Over the past year, equity investors would be hard pressed to find anything to complain about. Even without dividends, the S&P 500 is up 24%, the TSX has risen 19% and global equities are up 18%. Even better, periods of market weakness have proven shallow and short. Just look at the S&P 500, with six occasions that witnessed the index pull back more than 2.5%, the depth of the damage maxed out at 5%, and were often over in the span of a couple weeks. This has certainly emboldened investors to buy the dips in the market. Naturally, one of these pullbacks will develop into something more material, but, so far, the buyers of the dips have been rewarded and continue to come back in. Recency bias will bite them at some point. The TSX and global equities have similar patterns.
Pullbacks have been extending
It’s worth noting that the pullbacks have been getting larger and longer as the past year progressed. The September decline lasted a month!! Yes, a month went by without the market making a new high but then concerns over Delta faded as did talk of Evergrande. And now we sit down about 4%, this time its Omicron and increased concern over the speed of the Federal Reserves taper. Could this be the start of an actual correction (i.e., a pullback of 10% or more)?..
Sentiment has soured
The American Association of Individual Investors’ weekly poll was released on Thursday and the percentage who see the market rising over the next six months has dropped from over 40% a month ago to 27%. Meanwhile, the percentage who are bearish did the opposite, rising from 26% to 42%. When the bears minus bulls is 20 (it’s currently 15), we would say sentiment has reached an extreme…so we’re not there, yet. Note that reaching a contrarian market sentiment is a positive indicator.
ETF flows continue
Regardless of these bearish survey takers, dollars matter more when it comes to the markets. We won’t go into why surveys are not the best indicators of actual behaviours—that is a whole different Ethos. What we can see is that with markets down a few percentage points—and the last time the S&P 500 made a new high a whopping 10 days ago—money flows into ETFs have moved higher. The last week has seen over $10 billion of net buying, when measuring equity ETF flows based on all North American ETFs with assets of over $1 billion. While ETF flows may not be as clean an indicator of retail investor trading as they used to be, given more institutions are using these vehicles, they remain a decent gauge. What does this mean? The people may be more bearish, but clearly a sufficient amount are bullish enough to be buying.
The markets are certainly wrestling with some issues at the moment. The uncertainty of the new Omicron variant remains the most talked about issue with key determinants being how contagious will it be—both among the vaccinated and those who are not—and how severe will the symptoms become. Over the next few weeks, as science uncovers more evidence on these two big questions, the news flow will likely drive markets. But don’t forget the Fed and other central banks—the global tightening cycle appears to be getting started, and this pullback may prove to be yet one more buying opportunity during this great run. Alternatively, it could be the start of the correction that so many have been waiting for. The fact that so many appear to be waiting for weakness is a positive.
— Craig Basinger is the Chief Market Strategist at Purpose Investments
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Sources: Charts are sourced to Bloomberg L.P.
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