S&P 500 Weekly Update: Stock Market Pundits Are 'Fooled' Again

Summary

• Positive global PMI data far outweighs the negatives as the global economy continues to slowly recover.
• Earnings remain in focus, and many companies are not only providing but also raising guidance.
• Nothing has changed. Concentrating on what matters yields results.
• Using a disciplined and emotionless strategy has successfully navigated the COVID downturn.
• Looking for a helping hand in the market? Members of The Savvy Investor get exclusive ideas and guidance to navigate any climate. Get started today »

"People who make things happen, people who watch things happen, and people who say, what in the heck happened." - Herman Cain

The bulk of investors remain confused. Some of the best analysts, pundits, and money managers are having a hard time putting this equity market into perspective. Many are left dumbfounded when they try to explain to clients and members of their newsletters exactly what is transpiring in the markets lately. The stock market as measured by the S&P is near an all-time high yet the agenda-driven media is concentrating on the COVID crisis and the pain it has spread across the world.

In a letter to his investors, Seth Klarman, one of the greatest investment minds around recently, described the present stock market as follows:

"Surreal doesn't even begin to describe this moment."

I didn't take that as a negative because I note that Mr. Klarman continues to dig out what he continues to see as value. His Baupost Group continues to be active in this market.

The "experts'' are having trouble reading the tea leaves recently because of all the mixed signals. One area, in particular, is giving them pause. From a sentiment standpoint, the readings are mixed. While the Put/Call ratios are giving bearish signals, the CNN Fear & Greed Index has risen from 2 in March to 64 currently, from Extreme Fear to Greed. When the CNN Fear & Greed Index rises to 80 or higher (Extreme Greed), that would be a cause for concern.

Two weeks ago, the Barron's Insider Transaction Ratio jumped to 44, a bearish signal, but last week, it fell to 16 which is neutral. Amazingly, two weeks ago, the AAII Investor Sentiment Survey showed that only 20.2% are bullish; that is the lowest reading since the week of May 23, 2016, when it stood at 7.8%. Bears, on the other hand, soared to 48.5%. The Bears outnumbered the Bulls by more than 2-to-1. I continue to state that this type of sentiment is seen at major market bottoms, not at market tops.

The Bank of America BULL & BEAR Indicator (created by Michael Hartnett, one of the best market commentators on Wall Street) ranges between 0.0 and 10.0. In March, it stood at 0.0. Last week, it rose to 3.4, far from 10.0. When this indicator reaches 8.00 or higher, that would be cause for concern.

This divergence has many investors/analysts scratching their heads. Depending if you are BEARISH or BULLISH, it is fairly easy to spin a story using sentiment to make your case. The Bears have concentrated on this data point while the S&P defies them moving ever closer to new highs. The Nasdaq simply ridicules them by posting its 32nd new high in 2020 this week.

In my view, it is all about two distinct groups of investors that are separated by their respective ages. The notion being bandied about is that "Millennials" have been on a euphoric speculative binge playing all of the "hot" stocks.

The "Boomers" on the other hand represented by the AAII Survey and the BoA (Bull & Bear Index) are frightened. In the past month, I had many clients tell me they wanted to lighten up, sell their equity holdings. I have heard similar stories from brokers and fund managers. This is incredible as from its March low of 2,191 to today's close of 3,351, the S&P gained 51+%, a spectacular rally by any measure. The "speculative story" is being bought and the "handful of stocks are leading the market" is the battle cry.

Yet, despite all the talk that it's a handful of stocks, the S&P is near the highs, the Nasdaq is setting records, and I also note the Russell 2000 is up 52% off the lows. The Dow Transports which are laden with airline stocks has also gained 52%. The NYSE Composite posted a new recovery high this week but its ONLY up 46%.

All of this was achieved in four months. Yet, investors remain fearful. Why? They read the "headlines" and are captivated by the fear rhetoric. In today's media environment, the simple fact is investors are overwhelmed by narratives that are agenda-driven with the focus on Fear. So we are asked to believe the group that is trading their recently discovered stimulus checks is the new face of this stock market that controls the price action. In the meantime, they say the group that has spent 30 years building their wealth is meaningless and their actions need to be ignored.

The 4.5 trillion sitting in money market funds belies ALL of that nonsense.

Many investors have missed the global rally because they decided to watch the COVID death count. Some had the outright arrogance to chastise the investors that refused to be swayed because they decided to follow the market's message. There are many reasons we are witnessing a global stock market rally. While some pundits are talking about the stock market and displaying the latest data from John Hopkins on the COVID issue, there is plenty of data that explains what is going on in the world today.

The global recovery continues, with the U.S. still experiencing some "issues". Some believe many of these U.S. issues are exaggerated to the point of being "manufactured".

