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“If trouble comes when you least expect it then maybe the thing to do is to always expect it.” – Cormac McCarthy

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The S&P 500 and Nasdaq have benefited from the performance of mega caps this year, but this morning, a 4% decline in Tesla (TSLA) in reaction to earnings is weighing on futures for both of those indices.  At this point, though, the declines are minor.  The real test will come in the next couple of weeks when the trillion-dollar club of companies starts to report.

Overnight, Asian stocks were mixed with Japan and China lower while India and Australia rallied as payrolls down under came in better than expected.  Stocks are faring better in Europe this morning as major benchmarks are higher across the board as an ECB policymaker suggested that just one more 25 basis point increase in rates could be all that’s needed for the current cycle.

The focus now shifts to this morning’s economic data in the US with jobless claims (initial lower than expected, continuing higher) and the Philly Fed (weaker than expected) at 8:30 and then Existing Home Sales and Leading Indicators at 10 AM. While the earnings calendar has been busy this morning, the lineup after the close is relatively quiet with reports of note including Capital One (COF), CSX (CSX), and Intuitive Surgical (ISRG). Then tomorrow we close out the week with American Express (AXP), AutoNation (AN), and SLB.

With the market rising faster than the temperature this summer, we can’t say we were surprised this morning to see that individual investor sentiment as measured by the American Association of Individual Investors (AAII) has turned bullish.  In this week’s survey, the percentage of bullish respondents increased from 41% to 51.4% which is the highest level since April 2021.

That plus-50% reading in bullish sentiment also ended a streak of more than two years (116 weeks) where bulls were never in the majority in the weekly AAII poll.  In the history of the survey (since 1987), there have been just three other periods where bullish sentiment went more than 100 weeks without a 50%+ reading, and the just-ended streak ranks as the third longest of all time.  What’s notable about this chart is that the three longest streaks without 50%+ readings in bullish sentiment have now all occurred in the last ten years, and during that ten-year stretch, there have only been 17 weeks (out of 520) of 50%+ bullish readings.

With so few weeks where bulls were in the majority, you would think that it was an unsettled time for equities, but during this period, the S&P 500 has put up annualized returns of over 10% (not including dividends).  Like the Cormac McCarthy quote above, markets climb a wall of worry, and sometimes, the more issues that investors are worried about, the better the forward returns.  Conversely, just when you think things can’t go wrong for the stock market, you get years like 2022. Complacency kills.

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