Traders Scared - Stocks Crater Friday

Stocks were hit on Friday because of worries about poor Chinese retail sales and industrial production growth. This caused the S&P 500 to fall 1.91%. That's a big deal because it fell below the November low. It is now at its lowest point since May. S&P 500 closed at 2,599.95. The lowest close in February was 2,581.

Some traders believe the 2,600 level is important, but I don’t. I don’t think round numbers mean anything.

Clearly, the February low matters because the market has bounced off it several times this year. My expectation that the S&P 500 will stay above that floor until the Fed’s meeting is still in play.

There is only 2 days left for stocks to stay above it as the meeting is Wednesday. I don’t see why anyone would make a big bet in either direction before the meeting.

Nasdaq fell 2.26% and the Russell 2000 was down 1.53%. VIX rose 4.75% to 21.63 as it stayed elevated. Russell 2000 outperformed the market finally, but it still added to its losses. It is down 18.73% since its peak in August.

This is lowest it has been since September 2017. It has no technical support, unlike the S&P 500.

Traders Scared - JNJ Falls 10%

Besides the Chinese data, the averages were brought down by Johnson & Johnson. It fell 10% because there were reports the firm knew about the asbestos that was found in its baby powder. This will likely lead to fines. The firm’s market cap fell $39.8 billion.

This really hurts investors because JNJ is a defensive stock that does well in this environment. There are even land mines in safety sectors.

Traders Scared - Sentiment Is Disastrous: Investors go Bullish

Many investors, including me, are bearish on the economy. Personally, I think growth will slow in 2019 and there will be a recession in 2020. It takes a lot of selling for me to turn bullish.

That selling has occurred as stocks have fallen to the point where many are comfortable buying them. The CNN fear and greed index fell from 11 to 7. It is in the single digits again which is the sweet spot to buy stocks for the short term.

Traders Scared - Almost 50% of traders think stocks will fall in the next 6 months. 

The S&P 500’s 14 day RSI is 42.53 which still doesn’t mean the market is oversold. But I’m ignoring it to focus on other indicators.

As you can see from the chart below, the NDR daily trading sentiment index is at 26.67 out of 100. When the index is below 41.5, stocks average a 30.77% gain per year since 1994.

Looking at the data since 2014 shows the average gain is 32.02%. I’d like to know where the U.S. economy is falling off a cliff which justifies further declines. I’m bullish in the short term.

The chart below is another sentiment indicator which signals now is a good buying opportunity. Sentiment reading shows when investors are this bearish, tech stocks rally 28.93% in the next year. This indicator has an 85% win rate. It also has an 85% win rate with 20.16% gains in the next 6 months.

Usually, at this point in the cycle when a recession is about 18 months away, investors are really confident like in January 2018. However, now retail traders think they can predict recessions just because the yield curve is flat.

It’s tougher to predict a recession than it seems. I’d buy stocks now for the easy short-term gains and worry about a 2020 recession later in 2019 when sentiment is euphoric or at least positive.

Traders Scared - Every Sector Falls

The stock market had a complete washout as every sector was down. Even utilities and consumer staples fell 0.26% and 1.91%. There was nowhere to hide.

Healthcare was the worst sector because of the JNJ fiasco as it declined 3.37%. Outside of that, the worst 2 sectors were energy and technology which fell 2.38% and 2.48%. Financials fell 1.02% which means they outperformed which has been rare.

As you can see from the chart below, the banks’ outperformance over the S&P 500 since Trump was elected has completely unwound.

Regional banks didn’t outperform like the financials as the KBW index fell 1.92%. Since June 8th, the index is down 26.22%. I remember when regulation cuts were supposed to push small bank stocks higher.

It’s not that regulation cuts aren’t helping them. It’s that the potential for a recession, the flattening yield curve, declining interest rates, and weakness in the housing market are hurting them.

Usually, deregulation is a sign the business cycle is almost over. At the end of the cycle, the government forgets about how bad recessions are and allows firms to take more risk.

After recessions, the government tightens the laws because it doesn’t want to experience another recession.

Traders Scared - Yield Curve Steepens Further

Even though this selloff started partially because the yield curve was flat, the latest steepening hasn’t made investors more optimistic. The 10 year yield fell 2 basis points and the 2-year yield fell 3 basis points. This increased the difference between them to 16 basis points.

If the next Fed meeting was in 1 month, Fed members would likely be making dovish statements to the press which would lower the odds of a hike.

However, the meeting is too close which means the Fed is locked into its decision even if it might be a mistake. There is a 76.6% chance of a rate hike even though the S&P 500 is only slightly above its February low.

Traders Scared - Buy Stocks

It’s best to buy stocks when everyone is selling. Now is that time.

As you can see from the chart below, the S&P 500’s forward PE multiple is the lowest in almost 3 years. The forward PE is below the 20 year average and the 30 year average.

It’s slightly above the 10 year average. If stocks fall below the February support, it will be an even bigger buying opportunity. That would be a gift.