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John J. Gardner, CFP®, CPM®

blackhawkwealthadvisors.com

Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

August 15, 2024

Market Psychology…

Psychological Market Indicators

Emotional control is essential to successful investing. People, in general, are emotional – especially with investing. Fear and greed too often take control over investor’s when making investment decisions. The good news is you can manage our own emotions in a positive way by developing a higher EQ, or emotional quotient (also referred to as emotional intelligence). With respect to investing, a stronger EQ is gained through a rules based, discipled approach. In stock investing, buy and sell rules built on criteria to maximize returns and minimize risk can help calm the human emotions so detrimental so investing money in the stock market. More good news is that while you can control your emotions when investing, most investors don’t. There is evidence of that in the market on a constant, daily basis. And that evidence, commonly referred to as “psychological market indicators” can help you be a more successful investor. Spikes and extreme levels relative to the norm in certain indicators historical occur at stock market tops and bottoms. Think of them as a dashboard of gauges displaying potential pivot points in the stock market. These indicators reflecting investors emotions are available to be followed and wise to track. Here are the top 5 psychological market indicators I monitor.

Put Call Ratio

A contrarian sentiment indicator that helps determine major and short-term market bottoms. The Put/Call Volume Ratio compares the total number of puts traded each day with the total number of calls. The ratio will surge above 1.0 when investors turn bearish and buy more puts than calls. A reading above 1.15 can confirm a positive reversal in the S&P 500 or Nasdaq, or follow-through day.

A contrarian sentiment indicator that confirms market bottoms. The Bulls vs. Bears weekly survey of newsletter writers is published by Investors Intelligence. When the percentage of bears crosses above the bulls, a market bottom is more likely.

The VIX. This is a technical sentiment indicator that helps determine major market bottoms as well as shorter-term swings. Daily: The CBOE Market Volatility index estimates expected volatility based on S&P 500 option prices. Commonly called the VIX after its ticker symbol, the daily volatility index helps determine short- and intermediate-term market bottoms. When fear rules Wall Street, volatility surges in the stock market, which is typically the time the major indexes will hit bottom and rally higher. Look for the volatility index to rise more than 20% above its 10-day moving average, which can confirm a positive reversal in the market.

A contrarian sentiment indicator that has flagged three major market tops since the 1970s.The year-over-year percentage change in margin debt can help flag major tops in bull markets. This contrarian sentiment indicator will exceed 55% when optimism runs rampant on Wall Street and investors are heavily borrowing money during the late stages of a bull market.

A technical indicator that can flag rebounds from intermediate corrections during bull markets. The High-Low indicator looks at the ratio of the new highs to new lows. When the indicator shows its first up day after crossing below 0.5, look for a short-term bottom in an intermediate correction during a bull market. This indicator is less useful in bear markets when the S&P 500 and Nasdaq are below their 200-day moving averages. During such periods, the initial trigger level drops to 0.1.

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“When you begin to read a poem you are entering a foreign country whose laws and language and life are a kind of translation of your own.”

~~ Randall Jarrell, 1950

What Happened On This Day August 15, 1945 – Japan surrenders and this concludes the end of WW2 for America.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in confirmed uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. It is still green. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Market in confirmed uptrend. From November 1 to last week the market was in a Confirmed Uptrend. Market action on April 12 triggered the weakened trend signal to Uptrend Under Pressure. After running higher 18 out of 22 weeks, the SP 500 fell 3 consecutive weeks. May 16 market action changed that again, triggering a positive trend change back to Confirmed Uptrend. That bullish trend weakened July 24. Then the market’s trend signal lowered to Uptrend Under Pressure. The market’s trend turned more bullish Tuesday, August 13. The fourth day of a new rally attempt confirmed the rally with a follow-through day.

Here are key market levels as of Monday, August 12.