In reality, overseas activity is outpacing the U.S. right now, with the July China and Eurozone PMIs surprising on the upside. Their reopenings and flattened outbreak curves are strong tailwinds compared to the U.S. However, that should be the sequence of events, the overseas entities were "first in", they should be "first out". In the meantime, ALL economies are benefiting from enormous stimulus programs.

This chart shown below speaks volumes. The average Developed Market PMI activity is at the highest growth rate since late 2018, with Emerging Markets in less great shape but continuing to improve.

Source: Bespoke

That is occurring while global economies remain handcuffed with plenty of "lockdown" restrictions still in place. An investor has the choice to view what data they deem important, but if ALL of the data isn't included, that strategy fails miserably. That is precisely what has happened to the skeptics in the last four months.

No one knows whether the recovery continues unabated or if we will now witness a plateauing before the next step in the journey begins. Watching the wrong data and listening to the "noise" isn't the way to proceed.

The market pushed aside the stalemate in Congress regarding the next round of stimulus and started the new month in rally mode. Last week the concern was that the Nasdaq composite breached a very short-term support level, the first time it had done so since April. That kicked off the calls for a correction to start, suggesting the broad market was about to roll over. At the start of trading, this week leadership reasserted itself as the Nasdaq set another new all-time high (29th in 2020) fooling anyone that jumped to a premature conclusion.

Gains were seen across the board. The S&P was up +0.7%, Dow 30 +.95%, Nasdaq +1.4%. The Russell small-cap index was the big winner on the day up 1.6%.

Turnaround Tuesday has led to surprises lately, but this week was different. A tight trading range today, the index set a new recovery HIGH at 3,306, topping yesterday's intraday high of 3,302. Value outperformed growth during the session. The Nasdaq Composite eked out a small gain posting its 30th new high this year.

Earnings results put a positive spin on sentiment as trading began on Wednesday. PMI results were also in focus illustrating the continued improvement in the global economy. The Dow Transports and the Russell 200 joined the party posting new recovery highs. The Nasdaq continued higher by posting its 31st new high in 2020. The S&P 500 gained 0.6% closing less than 2% from the old all-time high. Financials, Consumer Discretionary, and Industrials all lead the way higher while defensives lagged. Gold closed at a record high and WTI traded up to a five-month high.

With investors contemplating the non-action out of Washington, a tepid open on Thursday was followed by downside probing that was finally resolved with another push to the upside. The 32nd new high for the NASDAQ Composite was recorded, as both, the Dow 30 and the S&P added 0.60 % on the day. With a close at 3,349, the S&P cleared the last technical hurdle before attempting an assault on the February high of 3,386.

It was small caps and value outpacing growth on Friday as the market continued to shrug off the never-ending drama out of Washington. The rotation was the theme as the Russell 2000 rose 0.8% finishing a positive week by gaining 5+%. Dow Transports posted its 8th straight day of gains closing the week with a 5.8% gain. The S&P and Dow 30 were flat for the day, while the NASDAQ Composite ended a streak of eight straight days of gains with four new highs falling 0.9% to end the week.

Friday's price action is exactly what the BULLS wanted to see. Rotation into the "old economy" areas of the market along with U.S.-based small caps. This questions the BEAR theories that there are only five stocks advancing and keeping this market afloat.

The S&P is now up 3.75% for the year and sits 1% from the all-time highs. The stock market has fooled the majority of pundits again.

Brazil and China were the winners in July gaining 13+% respectively. For the year, however, Brazil remained down 30% while the July gain for China pushed performance to +13.5% for 2020.

Of the global markets that are tracked, only Hong Kong and Japan showed losses in July.

Economy

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers' Index posted 50.9 at the start of the third quarter, up from 49.8 in June but slightly lower than the previously released "flash" estimate of 51.3. The latest figure signaled a marginal improvement in the performance of the U.S. manufacturing sector, the first since February.

Chris Williamson, Chief Business Economist at IHS Markit:

"Although indicating the strongest expansion of the manufacturing sector since January, the IHS Markit PMI remains worryingly weak. Much of the recent improvement in output appears to be driven merely by factories restarting work rather than reflecting an upswing in demand. Growth of new orders remains lacklustre and backlogs of work continue to fall, hinting strongly at the build-up of excess capacity. Many firms and their customers remain cautious in relation to spending in the face of re-imposed lockdowns in some states and worry about further disruptions from the pandemic."

"Encouragingly, business optimism about the year ahead has revived to levels last seen in February, but many see the next few months being a struggle amid the ongoing pandemic, with a more solid-looking recovery not starting in earnest towards the end of the year or even into 2021. Further infection waves could of course derail the recovery, and many firms also cited the presidential elections as a further potential for any recovery to be dampened by heightened political uncertainty."

