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“The only way to get ahead is to find errors in conventional wisdom.” – Larry Ellison
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Investors are trying to muster an up day as futures trade modestly higher an hour ahead of the opening bell. Jobless claims and the Philly Fed Manufacturing report were just released. The former was basically right in line with expectations while the Philly report unexpectedly increased. One potential negative of the Philly report was the fact that like its Empire counterpart, the Prices Paid component showed a notable increase.
With the flip of the calendar into August, the general tone of the market shifted on a dime. Look no further than the chart of Apple (AAPL). The stock closed at an all-time high on July 31st, but since then it’s been all downhill as the stock has corrected more than 10%, erasing more than $300 billion in market cap in the process. That’s greater than the market cap of all but 20 US publicly traded companies!
At the sector level as well, the tide has gone out. The image below is a snapshot of sector ETFs from our Trend Analyzer as of the end of July. At that point, all but one sector was overbought (1+ standard deviations above its 50-DMA), and two sectors – Communication Services and Energy – were at ‘extreme’ overbought levels.
The sector picture has changed significantly in just over two weeks, though. As of yesterday’s close, only one sector – Energy – remains at overbought levels, and three have moved into oversold territory (Utilities, Technology, and Real Estate). Also notable is the fact that every sector has traded lower over the last week with all but Health Care posting declines of more than 1%.
Just as there’s nothing like a rising market to improve investor sentiment, all it usually takes is a market pullback to get investors nervous. This week’s sentiment survey from the American Association of Individual Investors (AAII) looks as though we may be starting to see that play out. Over the last week, bullish sentiment dropped from 44.7% down to 35.9% which is down over 15 percentage points from the recent peak back in late July. Certainly not a panic, but bulls are starting to look over their shoulders.
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