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Written by: Eugene Peroni | Peroni Portfolio Advisors
When economists pitched recession forecasts last year the stock market embraced a contrary view with a more optimistic bias. Unrelenting bears cited the market’s narrow breadth patterns as a condition not conducive for a sustainable advance and tirelessly argued that the S&P 500’s gains were drastically skewed by a handful of technology stocks dubbed the “Magnificent Seven.” Naysayers also looked to economic data that indicated persistent inflation as well as to the Federal Reserve Board’s wavering guidance regarding interest rates. The stock market dismissed these concerns swivel-hipping around vacillating monetary forecasts and scheduled economic data with impressive alacrity. Following a consolidation between August and October last year, a rally ensued reinforced by wide-sweeping sector and theme participation that catapulted the Dow Jones Industrial Average (DJIA) and S&P 500 to all-time highs by early 2024. Investors’ positive assessments and thick-skinned reactions to downbeat analysts’ and economists’ interpretations of topics on numerous fronts proved correct to the extent that recession worries, and interest rate anxieties, have ultimately hushed to a whimper.
In the current market advance, it is noteworthy that the Russell 3000, S&P 500 and NASDAQ are tracking closely with one another year to date. This reflects a broad-based advance in contrast to the market’s profile a year earlier. The fact that the sharp and sudden selloff in technology stocks recently did not meaningfully disrupt or derail the market’s basic uptrend attests to a more cohesive and inclusive equity environment. Importantly, the prevailing market is not dependent on the vitality of a single sector or micro theme.
Another important technical pillar in this bull run is the emerging bullish relative strength among small and mid-cap stocks (SMID). Since the lows struck last October, the S&P 400 Mid-cap Index has gone from laggard to leader, which could reflect, in part, a revival in investor confidence. It could also underscore that mid-cap companies are benefiting from corporate strategies to move manufacturing and services operations back to North America in an effort to mitigate supply chain risks and volatile geopolitical conditions. Small- and mid-cap U.S. companies historically derive a majority of their revenues from domestic markets. Since SMID appears to be regaining its stature as a leading capitalization category, this bodes well for the overall market’s technical foundation and its ability to cope with unexpected news-driven setbacks.
While sentiment readings alone may not be an effective tool for determining market direction, when factored in with the market’s bottom-up dynamics, they can provide a supportive element when determining the durability of a trend. The bullish forces of the current market have prevailed through countless headline challenges on the economic, monetary and geopolitical fronts. The message the market is telegraphing may be worth heeding. And yet, from a contrarian standpoint and with the major indices within striking distance of record highs, sentiment readings continue to reflect a healthy measure of doubt. Recent survey results published by the American Association of Individual Investors (AAII) reveal bullish and bearish sentiment is equally divided and that a significant number of polled investors remain in the neutral camp. This seems to depict investor psychology that seems far from overly exuberant, and a market that has yet to make its greatest strides forward in this cycle.
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