The seasonally adjusted final IHS Markit U.S. Services PMI Business Activity Index registered 50.0 at the start of the third quarter, up from 47.9 in June, and improving on the "flash" estimate of 49.6, to signal stabilization in service sector business activity. The latest data brought to an end a five-month sequence of contraction, with the Business Activity index rising for a third successive month from April's record low (26.7). Although some firms remained closed or noted weak client demand and disrupted working practices due to the pandemic, others stated that the resumption of business had boosted output.

Chris Williamson, Chief Business Economist at IHS Markit:

The service sector is showing welcome signs of stabilizing after the unprecedented downturn seen during the second quarter, but many companies continue to struggle with virus-related constraints, especially in states where social distancing restrictions have been tightened again. The US was the only major economy to see COVID-19 containment measures tighten again in July , and this is reflected in the data, with new business inflows falling at an increased rate to hint at the possible start of a double dip in business activity. "More encouragingly, businesses have on balance become more optimistic about recovery in the year ahead, and took on extra staff to ensure capacity is sufficient to meet future growth. However, whether this optimism can be sustained and result in faster growth will of course depend on infection rates falling."

U.S. ISM Manufacturing index rose to a higher than expected 54.2 from 52.6 in June, 43.1 in May, and an 11-year low of 41.5 in April. That is the highest level since March of 2019, with broad-based gains. The ISM has had less room to bounce since April because this measure fell less dramatically than other sentiment measures during the shutdowns. The April bottom for the ISM never breached the prior recession-low of 34.5 in December of 2008, or the all-time low of 30.3 in June of 1980. Overall, analysts are seeing a firm producer sentiment path into July despite the pause for re-openings in some states, as production rises despite the constrained retail activity.

ISM services index rose 1 point to 58.1 in July, better than forecast, after jumping 11.7 points to 57.1 in June. It's up from the 41.8 April print, which is an 11-year low. And it's not far from the 61.2 13-year high from September 2018. However, the components were mixed. The employment number fell to 42.1 from 43.1, though it's up from the 30.0 in April. New orders rallied to 67.7 from 61.6 and it's double the 32.9 from April. New export orders dropped to 49.3 from 58.9, with imports at 46.3 from 52.9. Prices paid slid to 57.6 from 62.4.

U.S. construction spending report undershot market estimates but beat the BEA's pessimistic assumptions underlying the last round of GDP data, with a -0.7% June drop, following net upward revisions that left declines of -1.7% in May, -3.4% in April and -0.3% in March. Analysts saw small net upward revisions for residential construction concentrated in home improvements and public construction.

Factory orders beat estimates with a 6.2% June orders rise after a 7.7% May gain that left the two largest increases since July of 2014, after record declines of -13.5% in April and -11.0% in March. Analysts saw only minor revisions in the orders, shipments, equipment, and inventory data from the durables report, with slight net trimmings for equipment and inventories.

The first initial jobless claims release of August was a welcome surprise ahead of the week's Nonfarm Payrolls report. Seasonally adjusted claims came in at 1.186 million which was the lowest level since the start of the pandemic albeit still indicating over 1 million people filed a jobless claim for the first time. That has now been the case for 20 straight weeks. That was a 249K drop from last week as well which was the largest week-over-week decline for initial claims since the first week of June.

July U.S. nonfarm payrolls rose by 1.76M, Unemployment rates fall to 10.2%. Analysts now have the three largest payroll gains in history that have reversed 42% of history's two largest declines in March and April. The jobs data are tracking the 29% Q3 GDP estimate, in a quarter that still has two months to go. Most of the projected Q3 bounce for employment and output has already been booked by July.

For the payroll breakdown, private-sector jobs rose 1,46k, while government employment posted an out-sized 301k gain thanks to a 245k pop in education jobs that analysts warned of due to seasonal factors. State government education jobs rose 30k in July, while local government education jobs rose 215k.

Global Economy

The J.P. Morgan Global Manufacturing PMI, a composite index produced by JPMorgan and IHS Markit in association with ISM and IFPSM, rose to a six-month high of 50.3 in July, up from 47.9 in June and back above the neutral 50.0 level for the first time since January. Of the 27 nations for which July data were available, 13 had PMI readings above the neutral 50.0 level.

Olya Borichevska, Global Economist at J.P. Morgan:

"The July PMI indicates that the recovery which began in May continued into mid-summer. Many of the PMI components reached their pre-pandemic levels for the first time in July including output and new orders. The employment PMI has not recovered suggesting labor markets will take longer to improve. Still, to fully recoup the losses sustained in the first half of the year will still take some time, especially if the recovery is knocked off course by any future re-tightening of restrictions."

The euro area's manufacturing economy recorded its first growth in a year-and-a-half during July as output and demand continued to recover in line with the further easing of restrictions on activity related to the global coronavirus disease (COVID-19). After accounting for seasonality, the IHS Markit Eurozone Manufacturing PMI registered 51.8, up from 47.4 in the previous month, and an improvement on the earlier flash reading.