Recapping Last Week

U.S. equities fought back from a brutal drop of more than 4% at Monday’s open to finish only moderately lower, amid the highest volatility levels seen since the 2008 financial crisis and 2020 pandemic. Panic commenced when Japan’s stock market plunged 12% last Sunday evening, as the Bank of Japan’s recent interest rate hike and subsequent rising yen caused traders to begin unwinding the so-called “carry trade” that was built on years of negative rates in Japan. The S&P500 and Nasdaq Composite indices both ended only marginally negative, while the Russell 2000 slid 1.4%. The Cboe Volatility index soared above 65 in the premarket last Monday but quickly retreated into the low-20s by week’s end. However, readings in the 20s still represent the most volatility investors have seen since the regional banking crisis in March 2023. S&P500 sector performance was split, while crude oil prices rose nearly 4% as Mid-East tensions escalated. The 10-year U.S. Treasury yield plummeted to 3.67% as investors fled to the safe-haven of government debt, before bouncing back to 3.94% despite weak 10- and 30-year auctions. Concerns about rising recession risks and an unraveling in the U.S. labor market were somewhat countered by a rise in the Atlanta Fed GDPNow Q3 estimate to +2.9% and a drop in weekly jobless claims. These data points led to a strong rally in equities and interest rates on Thursday. However, economists will be closely monitoring incoming data for any signs of slowing economic growth. Some are calling for an inter-meeting rate cut, but the Federal Reserve is unlikely to take such action unless credit market conditions worsen. In other news, U.S. consumer borrowing increased less than expected in June, but overall balances and delinquencies continued to grow as inflation ate into Americans’ buying power. The Fed’s Senior Loan Officer Opinion Survey revealed easing lending standards for commercial and industrial loans in the second quarter, although consumer loans were somewhat tighter.

Internationally, the Summary of Opinions from the Bank of Japan’s recent meeting suggested that board members did not expect its rate hike to be large enough to disrupt global markets. On Wednesday, Deputy Governor Uchida attempted to reassure investors by saying that the BOJ won’t raise rates further while markets are unstable. In China, export growth slowed unexpectedly in July, signaling potential cooling global demand. Consumer prices in the world’s second-largest economy rose less than forecast when stripping out volatile food prices, while producer prices fell 0.8% YoY. Finally, the Reserve Bank of Australia left interest rates unchanged at its August meeting, warning that pricing in rate cuts was premature given that inflation remained problematic.

Current View

The market’s trend turned more bullish Tuesday, August 13. The fourth day of a new rally attempt confirmed the rally with a follow-through day. A day after making a bullish signal, the stock market followed up with gains in most indexes yesterday as new inflation data boosted the case for interest-rate cuts. Today, a robust U.S. retail sales report for July boosted investor confidence, and buyers came in full force in the stock market. Through mid-morning today, the Nasdaq is up a sharp 5% and the SP 500 has gained over 3.5%. A convincing V-shaped market formation is being underway since the July 10 market top and ensuing slide. The Dow looks poised to rise for the fifth time in six sessions. The Nasdaq remains lower for the third quarter so far, but the decline has now shrunk to 1%. Volume has also accelerated and risen notably vs. the same time on Wednesday on both the Nasdaq and the NYSE.

Notable…

The yield on the key U.S. Treasury 10-year bond spiked 12 basis points to 3.94%. It rose to as high as 3.95%.

Crude oil futures on the NYMEX rebounded 1.3% to $77.98 a barrel after taking some big hits in recent days.

Gold inched up 0.2% to $2,484 per ounce. It has been gliding to all-time highs for much of this year.

• Industry Group Strength:  BULLISH. As of yesterday, 136 out the 197 groups I monitor are up year-to-date. 61 are down.
• New Highs vs. New Lows: BULLISH. As of now, there were 187 new 52-week highs and 101 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.98%. The 10-year Treasury now 3.93%. This is the first time the 10-year Treasury yield has dipped below 4% since February.
• Volatility Index: NEUTRAL. Volatility has been volatile. The “VIX” is near 16. It is down from 19 two weeks ago. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: BULLISH.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 33, the Fear & Greed Index is down from 42 two weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  NEUTRAL. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 44.6%, down sharply from 59.4% two weeks ago. The bear sentiment is now 21.5%, a big jump higher from 15.6% two weeks ago. This reflects a decrease in bullish and bearish sentiment over the last two weeks. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.

• Put / Call Ratio: NEUTRAL. The ratio of put-to-call options is 0.84.  It is up from 0.64 two weeks ago. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

Business Inventories Show Mild Increase: U.S. business inventories increased moderately in June as a surge in stocks at retailers was offset by mild gains at wholesalers. Inventories rose 0.3% after increasing 0.5% in May. The increase in inventories, a key component of gross domestic product, was in line with economists’ expectations. Inventories increased 2.1% year-on-year in June. Private inventory investment contributed 0.82 percentage point to the economy’s 2.8% annualized growth pace in the second quarter, after being a drag for two straight quarters. Retail inventories shot up 0.9% in June instead of 0.7% as estimated in an advance report published last month. They rose 0.8% in May. Motor vehicle inventories climbed 2.2% instead of 1.8% as previously reported. They advanced 2.4% in May.

