In today’s Morning Lineup, we discussed the sideways range the S&P 500 has found itself in over the past eight trading days. With indecisive price action, sentiment—as measured by the AAII’s weekly survey— has been equally undecisive. After picking up substantially last week from 19.8% to 32.0%, the percentage of respondents reporting as bullish has reversed most of its gains coming in at 21.0% this week%

Back-to-back weeks of double-digit moves (either positive or negative for both weeks) in bullish sentiment are relatively rare with only about 4.6% of all weeks in the history of the survey dating back to 1987 seeing such a move. Of those, less than two dozen resemble this week with bulls rising by at least 10 percentage points in the first week followed by a 10 or more percentage point drop the next week for the first time in at least six months.  The most recent occurrence (of any double-digit back-to-back moves) was over a year ago in November 2020 when bulls rose by an even larger 17.9 percentage points followed by an 11.5 point drop.  We would also note that the current situation has the second-lowest reading in bullish sentiment of these past instances behind May 1988—roughly one year after the survey began—when it was two percentage points lower.

As we have frequently noted in the past, low bullish sentiment has actually tended to be a positive signal for forward performance of equities. Although that could pose an optimistic sign for the S&P 500 going forward, big swings up then down then have not tended to be the best sign for equities.   As shown below, after similar moves in bullish sentiment, performance for the S&P 500 one week and month later has been positive only half the time with an average decline of 0.11% and 0.95%, respectively.  While performance is more often than not positive three months later, the S&P 500 has averaged an 8 bps decline versus the norm of an average gain of 2.9%. Six and twelve-month performance is similarly more consistently positive but does not outperform the norm.

As bulls stepped back this week, bears recouped nearly 10 percentage points rising from 37.1% to 46.9%.  While that is still below the readings above 50% observed throughout April and May, historically that is an elevated reading well above the historical average of 30.7%.

Given this, the bull-bear spread moved deeper into negative territory meaning bears continue to heavily outweigh bulls.  Bears currently outnumber bulls by 25.9 percentage points. Again, that is a very low level albeit not as extreme as only a couple of weeks ago. Click here to learn more about Bespoke’s premium stock market research service.

Seasonally adjusted initial jobless claims came in well above expectations today rising from 202K to 229K. Only an increase of 4K had been penciled in by economist forecasts. Although that increase brings claims up to the highest level in about six months, looking back historically it is still within the range of readings in the few years prior to the pandemic and that is also well below the typical readings for much of the history of the data.

Turning over to non-seasonally adjusted claims, recent readings have been much less volatile. In fact, compared to the seasonally adjusted number whose 27K increase was the largest since July of last year, unadjusted claims experienced a meager 1K uptick relative to last week.  While the 1K increase during the current week of the year is very much normal (since 1967 72% of the time the 23rd week of the year has seen NSA claims rise WoW), it wasn’t a particularly large increase. On average, the same week of the year has seen unadjusted claims rise 31K. With the caveat that it covered a holiday week and revisions are still possible, that basically means the bulk of the move this week in the adjusted number was due to that seasonal adjustment rather than a material increase in claims. Taking another look at the unadjusted number, the current week of the year is well below the readings for comparable weeks in the years before the pandemic. In other words, the non-seasonally adjusted number points to a bit more strength than the adjusted number leads on.

Taking another look at the effects of seasonal adjustment, below we show the current series for seasonally adjusted and unadjusted claims as well as the adjusted numbers but using 2019 seasonal factoring (essentially removing any impacts on seasonal adjustment of the outlier-like high readings of the pandemic). While there are some minor discrepancies like how the current series had been understating claims relative to 2019 factoring earlier this year and the 2019 factoring was much more volatile around the holidays last year, overall the adjusted series have tracked one another well indicating that the extremely elevated readings of 2020 and 2021 have not had a major impact in undermining the effectiveness of seasonal factoring.

As the unadjusted initial claims number saw little change, continuing claims—lagged an additional week to the initial claims number— were unchanged week over week. Remaining at 1.306 million, it continues to be the strongest reading in several decades. Click here to learn more about Bespoke’s premium stock market research service.