The IHS Markit Eurozone PMI Composite Output Index maintained its recent upward trend during July, rising by over six points on the month to a level of 54.9. That compared to June's 48.5 and slightly higher than the earlier flash reading (54.8). Moreover, it was the first time that the index has posted above the 50.0 no-change level since February and represented the fastest rate of growth since June 2018.

Chris Williamson, Chief Business Economist at IHS Markit:

"Eurozone service sector business activity rebounded in July to grow at a rate not exceeded for over two years. France and Germany enjoyed especially strong gains though renewed growth was also recorded in Spain and Italy as COVID-19 containment measures continued to be relaxed."

"Combined with a surge in manufacturing production, the renewed expansion of the service sector bodes well for the economy to rebound in the third quarter after the unprecedented slump seen in the second quarter."

"Whether the recovery can be sustained will be determined first and foremost by virus case numbers, and the recent signs of a resurgence pose a particular risk to many parts of the service sector, such as travel, tourism and hospitality. However, even without a significant increase in infections, social distancing measures will need to be in place until an effective treatment or vaccine is available, dampening the ability of many firms to operate at anything like pre-pandemic capacity, and representing a major constraint on longer-run economic recovery prospects."

At 52.8 in July, the headline seasonally adjusted CAIXIN China Purchasing Managers' Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy, rose from 51.2 in June to signal a further improvement in the health of China's manufacturing economy. Operating conditions have now improved in each of the past three months, with the latest upturn the strongest since January 2011. Dr. Wang Zhe, Senior Economist at Caixin Insight Group:

"The Caixin China General Manufacturing PMI stood at 52.8 in July, up from 51.2 the previous month, reflecting that the manufacturing sector continued to expand amid the ongoing economic recovery."

1) Manufacturing demand and supply continued to recover, but overseas demand remained subdued. In July, manufacturing output and demand expanded at a faster pace than the previous month, with the subindexes for output and total new orders both hitting their highest levels since January 2011, as the domestic epidemic was largely under control. Due to the impact of the overseas pandemic, the gauge for new export orders remained in contraction territory for the seventh consecutive month. Although the pace of the contraction slowed, overseas demand remained a drag on overall demand.

2) As production and demand expanded, measures for purchases and stocks of purchased items both remained strong. Active production activities drove the gauge for the number of purchases to rise for the third consecutive month, reaching the highest since January 2013. Meanwhile, active stock replenishment led the sub-index for stocks of purchased items to expand for the second consecutive month, reaching a high not seen since February 2018. The gauge for stocks of finished goods stood slightly below 50, and the gauge for backlogs of work continued to expand, reflecting strong demand.

3) Employment remained weak. The sub-index for employment stayed in negative territory for the seventh consecutive month, although the contraction was marginal. The survey found that some companies increased recruitment to meet production needs, but some others remained cautious and laid off workers to reduce New Export Orders. However, to increase employment, manufacturers will need more time and confidence.

4) Input costs and output prices both rose at a faster clip. The gauge for input costs continued to rise, and the gauge for output prices increased strongly. Raw material prices continued to recover, and the recovery of market demand contributed to that price rise. Data from the National Bureau of Statistics showed that the producer price index (PPI) in June returned to growth month on month, and its year-over-year decline narrowed. We expect the PPI to rise in the future.

"Overall, flare-ups of the epidemic in some regions did not hurt the improving trend of the manufacturing economy, which continued to recover as more epidemic control measures were lifted. The supply and demand sides both improved, with relevant indicators maintaining strong momentum. However, we still need to pay attention to the weakness in both employment and overseas demand."

Commenting on the China General Services PMI data, Dr. Wang Zhe, Senior Economist at Caixin Insight Group:

"The Caixin China General Services Business Activity Index came in at 54.1 in July, down from a 10-year high of 58.4 the previous month. It remained in expansionary territory, pointing to continued rapid recovery of the services sector as the domestic Covid-19 epidemic has largely been brought under control.

1) Both the supply of and demand for services grew, but weak external demand was a drag. The business activity index and the gauge for new business both expanded for the third month in a row, maintaining strong momentum. The measure for outstanding business stayed in expansionary territory for a second straight month and rose from June. However, unlike the previous month, the gauge for new export business dropped sharply into contraction territory as the pandemic continued to hit other nations hard, dragging down overseas demand.

2) Employment continued to shrink. The employment gauge stayed in negative territory for the sixth straight month as the recovery of the services sector had a limited uplift on the job market. But the July reading was closer to 50, the line between negative and positive territory, than any of the preceding five months. Companies said in the survey that controlling costs remains a priority, so they are cautious about adding staff. Input costs rose while the prices that service providers charged customers declined slightly, suggesting that pressure on service firms' profitability was still high.