Import Price Index Shows Easing: The cost of imported goods barely rose in July, capping off a trifecta of low inflation readings this week that set the stage for the Federal Reserve to cut interest rates next month. The 0.1% increase in the import price index dovetails with similarly mild changes in consumer and wholesale prices last month. The cost of imports rose a tepid 1.6% in the 12 months ended in July. They rose an even slower 1.2% if fuel is omitted. Imports only play a small role in overall U.S. inflation, but the recent downtrend is certainly welcome news. With inflation slowing, the Fed is primed to reduce high U.S. borrowing costs next month. Lower rates could boost the economy by making it cheaper for consumers to buy home or cars and businesses to invest.

U.S. Retail Sales Soar: Sales at U.S. retailers posted the biggest increase in July in a year and a half, but most of the gain was tied to a rebound in auto sales after dealers recovered from a nationwide cyberattack on their computer systems. Sales surged 1.0% last month, the government said this morning. They had been forecast to rise 0.3%, based on a Wall Street Journal poll of economists. The exaggerated increase in sales in July does little to dispel the notion the economy has slowed from last year’s breakneck pace. Still, the steady increase in sales last month also suggests the economy is not in any big trouble. Gross domestic product, the official measure of growth, is tracking to expand close to 3% in the third quarter. Sales of new vehicles and auto parts, an up-and-down category, climbed 4% last month to mark the biggest increase since January 2023. Households are feeling more stress financial stress as evidence by rising — though still low — delinquency rates on loans. They have to rely more on current incomes to support spending, but incomes aren’t rising very fast.

Initial Jobless Claims Drop Again: Initial jobless claims fell by 7,000 to 227,000 in the week that ended Aug. 10, the Labor Department said this morning. It is the lowest level since early July. Last week claims fell a revised 16,000 to 234,000, compared with an initial estimate of a fall of 17,000 to 233,000. The four-week moving average of claims fell 4,500 to 236,500. The number of people already collecting jobless benefits in the week that ended Aug. 3 fell by 7,000 to 1.86 million.

CPI Shows Inflation Slowly Receding:  The battle against high inflation is not entirely over, but it’s getting closer to the end game. The three-month annual rate of inflation based on the consumer price index slowed to 0.4% in July from 1.1% in the prior month and a recent high of 4.6% in the early spring. The 12-month rate of inflation slowed to 2.9% from 3.0% and touched the lowest level since the spring of 2021. The yearly rate of core inflation edged down to 3.2% from 3.3%, also the lowest level in three years. The cost of housing in July accounted for 90% of the increase in consumer inflation, but private data has continued to indicate a broader slowdown in rents. Energy and food were on the tamer side. Energy prices were flat and the cost of food rose 0.2%. This adds to a narrative of slowing inflation and cementing the likelihood the Federal Reserve will cut interest rates next month.

PPI Prints Low Pre-Pandemic Increase: Wholesale prices have calmed down since a big spike in 2021 and 2022. They are now rising at a rate similar to low pre-pandemic levels. Even better, the cost of partly finished goods and raw materials show no evidence of accelerating costs. These prices tend to climb when inflation is about to get worse. Unless inflation shows a surprising – and unlikely surge – this month the Fed is all but certain to cut U.S. interest rates at its mid-September meeting.

NFIB Optimism Index Ticks Up: The NFIB Small Business Optimism Index rose 2.2 points in July to 93.7, the highest reading since February 2022. However, this is the 31st consecutive month below the 50-year average of 98. Inflation remains the top issue among small business owners, with 25% reporting it as their single most important problem in operating their business, up four points from June.

Trade Deficit Recedes: The trade deficit fell by 2.5% in June and receded from a 19-month high, owing to higher exports of aircraft and U.S.-produced oil and gas. The deficit dropped to $73.1 billion in June from $75.0 billion in May. Still, a bigger trade gap in the second quarter shaved 0.7 percent points off the 2.8% annual rate of growth in the second quarter. Higher deficits subtract from gross domestic product. What happens next is less clear, but economists will watch imports closely. If Americans reduce purchases of imports because they are worried about a recession, it could indicate the economy is entering a danger zone. Changes in the trade deficit usually have just a small influence on the economy, but the numbers can gyrate when the U.S. undergoes a major political shift or faces a big disruption. It’s too soon to tell if either is likely to occur.

ISM Service Index Shows Economy Still Growing: The service side of the economy that employs most Americans rebounded in July to counter the growing view the U.S. might be tipping closer to recession. An index of service businesses, produced by the Institute for Supply Management, jumped to 51.4% last month from 48.8% in June. The June reading was the lowest since May 2020 — during the height of the COVID-19 pandemic. Numbers over 50% are viewed as positive for the economy. The services side of the economy has been a juggernaut since the pandemic ended, and while it’s still expanding, it’s showing more signs of stress.