The economic calendar was light today with the only US releases of note being wholesale trade sales and inventories on top of the regularly scheduled weekly releases for Wednesday. Perhaps the most notable data point was the weekly reading on mortgage applications from the Mortgage Bankers Association. As the national average for a 30 year fixed rate mortgage has resumed its move higher and is once again above 5.5%, mortgage refinance applications continue to fall as fewer homeowners are balking at the highest rates in over a decade. The MBA’s index tracking refinance applications fell for a fifth week in a row. On top of all the other declines over the past year and a half, the index currently sits at the lowest level since December 2000.

While refinancing activity has completely turned a corner from the historically impressive readings earlier in the pandemic, purchase applications are not as historically depressed, but the picture hasn’t been particularly promising.  Falling another 7.1% week over week, today’s reading is one of the worst levels since the spring of 2020, and excluding those early days of the pandemic, it would be the worst reading since November 2016.

Taking a look at the non-seasonally adjusted number, claims have been running at a healthy level relative to the past decade, albeit below the pace of the past couple of years.  Late spring is typically when applications set an annual peak as was the case this year (blue dots in first chart below).  The high was now exactly one month ago which brings to question how the current decline from the seasonal high stacks up to prior years. As shown in the second chart below, the unadjusted number has fallen just short of 30% over the past four weeks which is one of the most rapid declines from a high of any year since at least 1990.  The largest and last time with a comparable drop was in 2010 when it fell almost 40%.  1995, 1999, and 2001 are the only other years that have seen even larger declines from an annual peak than this year.

While the macro backdrop for housing continues to deteriorate, S&P 1500 stocks that are part of various housing-related industries have underperformed the broader market over the past year. Below we show the relative strength lines of a handful of these industries’ S&P 1500 indices versus the S&P 1500 since this time last year.  Some groups like Mortgage REITs, Household Appliances, and Home Furnishing have been steady underperformers over the past year while there were others that had managed to hold out. For example, Residential REITs and home improvement stores were actually outperforming handily up until only a few months ago. Of course, the past few months have seen a complete unwind of that outperformance as they have now posted inline returns to the broader market. Click here to learn more about Bespoke’s premium stock market research service.

Yesterday, the Biden administration announced plans for a new federal program to support solar panel manufacturing via removal of import tariffs. In response, solar stocks proxied by the Invesco Solar Energy ETF (TAN) ripped higher gaining 4.26% on the day. Although TAN actually saw an even larger 5.5% single-day gain just last Thursday, yesterday’s move does rank in the top decile of all daily moves on record for the ETF. Perhaps more importantly, that also marked the first time the ETF moved above its 200-DMA intraday since December. However, those gains did not hold as TAN moved a few cents back below its 200-DMA by the close, and today it continues to hover slightly below that moving average. We would also note those levels are smack dab in the middle of the past year’s range and are at similar levels to the low end of the second half of last year’s range. In other words, solar stocks may have gotten a boost from the news yesterday, but the technical picture is at a bit of a crossroads and not decisively positive.

As solar stocks struggle to decisively make a move above their 200-DMA, the First Trust Global Wind ETF (FAN) is only managing to move above its 50-DMA.  Even though also a part of the clean energy space, wind-related clean energy stocks did not receive much of a bump from yesterday’s news as the group was only a modest 1% higher at the intraday highs compared to an over 7% gain for TAN at its highs. As FAN still needs to rally another 4.7% before joining solar stocks in testing its 200-DMA, the overall technical picture for FAN has been much less positive. The past year’s downtrend is more defined as the ETF has repeatedly failed to move back above its 200-DMA over the course of the past year with the most recent attempt being earlier this spring.

While solar shows a bit more promise than wind from a technical standpoint, overall the picture hasn’t changed much for clean energy as a whole. The largest clean energy ETF, the iShares Global Clean Energy ETF (ICLN), has likewise been stuck under its 200-DMA; having come up short yesterday following the rally off of the 52-week low last month and another failed attempt to move above its 200-DMA in April.