3) But businesses were highly confident about the economic outlook. The gauge for business expectations rose further into expansion territory and reached the highest point since March 2015. Service providers generally believed that the toughest times had passed and were optimistic about their prospects over the next 12 months as economic activity edges closer back to normality.

The seasonally adjusted headline IHS Markit Hong Kong SAR Purchasing Managers' Index fell from 49.6 in June to 44.5 in July and registered a marked deterioration in the health of the private sector. The latest reading was not as severe as seen during the worst of the pandemic from February to April, but signaled a setback to the current recovery of private sector conditions.

Bernard Aw, Principal Economist at IHS Markit:

"Latest PMI data pointed to a marked deterioration in private sector conditions across Hong Kong SAR, representing a setback to the economic recovery. The tightening of COVID-19 related measures in response to a rise in new infections dealt a new blow to the economy."

"Business activity and new orders both fell at steeper rates. Companies consequently cut back substantially on their purchasing activity and inventories. Business sentiment remained deeply pessimistic as firms worried about the possibility of stricter measures and their subsequent impact on economic activity."

"While employment remained broadly unchanged, the concern is that further severe deteriorations in business conditions will see a new round of job losses."

At 45.2 in July, the headline au Jibun Bank Japan Manufacturing Purchasing Managers' Index, a composite single-figure indicator of manufacturing performance, was up from 40.1 in June and the highest since February. The latest reading was below the neutral 50.0 value, but notably stronger than the 11-year low seen in April (38.4). The main factors contributing to the improved PMI number in July were much softer rates of contraction for output and new orders.

Tim Moore, Director at IHS Markit:

"Japan's manufacturing sector remained severely impacted by the COVID-19 pandemic and subsequent downturn in worldwide economic conditions. However, the headline PMI recovered some of the ground lost in the second quarter, helped by the smallest declines in output and new orders for five months during July."

"Manufacturers that reported a turnaround in production schedules typically cited a boost from easing emergency measures at home, alongside signs of recovery across the automotive supply chain and the restart of economic activity in key export destinations."

"Looking at output trends by market group, consumer goods fared better than the rest of the manufacturing sector. Production of consumer goods was close to stabilization in July, despite a headwind from weaker orders from abroad."

"Capital goods were the worst-performing segment for export sales, highlighting that reduced global investment spending and constrained trade flows are holding back the Japanese manufacturing sector."

At 45.4 in July, up slightly from 45.0 in June, the seasonally adjusted Japan Services Business Activity Index reached a five-month high. The latest reading also compared favorably with the survey-record low of 21.5 in April.

Tim Moore, Director at IHS Markit:

"Japan's service economy edged a little further along the path to recovery in July, with some firms experiencing an uplift after the state of emergency was lifted. The latest falls in business activity and new work were much less severe than those seen on average in the second quarter of 2020. Export sales were an exception in July as international travel restrictions meant that demand from overseas continued its rapid descent."

"While there were some positive signs in terms of domestic sales, large parts of the service sector remained impacted by fragile customer demand and the cancellation of projects due to the pandemic. As a result, service providers commented on the need to reduce fixed overheads and an aversion to replacing departing staff."

"Survey respondents are now more optimistic about the business outlook than at any time since February. However, projections of growth in the next 12 months were unsurprisingly contingent on the degree of success in suppressing the virus at home and abroad."

At 46.0 in July, the seasonally adjusted IHS Markit India Manufacturing PMI fell from 47.2 in June and pointed to a marked deterioration in business conditions across the Indian manufacturing sector.

Eliot Kerr, Economist at IHS Markit:

"Latest PMI data from Indian manufacturers shed more light on the state of economic conditions in one of the countries worst affected by the COVID-19 pandemic. The survey results showed a re-acceleration of declines in the key indices of output and new orders, undermining the trend towards stabilisation seen over the past two months. Anecdotal evidence indicated that firms were struggling to obtain work, with some of their clients remaining in lockdown, suggesting that we won't see a pick-up in activity until infection rates are quelled and restrictions can be further removed."

"However, on a more positive note, firms remained optimistic, with confidence towards future activity continuing to strengthen during July."

The IHS Markit India Services Business Activity Index registered 34.2 in July, and despite rising slightly from 33.7 in June, signaled a further rapid reduction in service sector output. Moreover, the latest reading was among the lowest recorded in nearly 15 years of data collection, surpassed only by the unprecedented falls in the previous three months.

Lewis Cooper, Economist at IHS Markit:

"The coronavirus pandemic and subsequent introduction of 'lockdown' measures continued to weigh heavily on the Indian service sector in July. Business activity and new orders dropped again, with the rates of decline remaining rapid overall. Panelists frequently reported temporary company closures and weak demand as a result of the pandemic."

"With demand severely restricted, July data highlighted another round of job cuts, with the latest reduction the most marked on record, while firms' output expectations in the year ahead remained pessimistic."

