Although the S&P 500 managed to bounce yesterday and today (as of this writing), further declines in the days prior have meant sentiment continued to take a header. In the latest update, only 18.1% of responses to the weekly AAII sentiment survey reported as bullish. That marked the third consecutive decline in bulls resulting in the weakest reading since the end of April.

Bearish sentiment in turn has rocketed higher, climbing back above 50% last week and rising further to 53.3% this week. That is the highest level of bearish sentiment since the week of June 23rd and ranks in the top 2.5% of all weeks on record.

Given the large inverse moves in bulls and bears, the spread of the two has fallen deeper into negative territory after almost turning positive only a few weeks prior.  We would also note that the over 30-point drop in the past month is the largest since a 47.4-point decline at the end of April and ranks as the 29th largest decline in a four-week span on record. With 23 weeks of negative readings in a row, the current stretch is now the second-longest streak of negative readings in the bull-bear spread on record.

Investors appear to be increasingly polarized between bullish and bearish sentiment as well. As optimism and pessimism have experienced wild swings, neutral sentiment has been relatively stable.  Neutral sentiment only rose one percentage point this week, rising to 28.7%.  That is right in the middle of its recent range. Click here to learn more about Bespoke’s premium stock market research service.

Although this year has seen seasonally adjusted jobless claims drift higher, the indicator is on a four-week-long streak of sequential declines.  The latest reading released this morning fell by 6K to 222K from the downwardly revised number of 228K last week.  In total, claims have now fallen by 30K during that streak of declines and are another 9K below the high of 261K from mid-July.

On a non-seasonally adjusted basis, claims were up slightly from 173.9K to 175.8K.  Modest increases are the standard for this point of the year as claims have likely put in place their seasonal low before turning higher into year-end. As shown in the first chart below, this week’s reading is historically strong but came up short of the lows for the comparable weeks of 2018 and 2019.

Although initial claims have been improving and came in lower than expectations, the opposite is true for continuing claims. Lagged an additional week to initial claims, seasonally adjusted continuing claims rose to 1.473 million (expectations of 1.438 million) which is the highest level since the start of April.  Unlike initial claims, in spite of recent increases, continuing claims have ample headroom until they reach their pre-COVID range as current levels remain consistent with some of the strongest in over 50 years.  In other words, even though initial claims have found respite and have reversed lower, the opposite is true for continuing claims which is evident through the ratio of the two having taken a sharp turn lower in recent weeks. Click here to learn more about Bespoke’s premium stock market research service.

It’s no secret that growth stocks have underperformed value stocks over the last twelve months. The trailing-twelve-month performance spread (percentage points) between the small-cap growth and large-cap value indices, two opposite ends of the equity market, is currently at -20.5 percentage points. Although this is far above the recent low of -33.9 ppts, the current reading is in the bottom 6% of all days since the mid-1994 (when both the MSCI USA Small Cap Growth and MSCI USA Large Cap Value Index were active). Interestingly, this year’s trailing twelve-month performance spread was the lowest since 2001 (unwind of the dot-com bubble). Funny enough, the spread had hit the highest level since early 2000 in 2021, as excessive performance from small-cap growth stocks has tended to reverse course after reaching extreme levels.

Small-cap growth stocks tend to trade at significantly higher valuation multiples than large-cap value stocks, which is part of the reason that small-cap growth equities have sold off at a higher rate than their counterparts. These stocks also have higher betas, so market moves have a disproportionate effect. These factors have caused the average daily percent change spread between the two indices to reach an extremely elevated level, the highest since 2000 – 2001. This measure of volatility is also yet to roll over, indicating no end to the volatility regime that has been in place. Click here to learn more about Bespoke’s premium stock market research service.

Following Tuesday’s drop, the Nasdaq Composite has closed lower for seven consecutive days, a streak that has not occurred since November 2016. During this stretch, the index has declined roughly 9%, which is the largest decline over seven trading days for the index since mid-June of 2022. Even during the COVID crash and the continued sell-off during the first half of this year, the Nasdaq never declined for seven straight days. As apparent from the chart below, the frequency of these occurrences has declined substantially since the first 20 years of the index’s history. Click here to learn more about Bespoke’s premium stock market research service.

