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The Fallen

Good Morning,

As you may have expected from previous notes about the topic, sentiment continues to falter on every little hiccup in markets.  I know 400-points down sounds like a lot – but from an 18,500 starting point?  Really?  Not.

Indeed, for the mass audience and the media, 400 points down now immediately triggers the 2008-2009 video reel library and Black Swan chatter abounds.

When will it end?  Likely at much higher prices, with far, far less than $9 Trillion sitting in the bank.  It will be when “bond” has become a new 4-letter word marking foolishness and almost no one remembering anything bad about markets or equities.  In other words – a long time from now.

Sentiment Wilts – Again

You did not expect otherwise did you?  The snapshot below is clear:

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 Fallen and They Can’t Get Up

Here is what we have for the bulls now for well over a year++:  When the market goes down, bullish sentiment retreats while bearish sentiment spikes – ala this past week.  The kicker is this: when the market does manage to fool the masses – and rise, bullish sentiment barely budges – more or less staying steady.

In the latest week, which obviously includes the ugly couple days starting on Friday, bullish sentiment declined from 29.75% down to 27.94% – or nearing again the levels seen at the bottom of the pit in 2009!  More amazing?

This also sets another record:  the 46th straight week and the 80th time in the last 81 weeks that bullish sentiment has been below 40%.

Said another way – 72% of investors surveyed nationally don’t like the stock market.

At what level do you think they will like it?

Surely not at lower prices.

While bullish data is still a brain-bender, bearish sentiment spiked quickly this week.  As selling cascaded into the market, bearishness went from 28.48% last week to 35.92% this week.  A quick check will show that 7-point increase was the largest since mid-June (yep – Brexit days).

The fact is – fear runs deep.  There is still a constant emotional reaction, widespread among individual investors, to the risk of being left with no chair to sit in “when the music stops.”

Hauntings of 2000-2003 and 2008-2009 remain as fresh as yesterday.  At the first hint of trouble, sentiment shifts rapidly.

Long-term investors need to be very grateful this is still the case.

Technical Review Backdrop

I prepped a short little video review of the SPY charts from a technical perspective.  I figured you may find some time over the weekend to review.  The upshot?

Markets are doing what they normally do – testing breakout regions and building price supports.  This chop is actually health for the long-term structure one wants to see.

You can view the short video here.  It just takes a few minutes.  I hope you find it helpful.

Improvement Anyone?  

While red ink hits the market for a bit, it may be too early to brag about improvements but we must.

Seems the manufacturing data are improving – again.  I suspect this matches up with data in recent weeks from other regions as well – all showing that the pain felt in this sector (driven primarily by huge setbacks in energy-related orders output) is slowly abating.

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 I know – red ink makes it tough to look forward – but that’s where the money is made.

The Empire State Manufacturing Survey chart above is a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Yesterday’s release showed a general improvement for both current and future assessments of manufacturing activity, with the current activity index rising to a still contraction level of -1.99, while future activity also increased, rising to a level of 35.43.

By the way – the latter is nearing highs seen in all of 2015 and 2016 – another hint that we are burning off the energy negatives.  Slowly but surely.  This is also part of the reason it has felt like that US economy has been walking through quicksand.

One more note:  while everyone complains about AI – let’s be thankful some robots exist. If they didn’t, who would man the factories which are producing near all-time record output?

Heck, homebuilders are short guys who will build houses – they can’t find enough of them.

Imagine trying to staff a new factory with just people.

Be thankful that robots are coming to the rescue instead of fearing the advances the technology shift provides for the rest of us.  Thank Gen Y for the push.

Results and Bearishness

An interesting piece from Morningstar, the creator of those God-awful “style boxes.”  They out out an item on fund managers results with data up to the end of August and covering the last 5 years.  It’s pretty ugly.  Take a look:

Here is the simplicity of the back-drop to this data which is most often overlooked when reading the bullet points.  Having been one in my career and with some of my very best friends being great fund managers, most do not recognize the culprit lurking in the background of this data.

It’s emotion.  The very knee-jerk reactions that so often quantify terrible judgment in hindsight.  In a nutshell?

The fund manager tends to see significant withdrawals as prices wilt.  This causes two things: a) a demand he / she sell when prices are low to meet redemptions and, b) a lack of capital to buy stocks while they are cheap.

On the flip-side, the fund manager tends to see inflows only after markets have risen. They are then faced with having to buy the very same stocks at higher prices.

Sounds simplistic – but the public tends to see a mirror image of their emotional reaction waves ripple through the “results” published by the fund manager world.

Last on this front – be careful what you wish for:  ETF’s are not what most people understand them to be.  They are becoming one of the primary causes of the chop we see when sell alarms do ring.

Long-term investors cannot possibly believe that the massively increasing wave of double-digit moves in specific stocks, seconds after an earnings note headline is released, is driven by John Doe and his broker, right?

Closing Thoughts

We hope you have a wonderful weekend.  Check the video above.  The fears of yesterday still haunt markets.  That’s good.

I have stated this repeatedly so let’s keep it in mind:  anytime you think people are too bullish – just give me a few days red ink and I will show you a terrified crowd again. This week is no different in the larger view.

Setbacks are your friend if you remain focused on the long-term horizon, and what is shaping up here in the US.  As much as the media coverage only covers the dark views, many parts of our economy have never been better.

Seeing through all the pitches in the dirt is critical – and it is what investors get paid for – taking risk.  Very significant waves of demand are building in our economy.  As is almost always the case, those understandings will not be clear in the mainstream until they are obvious.

And count on this:  when demand is rolling ahead rapidly.  When we start hearing of shortfalls, when Gen Y footprints are everywhere to be seen and months of waiting for some product pipelines becomes clear to all – we can be absolutely certain that terrible news will cloak all of those events as well.

Stay focused, stay patient, stay on your long-term pathway.

The Barbell Economy is unfolding as expected.

The chop in the market is healthy and a benefit for long-term investors.

Until we see you again, may your journey be grand and your legacy significant.

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