"July data, as a whole, provide no real signs that the downturn is slowing down. That's not surprising with lockdown measures still in force, but undoubtedly these will have to be loosened and companies reopen before the sector can move towards stabilization. With such a prolonged and significant downturn, any substantial recovery will take many months, if not years. Latest IHS Markit estimates point to an annual contraction in GDP of over 6% in the year ending March 2021."

The headline ASEAN Manufacturing PMI rose from 43.7 in June to 46.5 in July to signal a softer decline in the health of the sector, although the latest figure remained firmly below the no-change 50.0 level to signal a fifth consecutive deterioration in manufacturing conditions nonetheless. Central to the latest contraction were falls in both output and new orders, although the rates of decline were the softest recorded for five months. Underlying data suggested that any improvements in sales were primarily driven by firmer domestic demand, as export orders dropped markedly again. Concurrently, firms cut staffing levels for the fourteenth month running, with the rate of job shedding remaining sharp.

Lewis Cooper, Economist at IHS Markit:

"The downturn in the ASEAN manufacturing sector continued in July, with operating conditions deteriorating for a fifth successive month. The pace of deterioration continued to ease, however, as rates of decline across many indices softened from June, with output and new orders falling at the slowest rates for five months."

"Demand conditions remained muted, however, with the marked reduction in foreign orders highlighting export markets as a particular source of weakness. With substantial uncertainty surrounding the near-term outlook for demand, ASEAN goods producers continued to cut staffing levels sharply, while confidence regarding the 12-month outlook for output also remained subdued."

"The latest data did offer some encouraging signs towards a recovery as we enter the second half of the year, as the worst of the downturn looks to have passed. Nonetheless, overall demand will need to improve, and factories will need to ramp up production further towards full capacity before we will see any meaningful recovery. Given the potential for a resurgence of the pandemic and the reintroduction of lockdown measures, the downside risks remain notable."

The seasonally adjusted IHS Markit/CIPS UK Purchasing Managers' Index rose to a 16-month high of 53.3 in July, up from 50.1 in June and below the earlier flash estimate of 53.6. The headline PMI, calculated as a weighted average of five sub-indices, has posted above the neutral 50.0 level separating improvement from deterioration in each of the past two months.

Rob Dobson, Director at IHS Markit:

"The UK manufacturing sector started the third quarter on a much firmer footing, with output growth hitting a near three-year high and new orders rising for the first time in five months. The recovery strengthened as a loosening of lockdown restrictions allowed manufacturers to restart or raise production. July also saw signs of furloughed employees returning to work and customers resuming spending. Business optimism also rose to its highest for over two years as companies grew more hopeful that the future has brightened."

"Despite the solid start to the recovery, the road left to travel remains long and precarious. An extended period of growth is still needed to fully recoup the ground lost in recent months. This is also the case for the labor market, where job losses are continuing despite businesses reopening. There is a significant risk of further redundancies and of furloughed workers not returning unless demand and confidence stage more substantial and long-lasting rebounds in the months ahead."

At 56.5 in July, the headline seasonally adjusted IHS Markit/ CIPS UK Services PMI Business Activity Index picked up from 47.1 in June and signaled the fastest pace of expansion since July 2015. The index has risen in each month after reaching a survey-record low of 13.4 in April, but the latest reading was the first to exceed the neutral 50.0 level since the pandemic began.

Tim Moore, Economics Director at IHS Markit:

"UK service providers are starting to see light at the end of the tunnel after a record slump in business activity during the second quarter of 2020. July data revealed the fastest increase in business activity for five years, which adds to signs of recovery across the manufacturing sector this summer."

Higher levels of service sector output were almost exclusively linked to the reopening of the UK economy after lockdown measures and the subsequent return to work of employees and clients. However, these are still the very early stages of recovery and survey respondents often commented on achieving growth from an exceptionally low base. "While the latest survey data provide a number of positive signs that the UK economy is back in expansion mode, the weakness of the employment figures reported in July is clearly a cause for concern and likely to hold back the longer-term recovery in business and consumer spending."

At 52.9 in July, up from 47.8 in June, the headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers' Index registered above the 50.0 no-change level for the first time in five months. The latest PMI reading was the highest since January 2019 and signaled a partial rebound in business conditions from the low point seen during April (index at 33.0).

Tim Moore, Economics Director at IHS Markit:

"July data highlights a partial rebound in the Canadian manufacturing sector after the steep downturn seen during the second quarter of 2020. Production volumes expanded at the fastest pace for nearly two years, helped by a tentative recovery in manufacturing sales as customers restarted spending amid an easing of COVID-19 restrictions. A slight increase in employment numbers was also a positive signal that manufacturing companies expect to continue expanding their production schedules in the coming months."