Empire State & Philly Fed Manufacturing Shows Weakness: Two regional gauges of manufacturing sentiment weakened in August, according to data released this morning. The New York Fed’s Empire State business-conditions index, a gauge of manufacturing activity in the state, stayed in contraction territory for the ninth straight month in August. The general business-conditions index picked up 1.9 points — to negative 4.7 from negative 6.6 in July. The Philadelphia Fed manufacturing index slowed to a reading of negative 7 in August from 13.9 in the prior month. It is the first negative reading since January. Any reading below zero indicates deteriorating conditions. In the Empire State report, the key index for new orders fell 7.3 points to negative 7.9 in August. The shipments index fell 3.6 points to 0.3. Labor market conditions remained weak, with the average workweek dropping sharply. Despite the weakness, firms remained fairly optimistic about future conditions. In the Philadelphia Fed data, the index for new orders fell to 14.6 in August from 20.7 in the prior month. Shipments dropped sharply to 8.5 from 27.8 in July. Expectations over the next six months softened but stayed positive. Manufacturing has been struggling to regain its footing after the pandemic ended and the sector has not been helped by high interest rates and the strong dollar. Hopes of a turnaround in the second half of the year have faded.

U.S. Deficit Climbs Again: The U.S. budget deficit in July increased 10% from a year ago, driven by higher government spending and bigger interest payments on the national debt. The gap between federal spending and what the government collected in taxes rose to $244 billion in July, from $221 billion in the same month a year earlier. Outlays totaled $574 billion in July versus $330 billion in tax receipts, the Treasury reported. For the full fiscal year, the U.S. deficit totaled $1.52 trillion with two months to go. That’s down slightly from $1.61 trillion in the same span in the prior fiscal year. Still, the deficit in 2024 is on track to end up somewhat bigger at $1.9 trillion compared to $1.7 trillion in the previous year, according to the Congressional Budget Office. A big contributor are rising interest payments on the nation’s record $35 trillion in debt. The U.S. spent $763 billion on interest payments through the first 10 months of the fiscal year — more than what the federal government has spent on Medicare or the military. Rising interest payments — a byproduct of high U.S. interest rates — threaten to crowd out even more government priorities unless deficits are brought under control, experts warn.

Consumer Credit Slows: Consumers increased the amount of credit they used in June at a slower rate, in a sign of rising financial stress on U.S. households. Consumer credit rose by a modest $8.9 billion in June, Federal Reserve data showed. The use of credit in the 12 months ended in June advanced by 1.9%, but that was down sharply from a 5.3% yearly rate in June 2023. Typically the use of credit only rises that slowly around a recession, a sign that households are feeling more financial distress. Revolving credit, like credit cards, actually declined in June for the second time in the past three months. The last time that happened was in 2021. Credit-card interest rates are as high as 20% or more. High interest rates and lingering inflation have forced consumers to be more careful about how much they spend and what they buy. They’ve also depleted a lot of their savings and have to rely more on current income. Lower-income households are feeling even more stress, as evidenced by rising debt delinquencies and credit-card balances. Consumer spending is likely to slow and restrain U.S. economic growth, at least until the Federal Reserve cuts interest rates.

Factory Orders Decrease: U.S. factory orders fell 3.3% in June mostly because of weaker demand for passenger plans and military aircraft, but an ongoing slump in manufacturing showed no sign of ending. If transportation is excluded, orders for manufactured goods rose a scant 0.1%, the government said. Shipments of manufactured goods, meanwhile, rose 0.5% in June. These figures are factored into gross domestic product, the official scorecard of the U.S. economy. GDP rose at a 2.8% annual rate in the second quarter. The one bright spot in the report: So-called core orders, a measure of business investment, rose by a healthy 0.9%. Investment has barely risen in the past year, however. Weak shipments in the past year reflect an ongoing slump among manufacturers due to high interest rates and lukewarm consumer demand for big-ticket items such as new cars.

U.S. Employment Slows: The U.S. created a tepid 114,000 new jobs in July and signaled a slowdown in hiring since the spring, as the weight of high interest rates pressed down on the economy. The meager increase in jobs last month is the latest evidence of a gradual erosion in arguably what was the strongest labor market ever. It could also be a sign of a deterioration in the economy. A softening labor market and slowing inflation are laying the groundwork for the Federal Reserve to cut high U.S. interest rates by September. Unemployment, meanwhile, rose to 4.3% from 4.1% and hit the highest level since October 2021. The jobless rate has risen steadily from an extremely low 3.4% about one and half years ago. Wages rose a mild 0.2% last month. The increase in pay over the past year slowed to 3.6% from 3.8% in the prior month and is returning close to pre-pandemic levels.

John J. Gardner, CFP®, CPM®, AIF®

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.

Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It’s Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®). As an AIF®, John is also an Accredited Investment Fiduciary.

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