This remains a “buy weakness” market. Sure, there are plenty of reasons for concern – which is almost always the case. But the positives continue to outweigh the negatives. So, I’m moderately bullish on stocks, particularly the ones that insiders favor.
Here are six factors that are shaping my perspective on the market, three positive and three negative.
Let’s start with the three negatives.
3 Reasons for Worry
- One is “sell the trumpets.” Typically, the ends of wars can be times to lighten up on stock exposure due to investor enthusiasm. “Buy the canons, sell the trumpets,” says an old market adage.
Next, insider buying has dried up. In the week ending June 19, real insiders bought just $27 million worth of stock. That is well below the $86 million per week average before the start of the war. This is only one data point, and the drop-off in insider buying might be related in part to the holiday-shortened week. Weekly insider buying volume bounces around a lot, so we will have to wait and see if this less bullish insider trend continues.
Note that for this data point, unlike all other insider services, I only track real insiders. I exclude investors considered insiders because they hold big positions (beneficial owners). This is because around 80% of investors typically lag the market, so I don’t see why I should consider what they are doing.
- Progress towards peace in the Middle East wars will likely continue to advance in fits and starts. So many negotiating points are left open in the emerging treaty that this seems inevitable. All parties will continue to negotiate in part with drones, missile strikes and boisterous threats, which will contribute to further, tradeable market volatility.
[text_ad]
3 Reasons to Stay Bullish Anyway
The good news, in my view, is that any weakness caused by Iran conflict concerns will be buyable. Here are three reasons why.
- Investors remain cautious. It’s hard to argue that the end of the Iran conflict has created investor enthusiasm. “Sell the trumpets” may not apply this time, because investor sentiment remains low. This is a positive in the contrarian sense. I track a lot of sentiment indicators, but the one that consistently boils them all down into one number is the Investors Intelligence Bull/Bear ratio. It recently came in at around 2.5. By my system, stocks become a buy when this ratio falls to 2 or below, and we are pretty close. Conversely, stocks begin to become a sell at 4 and definitely so at 5. We are not near those levels.
- A bear market-inducing recession seems unlikely, according to Ed Yardeni at Yardeni Research. Most bear markets are caused by recessions, or more accurately, the Fed actions that contribute to recessions. He thinks consumer spending, the labor market, and corporate earnings growth all remain strong enough to avert a recession.
- Speaking of earnings, while there is now a lot of talk about a 1999-style bubble, the fact is that earnings growth momentum remains positive enough to justify stock gains in the past year. That earnings growth is lifting stock prices, but also the entire economy through two channels, says Yardeni. One is the wealth effect, which boosts consumer spending. The second is the profit channel. Profitable companies hire more workers, pay higher wages, and invest in new productive capacity. All of this supports growth. The Citigroup Economic Surprise Index stands at 48.7, firmly in positive territory.
Yardeni is not the only one who has noticed that earnings growth momentum justifies recent market gains, even in tech.
“From an earnings revision perspective, technology remains one of the strongest sectors we track,” says Nick Raich, at the Earnings Scout, which tracks earnings growth momentum. “History shows that sustained market declines typically occur after earnings expectations begin to weaken for an extended time frame. Today, we continue to measure the opposite trend across much of the technology sector. Until we begin to see a meaningful deterioration in earnings expectations, we believe the fundamental backdrop for AI, technology, and equities remains favorable, and that recent pullbacks are creating opportunity rather than signaling the end of the rally.”
While Raich uses earnings growth momentum to identify strong sectors, I turn to insider buying, which can be useful for sector calls when insider buying pops up at several companies in a sector. That’s recently been the case in two sectors: payment services and construction. For details on my two favorite names right now in payment services and construction, consider subscribing to Cabot Insider Edge.
[author_ad]