"It was not all good news in July, however, as export sales continued to slide and business expectations slipped back from June's four-month high. Reports from survey respondents suggested that concerns about the global economic outlook and a second wave of the pandemic had curtailed growth projections for some manufacturers in the latest survey period."

The headline seasonally adjusted IHS Markit Mexico Manufacturing PMI registered 40.4 in July, up from 38.6 in June. The latest reading pointed to another substantial deterioration in manufacturing operating conditions, with many businesses still closed due to the COVID-19 outbreak. However, the rate of decline eased to the softest since before the virus began to severely hamper the Mexican economy in April.

Eliot Kerr, Economist at IHS Markit:

"The latest PMI data suggested that the Mexican manufacturing sector is continuing to struggle amid the COVID-19 outbreak. Although rates of decline in output and new orders eased further from April's records, the overall contractions remained sharp. With many businesses remaining closed, demand is still severely depressed and that is being reflected by continuous job cutting that only weighs further on new business, creating a downward spiral."

"One sign of more positive news is that sentiment towards future activity prospects is slowly improving, although it remains negative overall. This suggests that an increasing number of panelists are becoming confident that the worst of the crisis will soon be over, and then we may start to see a reversal of the job cuts and activity declines recorded since the start of the pandemic."

Earnings Observations

In the first three weeks of earnings season, 2020 EPS estimates have increased from just below $125 to just below $129, and we might see enough momentum to take them to $130-$135 range by earnings season's end, down from $162 in 2019. Economic re-openings were far stronger in 2Q20 relative to expectations in April, and so we have seen 2020 EPS consensus improve in most sectors, especially consumer discretionary, financial services, and healthcare.

Technology Earnings On A Hot Streak

About 59% of S&P 500 companies have reported already and another ~21% of companies will report through the end of next week. So far, results are coming in well above depressed estimates. 82% of companies have beaten on the bottom line (above the five-year average of 73%), led by Technology, Materials, Health Care, and Industrials.

Earnings reports from the Info-Tech sector have experienced the largest magnitude of earnings beats, 94.1%, far outpacing the sector's 20-quarter average of 83.6%. There should be little surprise as to why technology stocks are dominating the scene now.

My opinion that analysts had estimates far too low is being confirmed especially in the technology world. This week investors witnessed another positive week. As of Friday morning, 79 companies have reported, 70 beat, 9 missed, and 26 raised guidance. In the last two weeks, 56 companies raised guidance and told investors what they see in the next quarter and for the remainder of 2020.

It seems that worst fears failed to materialize or the "COVID Economy" is benefiting a lot of public companies. Or maybe it's a little bit of both.

If one is armed with the information and looks closely, there is plenty of "visibility" out there. It's simply imperative for investors to be able to identify then research these "winners". Savvy Investors receive DAILY updates that provide all of that information as earnings season progresses.

The Political Scene

The media and any pundit that had a microphone handy obsessed over the status of the negotiations regarding the next stimulus package. Last week I believed the market would shrug this off;

"What we will also see is the typical posturing, rhetoric, and a last-minute or perhaps a 'just past midnight' deal completed."

With the market in a positive feedback loop now (positives are viewed that way and negatives aren't that bad) that is exactly what occurred as Mr. Market decided to concentrate on the economic data that continued to come in with a positive slant. As of the close on Friday there was no deal and the S&P sits less than 2% off the all-time high.

Another potential market mover - U.S. and China will assess their trade deal on August 15th.

Although it seems like the stock market is oblivious to the upcoming election at some point in time I believe we will start to see institutions start to pay more attention and perhaps start jockeying their positioning in the markets based on their "feel" for the situation.

The graphic posted below is from Bespoke Investment Group, the data is compiled by Predictit, and at the moment they are calling for a clean sweep by the Democrats.

The Fed

A trading range under 1% for the 10-year Treasury note has been in place for quite some time. After making a run to the top of that range in June, the 10-year is drifting back down as the COVID impact on the economy weighs on the market. The 10-year closed trading at 0.57%, rising 0.02% for the week.

The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.

Source: U.S. Dept. Of The Treasury

The 2-10 spread was 30 basis points at the start of 2020; it stands at 44 basis points today.

Sentiment

In AAII's weekly survey, only 23.2% of investors reported as bullish on the direction of stocks over the next six months. That is up 3% from last week's reading of 20.2% which was the lowest reading on bullish sentiment since May of 2016.

Meanwhile, bearish sentiment also moderated slightly falling to 47.6% from 48.4%.

So this week's commentary on sentiment is easy. It was a simple "cut and paste" from last week.

"While the 'worries' have investors very nervous, history tells me market tops aren't formed when sentiment is this Fearful."

Crude Oil

Following last week's massive 10 million barrel draw, crude oil inventories (including SPR) were expected to draw by 3.35 million barrels this week. Instead, the decline was more than double that with a 7.37 million barrel drop. That leaves inventories including SPR at the lowest level since early April at 518.6 million barrels.

