This month’s negative tone continued in the past week as the S&P 500 collapsed through its 50-DMA. Not susprisingly, the weakness has put a dampener on sentiment.  The latest investor sentiment survey from AAII showed only 35.9% of respondents reported as bullish. That is down for a second week in a row from 49% two weeks ago, and the 13.1 percentage point drop during that span ranks as the largest since the back half of February when bullish sentiment fell by more than 15 percentage points.  It is an even more pronounced drop from 50%+ reading that was put in place the week of July 20th.

Bearish sentiment picked up some of the difference this week, rising 4.6 percentage points to 30.1% and is the highest reading since the first week of June.

With inverse moves in bullish and bearish sentiment, the bull bear spread has fallen sharply to 5.8 after ten consecutive weeks of double digit positive readings (what had been the longest such streak in over two years as shown in the second chart below). In other words, sentiment continues to favor bulls, but by a much narrower margin than what has been seen in the past few months.

In the table below, we show every other instance in the AAII survey’s history in which streaks of at least ten weeks or more of bulls outnumbering bears by at least ten percentage points have come to an end. As shown above and below, these sorts of streaks tend to happen every few years and typically when they end, bullish and bearish sentiment are not far off from their overall historical averages.  As for how the S&P 500 has tended to perform going forward, short term performance has been weak with an average decline one week later.  However, performance one month to one year out is much more consistently positive. That being said, average/median returns six months to one year out have been smaller than the norm.

Finally, we would note that the AAII survey was not the only sentiment indicator to have taken a bearish turn in recent weeks. Other weekly sentiment gauges like the Investors Intelligence survey of newsletter writers and the NAAIM Exposure Index have also turned lower.  In the case of the former, the percentage of respondents reporting as bullish is back below 50% for the first time since the end of May. The latter similarly shows active managers are the least exposed to equities since the end of May.  Combined with the AAII survey, our sentiment composite shows investors are only slightly more bullish than what has historically been normal.

Jobless claims have continued to occupy the past several months’ range between a low of 221K in late July and a high of 265K from a month earlier. This week, claims came in slightly below expectations of 240K falling to 239K. That compares to last week’s reading of 248K which was at the higher end of the aforementioned range.

As we close in on the one year mark of last September’s post pandemic and multi-decade low of 182K in initial claims, they have plateaued and are merely trending sideways. Of course, that is not to say claims are in a bad spot. Although claims have come well off that low, they have yet to move back above 300K. In fact, it has almost been 100 weeks since initial claims last printed a level of more than 300K which ranks as the third longest streak of sub-300K prints on record.

On a non-seasonally adjusted basis, claims actually dipped slightly in the latest week’s data which is somewhat unusual from a seasonal perspective. As shown below, historically the past two weeks have marked modest seasonal bumps in claims before reaching a seasonal low in late August/early September. Worth noting, next week has been one of the most consistent weeks of the year to see unadjusted claims fall with a week over week drop 98% of the time.

Continuing claims are lagged an additional week to initial claims and the latest reading for the first week of August showed claims ticked back above 1.7 million.  As shown below, that is only a modest turn higher as the overall trend of falling continuing claims appears to still be in place for the time being.

If it seems to you like most financial assets have done nothing but go down this month, you’re right.  A perfect example of this pattern is the price of Gold. The SPDR Gold Trust (GLD) has had an intraday high and low that was lower than the intraday high and low of the previous day on each of the last eight trading days (shaded area in chart), and there has only been one day this month (8/4) when GLD had a higher high and higher low relative to the previous day.  August has been a one-way street, and the direction has been south.

What makes the current streak notable is that in the trading history of GLD dating back to late 2004, there has never been a longer streak of daily lower highs and lower lows.  There have been three prior periods where GLD had lower highs and lower lows for seven straight days, but with yesterday’s decline, GLD’s current streak is now in a league of its own.

The latest reads on Housing Starts and Building Permits for the month of June were released earlier this morning and showed mixed results relative to expectations (starts slightly better than expected, permits modestly weaker).  The table below breaks down the report by single and multi-family units as well as on a regional basis.  Two notable trends that stand out in the table concern single-family vs multi-family and regional trends.  First, for both starts and permits, single-family was stronger than multi on both a m/m and y/y basis. Single-family units have more of an economic impact, so it’s good to see strength on that score.  On a regional basis, we found it interesting to see that while most regions of the country experienced double-digit y/y increases in starts, permits in all-four regions were down by at least 9% on a y/y basis which would suggest that the pipeline for future starts is getting smaller.

Below are a couple notable charts worth highlighting from the report. On a 12-month average basis, both Housing Starts and Building Permits are down sharply from their early 2022 peaks, but the last few months have seen some stabilization in the pace of starts. Permits, meanwhile, remain stuck in their trend, and based on the current pace and where they were last fall, we’re unlikely to see any stabilization in this reading over the course of the next few months.

