Short-term Outlook (1-5 Days):  Neutral  Since July 20, 1057 SPX

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Equity Indicators - Updates and Extremes

Investor's Intelligence Bulls

Last week, we saw what looked like capitulation from the individual investors that make up the AAII sentiment survey.

Now, it's the newsletter writers' turn.  The latest survey from Investor's Intelligence showed a marked drop in bulls, and even a drop in the "correction" camp, with all of them moving over to the bearish side.

That leaves the percentage of bulls under 30% for the first time since March 2009, and at one of the lowest levels in 20 years.

As we saw during the 2008 crisis, a low bullish percentage is not necessarily an immediate recipe for higher prices as the fundamental forces overwhelmed overly-pessimistic sentiment.  But usually, that doesn't happen, especially the longer-out we look.

Since the inception of the survey in 1969, there have been 162 weeks with as few bulls as we're seeing now.  A year later, the median return in the S&P 500 was +18.3%.  More notably, the median drawdown (worst loss) was -6.2%, compared to a median maximum gain of +22.1%.  That's a fairly remarkable risk/reward ratio...but again, there have been some wicked drawdowns and it works best on a long-term (6-12 month) time frame.

S&P 500 Seasonality

Much has been made of September's usually nasty temperament, but sometimes when we put seasonality in the context of what just happened, things change.

So let's take a look at what's happened when August got a head start on September's bad mood.  The table below shows the worst Augusts for the S&P 500 since 1928, along with how the index fared during September and through the end of the year.  Our current year, by the way, would be the next one on the list with an August loss of -4.7%.

There isn't much encouraging about that.  Three times, the S&P managed to rally by a meaningful amount during September, while the rest of the time it...didn't.  Through the rest of the year, it didn't exactly go gangbusters, but did reverse some of September's losses a few times.

Our local paper mentioned that this was the worst August since 2001, which meant that September would be bad too (they didn't give a reason why, they just assumed that's the case).  So let's change it a bit and look at what happened going forward when we suffered through the worst August in at least 5 years.

This isn't as bad as the table above, but still noting to write home about, especially when looking just at September's returns.  There wasn't much of a mean-reversion bounce kind of thing going on.

With such bad performance recently, sentiment has deteriorated substantially, as we've seen in a couple of studies over the past week.  So maybe September tends to be not so bad when sentiment is already poor.

The table below shows the S&P's tendency when the percentage of bulls in the Investor's Intelligence survey was below 35% at the end of August, as is the current case.

While we only have five precedents, September performance certainly didn't improve much - if anything, it got even worse.  There was only one year, 1983, when the index managed to hold up reasonably well.

By this point, "everyone" knows September's reputation.  It certainly can buck the trend (the S&P has been positive five of the last six Septembers), but the VIX volatility gauge rises an average of +31% at its maximum point during the month, so at some point something scary often happens.  And after a bad August or poor sentiment, there doesn't seem to be any hint that we're less in store for it this year.

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