The focus remains on the Middle East, even as the situation becomes increasingly unclear. Reports of progress from the U.S. government and denials from Iran are now coming in at ever-shorter intervals. However, as expected, the price of oil appears to be stabilizing at a lower, more comfortable level, and with it, the bond markets. The recent rise in interest rates was ultimately responsible for some headaches on Wall Street. In fact, as described in last week’s Thoughts, the Balance of Power indicator shows a significant loss of momentum. This indicator measures the balance of power between bulls and bears, and the current trend suggests that the decline in market yields is unlikely to be a flash in the pan.
A stabilization or even a renewed decline in market yields would be pure fuel for the Wall Street bulls. In fact, the Smart Investors Action chart shows that accumulation continues in the background: the light blue area remains on the positive side.
A key prerequisite for Wall Street to venture the next leap to a higher level is positive sentiment. While the corresponding indicator shows that optimism has waned somewhat, it remains very strong. As a result, the market is likely to generously ignore negative news for the time being—while positive developments are met with standing ovations.
Unsurprisingly, the same indicator also points to a similar scenario for Nasdaq stocks. This comes as no surprise, as it is primarily high-tech stocks in the semiconductor, AI, and quantum sectors that are currently leading the charge.
European markets, on the other hand, which unfortunately play a less leading role in these sectors, are being pulled upward by Wall Street, yet the environment remains significantly less robust. There is hardly any sign of strong accumulation by smart investors. So if Wall Street were to catch a temporary cough, Europe would likely soon find itself in bed with a full-blown flu.
It is also striking that sentiment in Europe does not radiate any real optimism. It gives the impression that the indicator is lagging behind market developments rather than running ahead of them. Sentiment improves only after price gains—or darkens again when these fail to materialize.
Many market observers point to poor consumer sentiment in the U.S., yet one of the most important leading indicators for the U.S. economy paints a significantly more positive picture: The Conference Board U.S. Leading Indicator is composed of ten sub-indicators, and its upward trend points to a strengthening economy.
Our own SESI Warning Index, which measures the strength of particularly cyclical stocks, also provides confirmation. If sentiment in the U.S. economy were truly that poor, these cyclical stocks would hardly be performing so strongly.
Another of our key indicators, which prompted us to switch to the bull camp at the end of March, also remains positive: the ratio between the S&P 500 Index and defensive utility stocks. Whenever Wall Street outperforms the sector where investors tend to seek refuge during turbulent times, “risk-on” is the order of the day. This indicator is particularly interesting when it reaches an extreme value, as it did in March. Although the ratio has since risen significantly and is approaching an upper extreme, it does not yet appear to be acting as a brake.
Of course, there are also warning signs, such as the Happy Friday indicator: If Wall Street underperforms on a Friday, the negative sentiment can take hold over the weekend—and often leads to a rather pessimistic following week. Conversely, the new week often starts with a lot of momentum after a strong Friday. If such developments become frequent, the Happy Friday indicator sounds the alarm. After we received the green light for the bulls several times in April, a red dot has now appeared for the first time. However, one swallow does not make a summer—a single red dot is not yet a game-changer.
Bottom Line: Those who missed the rally are now warning particularly loudly about the next correction. We’re letting our investments run their course, as the chance remains intact that Wall Street will soon make its next move. That doesn’t mean we’re ignoring negative developments. The clouds are getting darker, but the storm is likely still a ways off.
Next week, we’ll take another look at precious metals. Things finally seem to be picking up again, especially with silver.
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