Last but not least, the chart below compares the trend in Housing Starts over a three-month rolling basis to the performance of homebuilder stocks as tracked by the iShares Home Construction ETF (ITB), and it provides a great example of how the market is always looking past the headlines.  Even as Housing Starts continued to crater in the middle of 2022, homebuilder stocks began what looked like an inexplicable rally, but just as stocks in the group peaked ahead of the peak in Housing Starts in April 2022, they also bottomed well before the February low.

As the national average for a 30-year fixed rate mortgage eclipsed 7.5%recently, homebuilder sentiment has turned lower.  The Housing Market Index from the NAHB fell to 50 in August from 56 the previous month. That six point drop month over month ranks as the eleventh largest decline in the survey’s nearly 40-year history.

Homebuilders reported significantly weaker sentiment across the board with mid-single digit declines for present and futures sales as well as traffic. Geographically likewise also saw broad declines.  The West experienced the biggest drop and now has the lowest reading with respect to its historical range. Meanwhile, the Northeast index has managed to hold at a more historically healthy level, albeit it too fell significantly in August.

Homebuilder stocks are trading higher today, but they have come well off the early highs since the release of the sentiment numbers.  As things stand for the group, the past month has seen the homebuilders consolidating as they continue to trade handily above their respective 50-DMAs.

The New York Fed published the first of regional manufacturing surveys this morning, and results were disappointing.  Whereas last month saw a slightly expansionary reading of 1.1 in the headline index, the August reading fell firmly back into contraction at a level of -19 far exceeding forecasts of -1.

In the table below, we show each category of the report. As shown, the drop in the headline number was almost entirely driven by significant deterioration in new orders, shipments, and employment metrics.  Breadth otherwise was actually fairly positive.  As for six month expectations, readings across the board have been much healthier. In addition to significant increases month over month (many of which rank in the top decile of historical monthly changes), these readings are not as historically weak as their corresponding levels for the current condition indices.

As previously mentioned, the big drop in the headline index was largely driven by weakness in new orders and shipments.  Each of those (as with the headline index) fell by more than 20 points month over month which ranks in the 3rd percentile of all monthly moves.  That shift from slightly expansionary to historically contractionary readings is another bout of volatility in these readings consistent with big swings in previous months. Amidst that volatility, these readings have generally pointed to the side of demand having weakened, but expectations have begun to move in the opposite direction.  As shown below, expectations indices for new orders, shipments, and unfilled orders have all reached the highest level since March 2022.

Both prices paid and received rebounded in August with those month over month increases coming in the 87th and 91st percentiles, respectively, of all monthly changes. In spite of those increases, that overall picture of prices trending lower remain in place.

As mentioned earlier, aside from new orders and shipments, employment metrics were the other point of weakness for current condition indices.  However, number of employees is the most elevated category of all expectations indices after a 96th percentile month over month increase in August.  Meanwhile, both capital expenditures and technology spending likewise experienced large month over month jumps in August. All combined, that would indicate a dramatic turnaround in manufacturing firms spending plans.

Major retailers are set to report earnings over the next couple of weeks as the Q2 reporting period winds down.  Before highlighting a list of the names set to report, below is a look at the performance of the “Bricks and Mortar” Retail index run by Solactive-ProShares since COVID hit in February 2020.  Already on death’s door prior to COVID due to the “bricks to clicks” trend of shoppers ditching trips to stores for supposedly more convenient online shopping, pandemic lock-downs were supposed to be the final nail in the coffin for physical retail stores.  Fast forward to today, and you may be surprised to see that brick-and-mortar retail has actually outperformed the S&P 500 by more than 50% since COVID hit.  As shown below, the Brick and Mortar Retail index did fall more than SPY during the COVID Crash in February and March 2020, but the bounce back for retail was much more pronounced coming out of COVID in late 2020 and 2021.  While the retail index has generally trended sideways for the last two years now, so has the S&P 500.  At this point, the Brick and Mortar index is up 71.6% since 2/19/20 on a total return basis compared to SPY’s total return of 39.1%.  Just when investors think they have a check-mate situation, the market always seems to have a counter move.

As shown below, more than half of the major stocks in the Brick and Mortar index are set to report by the end of August.  Target (TGT) and TJX (TJX) will report ahead of the open tomorrow, followed by Walmart (WMT) on Thursday morning.  Other big names like Lowe’s (LOW), Dick’s (DKS), BJ’s (BJ), Foot Locker (FL), and Ulta Beauty (ULTA) will report next week.

Looking at the table, some of the best performers in the group this year have been names like Dick’s (DKS), Lowe’s (LOW), Walmart (WMT), Ollie’s Bargain (OLLI), Signet Jewelers (SIG), and Costco (COST), while names like Target (TGT), Foot Locker (FL), Dollar General (DG), and Walgreen (WBA) have gone in the opposite direction and traded lower.  Over the last ten years, three names on the list are up more than 500% — Lowe’s (LOW), Costco (COST), and O’Reilly Automotive (ORLY) — while AutoZone (AZO) is currently up 499.2%.