At the moment, clean energy stocks have failed in breaking out, but versus the broader market the move certainly stands out. In the chart below we show the relative strength line over the past five years for the Solar Energy ETF (TAN) versus the S&P 500 (SPY).  Beginning in late 2018 that line was consistently on the rise followed by an enormous surge in the second half of 2020 through the end of the year.  That steep rise in the line means this cohort of stocks experienced massive outperformance relative to the S&P 500. Of course, as fast as it went up, the line came crashing back to Earth in the first half of 2021 with further follow-through up until earlier this year. In late January, the relative strength line made its way back down to and successfully tested the longer-term and more gradual uptrend line off the late 2018 levels, and that continued to hold throughout the spring.  In the past couple of weeks and especially after yesterday’s surge, the line has dramatically broken out of the past year and a half’s downtrend.  Click here to learn more about Bespoke’s premium stock market research service.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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Real Estate

Big U.S. Cities Lost More Residents as Covid-19 Pandemic Stretched On by Paul Overberg and Janet Adamy (WSJ)

Among the ten largest cities in the country, only two (San Antonio and Phoenix) saw population grow last year, while cities with a resident population of less than 1mm but more than 500k saw aggregate declines as well. [Link; paywall]

The Hamptons summer rental market is facing an unexpected chill as inventory piles up and prices come down by Robert Frank (CNBC)

Travelers are moving further afield than the far end of Long Island and as a result demand for rentals in the Hamptons is crashing with summer demand falling well short of estimates. [Link]

States Help Business Owners Save Big on Federal Taxes With SALT-Cap Workarounds by Richard Rubin (WSJ)

Closely-held businesses are getting billions in tax benefits by skirting the SALT cap using a conversion that converts personal income taxes to business taxes. Regular wage earners are unable to enjoy the deduction. [Link; paywall]

Crypto

Crypto Goes Shopping for a Regulator It Can Push Around by Max Chafkin (Bloomberg)

The heaviest hitters in the crypto industry are pushing for regulation of the space to be taken on by the CFTC rather than the more aggressive and administratively powerful SEC. [Link; soft paywall]

Crypto Industry Sees Surge in Lawsuits as Investor Losses Pile Up by James Fanelli (WSJ)

Predictably, the near-inevitable cascade of losses emerging in the crypto industry are being litigated. Various flavors of fraud were being alleged even before the brutal fall in many crypto assets over the winter. [Link; paywall]

Financial Stability

‘Everything Is Terrible, but I’m Fine’ by Derek Thompson (The Atlantic)

Despite improving prospects thanks to higher checking account balances and incomes, Americans are feeling more dire about the national economy. Why? [Link]

The Racial Gap in Stock Market Participation (FRBSL On The Economy)

Across all income brackets, far fewer Black Americans hold investments in the stock market, with roughly one-third of the stock market participation of white households depending on income levels. [Link]

Missed Payments, Rising Interest Rates Put ‘Buy Now, Pay Later’ to the Test by AnnaMaria Andriotis (WSJ)

Wildly popular installment plans which allow consumers to purchase items immediately and pay for them over four or more later payments are proving more expensive for lenders than anticipated. [Link; paywall]

Streaming

Ted Sarandos Talks About That Stock Drop, Backing Dave Chappelle, and Hollywood Schadenfreude by Maureen Dowd (NYT)

A profile of Netflix CEO Ted Sarandos, featuring nautical musings, personal tragedy, layoffs, and Hollywood schadenfreude. [Link; soft paywall]

Fantasy Football

Mike Trout Would Rather Talk About the Angels by Tyler Kepner (NYT)

You know your fantasy football league is getting a little bit carried away when it leads to an on-field fight between two of its members. [Link; soft paywall]

Retro

The Wall Street Hotel Aims to Make 1700s-Era Finance Cool Again by Nikki Ekstein (BNN Bloomberg)

Lower Manhattan is being graced by a new place to stay: a new 180 room hotel located just across the street from the literal roots of the New York Stock Exchange. [Link]

Sanctions

U.S. Technology, a Longtime Tool for Russia, Becomes a Vulnerability by Ana Swanson, John Ismay, and Edward Wong (NYT)

The flow of critical inputs in to Russia via imports from a range of countries has slowed to a trickle, and that poses major challenges to Putin’s ability to make war in the Ukraine, let alone operate a modern economy at scale. [Link; soft paywall]

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Have a great weekend!