McMurtry Investment Report – October 2022

Remaining underweight equities, in the current period of falling markets and an aggressive Fed, continues to be my recommendation despite any possible bear market rally.

Please note that I gathered all the following indicators over the past weekend. Both Monday and Tuesday registered a strong technical rebound. Markets also benefitted yesterday by the announcement that help wanted ads in the US fell by 1 million. This is a positive development for the Federal Reserve in terms of trying to cool off the labour market.

This may be viewed as a classic bear market rally that we have already experienced six weeks ago. This will provide investors with an opportunity to trade this market, but not to materially increase equity exposure until domestic US inflation is showing clear evidence of peaking leading to the Federal Reserve to pause.

As of September 27^th, The Investors Intelligence bull / bear ratio is a low 0.74, compared to a high of over 5 in 2018 and a low of 0.50 in 2008.  The Investors Intelligence percentage of bulls as of September 27^th is at 25.4%, compared to a high of over 65% in 2018 and a low of 20% in 2008.

Current market breadth indicators, as of October 3rd for the US market, indicates that the percentage of stocks above their 200- day moving average is 20.23%. This compares to a recent high of almost 100% in 2021 and a low of close to zero in 2008. The percentage of US stocks above their 50 -day moving average is at 16.70% compared to 90% in 2021.

At the current level of $3,791, the price for the S&P 500 is below both its 50- and 200-day moving averages of $4,002.49 and $4,203.49 respectively as of October 4^th at the close.

Another one of the indicators are the Bollinger Bands for the S&P 500. The three bands are $3,550.39, $3,844.71 and $4,139.02. The lower band is very close to the current level of the market.

Another market sentiment indicator is the RSI index for the S&P 500 index. The current 14-day number is a low level of 37.65 as of October 3rd compared to a recent high of 70 in August. RSI levels below 30 are often viewed as an oversold market. When I initially gathered the data on the weekend, the RSI was below 30.

The AAII Bull / bear ratio sits at a level of 0.30 times as of September 28^th. This compares to a level close to 3 times in 2021.

For the five weeks ending September 7, the S&P Global Market Intelligence indicates that US institutional investors have liquidated $51 billion of equities. At the same time, retail investors have been buying stocks. This is another contrarian indicator that shows that institutional investors tend to be more risk averse than retail investors.

Corporate stock buybacks for the S&P 500 companies have dropped off sharply from a high of $1.15 billion in 2021 to the level, as of the end of the second quarter of this year, of just over $850 million. This is a major drop of 26%.

Merger & Acquisition activity in the US has dropped off sharply from the $600 billion in 2019 to the $230 billion as of the first quarter of this year.

The S&P 500 has seen its price decline by 23% from its recent 52 week high while the heavily weighed Energy TSX Composite has only dropped by 12.3% over the same period. The US equity market can still fall another 15-20% before it is all over. As it normally does, the Canadian market will follow suit, albeit with a lesser decline because of the energy exposure.

I do not know how long the bear market rally will continue. However, I would only use this rebound as an opportunity to trade and not to materially increase your equity exposure until domestic inflation is showing signs of peaking.