A small cutback in domestic production likely played a role while imports were higher and exports were lower from last week. As for products, there was a surprise build for gasoline (0.419 mm bbls vs. 0.5 mm bbl draw expected) as refinery throughput ramped up and exports remained at a five-year high for the week.

The chart pf WTI shows crude trading just below a resistance zone at $42.50. If price can break above $42.50, there's not much obvious resistance again until closer to $49-50.

Traders kept WTI prices in a fairly narrow range. The price of crude oil closed at $41.52 on Friday, which represented a gain of $1.35 for the week.

The Technical Picture

Time and time again the technical message here stated that there can be no discussion of a "correction" until the S&P index violates the very short-term 20-day moving average (green line). Yet many have been calling for a pullback on a daily/weekly basis since the middle of June.

The index is poised to take a run at the February high of 3,386. This is of course an area of solid overhead resistance and it wouldn't be so unusual to see the S&P struggle at these levels.

No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.

Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.

In addition to the economic data, Mr. Market is also paying attention to other developments.

"New York Covid hospitalizations, ICU patients, and three-day average death toll all dropped to crisis lows in this week's data release."

The new "hotspots" that caused so much consternation recently can be expected to follow the same path. When the re-opening begins the lessons learned will tell us to open to what we will see as the new normal versus "normal"

Bespoke Investment Group:

"All major COVID outbreak indicators except positive test rate are now in decline at the national level, with cases, hospitalization rate, and deaths all trending lower on a 7 day moving average basis."

Source: Bespoke

Finally, although traffic remains well below normal, TSA reports a post-COVID high for air travel this past week.

This past week saw travel restrictions lifted in the Eurozone. Recently locked down Florida also decided it was time to lighten up. The State Department also lifted travel restrictions on Thursday.

While the narrative remains fixated on how much stocks are overextended and overvalued, other metrics are floating around these days that raise an eyebrow.

The S&P 500 is 9% above its 200-day moving average, similar to what it was before the COVID debacle. However, as of Friday morning, gold and silver are trading 44% above their respective 200 day moving averages.

The opening quote from Mr. Cain can be used to describe different groups of investors these days. With equities continuing to rally off the March lows, one group decided to make things happen. Of course, that wasn't an easy decision at the time. However, the tried and true method to keep watching the data and listening to the market message in the last four months has paid off.

April 10th - The headline here read "The Bulls Come Roaring Back"

May 30th -"The 'Bull' Is Alive As Equities Break Out Of The Trading Range"

June 6th - "The Secular Bull Market Rolls On"

July 4th - "The Rally Continues For This Market Of Stocks"

July 11th - "In A Secular Bull Market, Surprises Often Occur On The Upside"

August 1 - "The Secular Bull 'Market Of Stocks' Rolls On"

Each week the price action and the data were confirming those headlines.

Another group decided to sit and watch, frozen in place by the scary COVID headlines while listening to the naysayers tell those that stayed invested how foolish they were. The last group was the naysayers themselves, who once again never bothered to look at what mattered. Instead, they listened to their "feelings", spun a story that they bought hook, line, and sinker and now find themselves wondering what has just happened.

Now it is deemed this equity market is a handful of stocks with its euphoric atmosphere that warrant warnings from pundits to get ready to watch the market fall apart right before your eyes. One always has to wonder exactly who are they warning? If it is the crowd that stayed invested and reaped the rewards, they are the folks that were the brightest bulbs in the box. They will surely know how to handle themselves if this forecast for a wicked downturn develops.

On the other hand, if it is the "Johnny Come Lately" crowd that is playing with their stimulus funds, well that group always gets burned. It has been that way since the beginning of trading. Finally, if it is the army that is on the sidelines, it matters little. They didn't participate in the upside; they won't be hurt on the downside. Except it's very doubtful we will see this entire rally given back, so they still find themselves in a quandary, asking themselves "What do I do now?" When an investor tries to outthink the market, they better be prepared to suffer the consequences.

I conclude these town criers are simply shouting out loud to feed their egos so they can claim to be THE person that calls the top. They vie for the Guru title that calls the end of the rally.

Ladies and gentlemen, these people will simply join forces with all of the other "top callers" that committed hara-kiri before them. With the NASDAQ setting its 32nd all-time high in 2020, it is quite obvious the person that called the end at the first new high this year, the second or the other 30 are no longer around to make another call.

An emotionless disciplined approach to the stock market has been the message here for years. The headlines posted every week in the last four months demonstrate the difference that strategy makes. If nothing else, 2020 has taught investors if the time tested strategy I employ isn't followed, they will consistently struggle and be left behind making the same mistakes over and over.

Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore, it is impossible to pinpoint what may be right for each situation.

In different circumstances, I can determine each client's situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.

to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.