When I look at the daily trading action in the stock market and compare it to the news of the day, it’s plain to see just how fragile investor sentiment really is. We might have had a strong start to the year and, no doubt, the stock market recovered impressively since the subprime financial crisis, but I continue to get the sense that everything could come apart on a dime. Even with the certainty of very low interest rates, the sovereign debt problems throughout the world will continue to be the bane of financial markets. Investment risk in equities remains very high.
Investor sentiment took a very positive turn at the beginning of the year and most of the change was due to institutional investor fatigue related to problems with Greek’s sovereign debt. Decent corporate earnings and the Federal Reserve carried the stock market through January and now economic news and geopolitical events are ruling investor sentiment. This is a very difficult market in which to make predictions, but I still am of the view that this year’s trading action could be very similar to last year’s; a strong start, followed by consolidation, then correction. (See The Policies We Have Today Will Hurt Us Tomorrow.) To cap this off, a fourth-quarter rally (related to the election) is a definite possibility. But, as I watch investor sentiment change on a daily basis and the stock market wane without good news, the potential for a change in the most recent price trend is substantial.
The stock market today is in one gigantic recovery, trying in a sense to return to its mean. The spectacular wealth creation in the 1990s was so unusual and so over-the-top that the stock market is still trying to come to terms with that price bubble and overvaluation. Corporations are plodding along, doing what they do best, yet equity investors today are left in an environment of almost total uncertainty and that’s why investor sentiment is all over the place. Do you buy stocks now? Will the U.S. go back into recession? Are Treasuries in a bubble? And what happens when Greece defaults? These questions are valid, but virtually unanswerable and this is why, despite our gains so far this year, investor sentiment is stuck in a state of fragility.
An important near-term technical barrier for the S&P 500 Index is 1,325. After that, 1,300 is a serious floor that I would not want to see broken. The stock market has been running strong and is due for a consolidation in the near-term. The performance of the NASDAQ has been particularly impressive and, in my mind, investor sentiment in the technology sector has been surprising. Developments about Greece will no doubt affect investor sentiment going forward, but, no matter what happens, if the S&P 500 Index can hold at 1,300, the stock market’s still in decent shape.