying during a seasonally strong April time period suggests that last week’s oversold sentiment signal has tax rebate buying power behind it. Our charts suggest that a 4 to 6% rally is the initial target near the end of April or early May. With the widely expected 50 basis point Fed Funds rate hike due on May 3rd, the market can rally modestly without fear of any surprise action by the Fed to fight the 40 year high in inflation. While the wise adage is to Buy the Rumor and Sell the News in these situations, it seems the market is already pricing in multiple 50 basis point rate hikes at ensuing Federal Open Market Committee (FOMC) meetings, thus the markets are unlikely to be unnerved by any Central Bank actions.

The only event garnering more certitude than escalating Fed rate hikes is the brutal escalation of Russia’s attack on Ukraine. Energy sanctions meekly threatened by Europe seem implausible due to the years of massive rationing that would be required. However, this is one of the few actions that can truly harm Russia over the short term. Sadly, Germany just vetoed turning its Nuclear Power Plants back on as a measure to escape Russia’s boot on their energy lifeline and instead opted to pursue a multi-year build out of Natural Gas infrastructure and clean energy. The Russian backed Green Lobby apparently holds more sway than the urgency of saving Ukranians by terminating the European energy payments funding Russia’s war. Europe keeps threatening to cut off Russian energy imports, but without Recessionary rationing and at least 3 to 5 years of energy infrastructure buildout, they can’t make good on such threats. Putin of course understood Europe’s naivete years ago when he funded green energy lobbies in the US and Europe and fostered Europe’s energy addiction to Russia. Essentially, the US and Europe are still the primary funding sources for the Putin war machine. The markets are not taking Russian trade sanctions seriously at this juncture, but a total ban on Russian commodities would send Oil to $185 a barrel, according to JP Morgan. A feckless Europe is bad news for Ukraine as their only remaining hope is an influx of weapons far greater than has been prospoed to date.  The bad news on the war is sadly better news for stock investors who have already priced in months of rate hikes and assume no further surge in energy inflation. Despite the exogenous inflationary war risk, our work projects higher stock prices into a topping phase during May and June (SP 4550 – 4700) before succumbing to a midterm election pullback during August and September.

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