Investor fears set the table for an 'echo bubble' down the road: Morning Brief

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Thursday, June 2, 2022

Today's newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared.

Fear and greed are universal to the human condition.

And the fear and greed of the herd — a/k/a retail traders — is currently swinging far to the fear side.

This may be good news, as the herd is often wrong. A bottom, in theory, should be near. But at what price is the million-dollar question.

The Citi Levkovich Index models investor sentiment and is dangerously close to tipping into "panic" territory. If the model stays at current levels, it suggests a "very attractive long-term entry point," writes Citi.

But that's a big "if."

Similarly, Michael Hartnett's team over at Bank of America Global Research noted their proprietary Bull & Bear indicator swung into contrarian buy mode a few weeks ago. But Hartnett still leans bearish, arguing that U.S. stocks are "vulnerable" to a bear market rally and that traders should “sell any rips."

BofA Bull & Bear Indicator down to 0.6 from 1.5.
Bank of America's "Bull & Bear" indicator is suggesting investor fear may be at its peak, traditionally a "Buy" signal for long-term investors. (Source: Bank of America Global Research)

Consumer and investor sentiment measures themselves can be important, but need to be backed up by behavior, Charles Schwab's Liz Ann Sonders reminded viewers on Yahoo Finance Live on Wednesday.

"I think sentiment is starting to set up as a contrarian movement with [the latest University of Michigan survey data] added to it," Sonders said, referencing her earlier tweet noting consumer expectations for stock prices are at a six-year low.

"I think [on] the behavioral side — what investors are actually doing — we're not quite there yet," Sonders adds.

Separately, a growing chorus of Wall Street analysts and traders are the sounding alarm bells on a final bear market capitulation. By implication, this means all rallies are suspect until the air clears. That may take time, as the Fed isn't likely to blink for at least a couple meetings.

TOPSHOT - A trader makes a bubble with a chewing gum ahead of the closing bell on the floor of the New York Stock Exchange (NYSE) on January 29, 2019 in New York City. - Shares of large tech companies tumbled Tuesday ahead of big earnings announcements from the sector as US stocks finished a choppy session mostly lower. The tech-rich Nasdaq Composite Index finished 0.8 percent lower at 7,028.29. The Dow Jones Industrial climbed 0.2 percent to 24,579.96, while the broad-based S&P 500 shed 0.2 percent to 2,640.00. (Photo by Johannes EISELE / AFP) (Photo credit should read JOHANNES EISELE/AFP via Getty Images)
A trader makes a bubble with a chewing gum ahead of the closing bell on the floor of the New York Stock Exchange (NYSE) on January 29, 2019 in New York City. (JOHANNES EISELE/AFP via Getty Images) (JOHANNES EISELE via Getty Images)

On the flip side, not everyone is bearish and holding out for a final washout. Yves Lamoureux, president of Lamoureux & Co., maintains his longer-term bullish thesis for stocks into 2025.

"To me the price bottom is in. I do not expect another low in indices. The new bull market begins in earnest amid the chaos and massive panic as usual," he wrote to Yahoo Finance in a note.

Lamoureux sticks by his thesis that the 40-year trend lower in interest rates is not over — and that there will be a new deflationary scare. This will force the Fed to pivot as the economy slows, with lower rates inciting a new tech bubble trade. Or so goes the theory.

"If correct, we will see a dramatic shift of fear to FOMO, especially in tech stocks," Lamoureux writes. "They're long duration assets and they'll rally hard once market participants see rates trending lower. The tech rally will be an 'echo bubble' of the previous recent one."

Perhaps not a market for the herd to fear, after all.

What to Watch Today

Economy

  • 7:30 a.m. ET: Challenger Job Cuts, year-over-year, May (6.0% during prior month)

  • 8:15 a.m. ET: ADP Employment Change, May (300,000 expected, 247,000 during prior month)

  • 8:30 a.m. ET: Nonfarm Productivity, Q1 final (-7.5% expected, 7.5% during prior month)

  • 8:30 a.m. ET: Unit Labor Costs, Q1 final (11.6% expected, 11.6% final)

  • 8:30 a.m. ET: Initial Jobless Claims, week ended May 28 (210,000 expected, 210,000 during prior week)

  • 8:30 a.m. ET: Continuing Claims, week ended May 21 (1.340 million expected, 1.346 million during prior week)

  • 10:00 a.m. ET: Factory Orders, April (0.7 expected, 2.2% during prior month, revised to 1.8%)

  • 10:00 a.m. ET: Factory Orders Excluding Transportation, April (2.5% during prior month, revised to 2.1%)

  • 10:00 a.m. ET: Durable goods orders, April final (0.4% expected, 0.4% during prior month)

  • 10:00 a.m. ET: Durables excluding transportation, April final (0.3% during prior month)

  • 10:00 a.m. ET: Non-defense capital goods orders excluding aircraft, April final (0.3% during prior month)

  • 10:00 a.m. ET: Non-defense capital goods shipments excluding aircraft, April final (0.8% during prior month)

Earnings

Pre-market

  • Hormel Foods (HRL) is expected to report adjusted earnings of $0.47 per share on revenue of $3.07 billion

Post-market

  • Lululemon (LULU) is expected to report adjusted earnings of $1.43 per share on revenue of $1.54 billion

  • Okta (OKTA) is expected to report an adjusted loss of $0.33 per share on revenue of $388.89 million

Yahoo Finance Highlights

IMAX CEO says 'no doubt' there will be a summer box office boom

SPAC market slowdown sees Forbes, SeatGeek cancel plans to go public

Ratings giant S&P warns of "extraordinarily weak" environment for fixed income

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