As shown in the table below, the median performance following these occurrences does not differ greatly from all periods. Average performance is lower over the following month, three months, and six months, but the positivity rate six months out is identical to that of all periods. The median performance does not differ too greatly compared to all periods across each time frame we looked at. Although investors are likely feeling the pain of this sell-off, there is no evidence suggesting that the forward performance will diverge from the norm.

The chart below provides an alternative way to visualize the consistency of positive returns following seven straight declines for the Nasdaq. Apart from three months forward, the positivity rate for the index was within three percentage points of the norm for every time period we looked at.

Early in 2022, extremely high oil and gas prices provided a headwind to the broader economy and significantly contributed to inflation, forcing the Fed to embark on its current aggressive policy of rate hikes. Rising energy prices and higher interest rates led to a divergence in the performance of the Energy sector, which rallied on higher energy prices, and the S&P 500, which came under pressure due to higher rates.  As a result, on both a 100 and 200-trading day basis, the correlation coefficients between each index’s closing prices hit the second most negative levels since 1990.

Since 7/15, though, the extreme negative correlation between the Energy sector and the S&P 500 has started to reverse, In fact, the 100-day correlation has even just recently moved back to positive levels, meaning that the S&P 500 and the Energy sector have begun moving more in the same than opposite directions. Although the 200-day correlation coefficient is still near extremely inverse levels, it too has stopped going down and is starting to move towards a more positive relationship.  Click here to learn more about Bespoke’s premium stock market research service.

As mentioned above, on 7/15, the 100-Day correlation turned positive while the 200-day remained negative, which has only occurred seven other times since 1990 (with no other occurrences in the prior three months). The table below summarizes the performance of both the S&P 500 and the Energy sector following these occurrences. As you can see, with regard to the S&P 500, there is no clear trend in performance going forward as returns have generally been in line with the historical average for all other periods.  As for the Energy sector, performance six months out was quite weak, as the sector was positive less than half of the time with a median decline of 0.4%.  The last 25 years have been especially weak as the sector was lower six months later four times in a row.  Click here to learn more about Bespoke’s premium stock market research service.

The chart below provides a visualization of the collective returns following each of the occurrences in the table above.  When it comes to the S&P 500, its median return was better than ‘normal’; over the following week and month but weaker over the following three and six months.  Similarly, the Energy sector also posited weaker than normal returns over the following three and six months.

It’s a bit ironic that just as inflation is raging at the highest levels in decades, the value of the US dollar (at least relative to other currencies) has been surging. Imagine where we’d be if the dollar was falling in value.  Just last week, the y/y change in the US Dollar Index topped 18.4% which is a rate of change not seen since the summer of 2015 when China was devaluing the yuan. Throughout the history of the US Dollar Index, there have only been a handful of other times that it has rallied this much over a year.  Even rarer have been times when the y/y change exceeded 20%. Click here to learn more about Bespoke’s premium stock market research service.

The dollar has already seen a big gain, but could this rally match the rarified air of prior 20%+ y/y rallies?  Anything is possible, but to get there, it’s going to have to do some heavy lifting. Just looking at a chart of the y/y change since the start of 2020, the momentum of the rally, while still trending higher, has slowed to more of a rangebound area than the blistering momentum experienced in late 2021 and early 2022.

A price chart of the Dollar Index illustrates why.  For much of 2022, the comps for the y/y change have been relatively easy as the dollar sold off from its initial COVID surge and traded down to its lowest levels since 2018 and before that levels not seen since 2015.  The Dollar Index then made a double-bottom last summer and started to rally in the fall.  Therefore, now that the rally is starting to ‘lap’ its early stages, the comps are increasingly tougher.  From 9/6/21 to 10/6/21, the US Dollar Index rallied 2.4%, which means that just for the y/y change to remain at current levels, it would need to rally at least that much and then more on top of that to push the gain up to 20%.