Record Highs Meet Confidence Lows
The latest earnings data from Refintiv shows analysts are starting their normal "hook" process.
In other words, as we get a few weeks away from earnings season you start to see analysts running scared and making reductions in their expectations.
It's why we tend to see consistent "better than expected" results when the data is actually released by the companies.
The "reduction window" typically lasts from now until October 10th to 12th or thereabouts. Then, once Q3, 2020 earnings start we see upward pressure once again.
But don’t stress over this. It happens every quarter. In fact, it's the last week of the current quarter and then the first 10 days of the new quarter when analysts get nervous and don't want to be tagged on a downside shock.
And it’s important to remember the normal "quarterly bump" comes next week. We'll see this in the Friday, October 2nd release of Refinitiv's data. It should come in around $156.00+/- versus the current S&P 500 "forward 4-quarter estimate" this week of $146.27.
That's about a $10 or 6.0% increase in the forward roll from Q3 '20 to Q2 '21, to Q4 '20 through Q3 '21.
The July 1 estimate from June 30 this year was a larger 11.8% increase from $127.44 to $142.66 (they were dramatically short). Expect them to be so again as margins and efficiencies are improving far more quickly than assumed.
Even as This Stuff Quietly Improves...
Fear remains deeply set in the psychology of the investor crowd.
The good news is that it seems to be increasing.
The images below suggest that chop and red ink over the next few weeks will continue to set an excellent foundation for the next leg up from here. There’s extraordinarily little bullishness left in the marketplace.
In some cases, we are hitting record fears:
What follows below is the "Yale Crash Index."
It tracks several different internal data points.
Keep in mind that the blue line is a bit backwards in how it's presented: Low readings mean that a low number of investors are not worried about a stock market crash. The lower the reading, the higher the concern is about an upcoming market crash.
Conversely, higher readings suggest an increased level of investor complacency.
The August 2020 survey results were published within the last week, and they showed yet another increase in crash concerns for both institutional and individual investors.
This time the Crash Confidence indicator dipped to just 13.1 for individual investors, which is even lower than the prior record low seen in April 2009 immediately after the Financial Crisis market lows were put in.
It’s actually a 20-year record low.
And while the prior record low Crash Confidence reading in April 2009 came after the S&P 500 had fallen 50% from its 2007 highs, the current record low reading comes as the S&P 500 has recently made new all-time highs while in the midst of a global pandemic:
There’s a bit more perspective on this in the next image.
Notice that the Crash Confidence results show that these are critical points for lows, at least for the last 20 years.
In short, investors are spooked.
The good news is that they are spooked to levels seen at times when historically, especially important lows are being formed.
Market Timers and Newsletter Writers
Now, here’s how short-term market timers and newsletter writers feel about the market.
As you’ll see (below) both categories are extremely bearish.
In fact, the combination of various directions to readers is now a combined short reading:
The level below zero is the amount the collective body of newsletter writers believe their subscribers should be short the market…in percentage terms.
Every single other reading at this level (or a tad bit lower) marked important lows when viewed in the rearview mirror.
Another 2-3 weeks of chop and you should see all the sentiment readings, AAII, Yale Crash Confidence, Mutual Fund cash (NAAIM) and the Newsletter timers nearly perfectly aligned to mark a particularly important low.
There won't be a perfect day to act - but suffice it to say that survey results like the weekly AAII investor sentiment reading and Yale's Crash Confidence index suggest that the market is still climbing the "wall of worry" that all long-term investors prefer to see.
With stock market crash concerns are at their most elevated levels of at least the last 20 years, it suggests that an actual crash is not very likely.
From a contrarian perspective, high levels of concern for a looming crash make us even more bullish on forward returns and upside surprises.