The S&P 500 has been fighting to regain some of its lost ground in the past week working its way out of oversold territory at yesterday’s close in the process. As a result, investor sentiment has taken a more optimistic tone this week as the AAII sentiment survey showed the percentage of respondents reporting as bullish climbed back above 30% for the first time since the first week of the year.  In total over the past two weeks, bullish sentiment has now risen 11.2 percentage points. While improved, that still leaves bullish sentiment several percentage points below its historical average of roughly 38%.

The gains to bullish sentiment borrowed heavily from an extremely elevated reading in bearish sentiment.  Last week over half of the respondents reported as bearish after a 10.5 percentage point increase week over week. This week that has dropped all the way down to 41.4%. That 12.3 percentage point decline was the largest drop since October 2019 when it fell 12.91 percentage points to a much lower 31%. This also marks the first time bearish sentiment rose double-digits then fell double digits in back-to-back weeks since February 2016.

In spite of the big drop to bearish sentiment, they continue to heavily outnumber bulls with an 11 point spread between bullish and bearish sentiment. That is improved from last week’s reading of -30.3 but remains at the low end of the recent range.

While the AAII survey results showed an improvement in sentiment, other sentiment surveys showed the opposite.  The Investors Intelligence survey saw the lowest reading on bullish sentiment since February 2016 and the NAAIM Exposure index showed investment managers are basically market-neutral as the index saw the lowest reading since the COVID crash. Combining all of these readings into our Sentiment Composite, the gains to AAII sentiment in the past couple of weeks has brought the composite off the lows, but current levels are still some of the most bearish of the past decade.  The only lower readings were in the spring of 2020 and early 2016.  Click here to view Bespoke’s premium membership options.

It’s been a volatile start to 2022 so far.  With an average intraday trading range of two percentage points, the S&P 500’s average intraday range in the first 41 trading days of the year has been the widest since 2009, and the only other year besides 2009 where the average range was wider was 2008.

High levels of intraday volatility tend to coincide with periods of elevated uncertainty among investors and typically occur during periods when the market is lower. When the average daily range of the S&P 500 has been more than 1.5 percentage points during the first 41 trading days of the year, the average YTD performance of the S&P 500 was a decline of 5.7% (median: -4.3%). This significantly trails the average gain of 1.3% (median: 2.0%) of all years since 1983. So far this year, the S&P 500 has had the second-worst start since 1983 trailing just 2009, when the S&P 500 tanked 25.3% in the first 41 trading days.

Regarding forward returns after these volatile starts, returns vary.  Although performance over the following one and three months tended to be better than average and more consistent to the upside, over the following six months and for the rest of the year, performance was more mixed.  Click here to view Bespoke’s premium membership options.

Jobless claims were expected to fall to 225K this week, but the decline was even larger as first-time claims fell to 215K.  That marked an 18K decline from last week’s slight upwardly revised number of 233K and is the lowest level of claims since the final week of 2021.

On a non-seasonally adjusted basis, it was a very impressive week.  Claims dropped to 194.7K, and after revisions, it is the first sub 200K print since March 2020. That also makes for the lowest level of the current week of the year on record.  The 21.3K improvement from last week is also seasonally unusual. The current period of the year has historically marked a temporary low in the average reading on claims (second chart below).  Additionally, the current week of the year has infrequently seen claims fall as they did this week. Throughout history, the ninth week of the year has been one of the most consistent periods in the first half of the year to experience week over week increases in claims. In fact, historically the current week of the year has seen claims rise WoW over 70% of the time and prior to this year, the last time the current week of the year saw a lower reading on claims was 2011.

Continuing claims were less impressive this week. While last week’s reading was revised down by 2K to 1474K, this week’s number was slightly higher at 1476K.  That compares to estimates of further declines down to 1420K. Even though the most recent reading disappointed, the current level of claims is still well below the range of readings from the past several decades. Click here to view Bespoke’s premium membership options.

As COVID becomes endemic, levels of anxiety across the country have been declining. At the beginning of the pandemic, uncertainty in the political climate caused by riots and pandemic-related restrictions pushed Americans to rush to their local sporting stores to purchase firearms, resulting in a y/y percent increase in background checks that was second only to the spike seen after Obama’s second term began. In July 2020, FBI background checks spiked by 79.2% y/y, just two percentage points less than the increase seen in January of 2013. However, the absolute number of checks in July of 2020 was 1.14 million higher than the figure from January 2013 (3.64 million vs 2.50 million). In March 2021, background checks topped out at 4.69 million, the highest monthly figure on record. The number of background checks has somewhat normalized since then, resulting in just 2.55 million checks being run in February, albeit a slightly shorter month. Click here to view Bespoke’s premium membership options.

On a full-year basis, 2021 saw total background checks decline by 9.0% to 31.1 million. However, this came off of a record year in 2021, in which checks increased by a whopping 41.6% to 34.2 million. In the first two months of 2022, total background checks have declined by 358,669 YTD or 6.5%.

As you may have assumed, the pullback in background checks does not bode well for the gun manufacturing stocks. Below are the charts of Sturm Ruger (RGR) and Smith and Wesson (SWBI) over the last 12 months. RGR is currently 19.9% off of its high but has rebounded since Russia’s invasion of Ukraine. As the international geopolitical situation becomes increasingly uncertain, firearm sales will likely increase, which has been represented in RGR’s 13.7% upside move in the last week. SWBI is performing far worse, down 54.6% from its 52-week highs. The stock has moved 12.4% higher in the last week but remains deep in the hole. In addition, both of these stocks have been impacted by the legal ruling that could hold gun manufacturers liable for incidents involving their firearms. Previously, these companies were entirely immune from litigation.

As expected, there is a high correlation between the performance of RGR and the number of background checks run over the last twelve months. Since 2000, the correlation coefficient between these two data sets is 0.90, which signifies a strong positive relationship. Should the Ukrainian conflict boost background checks, look for continued strong performance from the gun manufacturers.

While Financials are the best performing sector so far in today’s session, leading into today it was the worst-performing sector over the past week thanks in large part to a 3.7% decline on Tuesday; the sector’s worst single day since June 2020. Looking more specifically at bank stocks, using the SPDR S&P Regional Banking ETF (KRE) as a proxy, yesterday saw an even more dramatic decline of 5.47% marking the largest decline since November 2020. That drop also ranks in the bottom 1% of all daily changes on record since the ETF began trading in 2006.  The over 3.5% rebound today, meanwhile, ranks in the top 5% of all days on record as yesterday’s decline was not quite enough to drop the industry below its 200-DMA; a support level that has now held multiple times in the past year.

As previously mentioned, it is rare for KRE to fall over 5% in a single day. Excluding yesterday, there were 68 other times this happened but only a dozen of those occurred with at least 3 months between the prior instance.  In the table below, we show the performance of KRE after each of those periods.

While it is far from the case today, typically, the next day has often seen KRE fall further after a 5% drop.  Instead, today it is seeing the second-best next-day performance of these instances.  As for where things go from here though, returns have been weaker than the norm one week and one month following these past occurrences. KRE has then tended to outperform all other periods three, six, and twelve months out. Click here to view Bespoke’s premium membership options.