Our Positioning as Market Grows Increasingly Complacent

As I am sure you’ve noticed, both the S&P 500 and the Nasdaq Composite have made a sizable move off of their July 29 lows. It’s also been rather good for the Portfolio as well.

Lending a helping hand to that was the amount of inflows to U.S. equity funds. Per Morningstar, after a mixed start to the quarter, U.S. equity funds finished the period on strong footing. The category attracted nearly $19 billion in June, helping second-quarter inflows exceed $61 billion. To that we can add findings from LSEG Lipper that U.S. equity funds closed July with an other $11.83 billion.

It would be over simplistic to think those flows alone led to the market rebound over the last two weeks. But putting fresh money to work along with several other factors including favorable data points, especially for the AI and data center “trade,” short covering and a few other factors are several of the factors.

So far, based on their relative strength index (RSI) levels, neither the S&P 500 nor the Nasdaq Composite are in an overbought condition. However, over the last few weeks, the Fear & Greed Index climbed back into Greed from Neutral.

The Citibank Panic Euphoria Index hit a reading of 0.96, which puts it among the index’s highest reading and signals giddiness is in the market. For context, a reading above 0.38 is euphoria and below -0.17 is panic.

Finally, after dropping like a stone in late July, the Cboe Volatility Index (VIX) has continued to fall in August, landing it around 14.55. That is the lowest level since the 14.49 closing figure on January 9.

As those data points sink in and you ruminate about the strong move in the market, you’ll see what we’ve elected to lock in some gains on Tuesday with Microsoft (MSFT) shares and again on Wednesday with Eaton (ETN). As much as we tend to focus on the fundamentals, thematics and technicals behind an individual holding in the Portfolio, we have to be mindful of the market mood.

In this case, the combination factors suggest complacency has been on the rise at a time when trading volumes have historically slowed and the A-team of traders are off the desk. The U.S.-Iran war increasingly looks like a more protracted conflict, retail facing earnings are approaching and before too long Fed Chair Kevin Warsh will deliver his Jackson Hole address.

Our point is not to be fear mongers, but rather to acknowledge that there are a few uncertainties out there that could catch a complacent market off guard. To the extend it happens when trading volumes are lower, it could result in an exaggerated reaction, especially as traders look to lock in gains over the last few weeks.

That’s if something happens that the market is not expecting.

Historically, the data shows the S&P 500 experiences, on average, three to four 5% pullback each calendar year. So, far this year, we’ve had two. The first was the late winter correction that bottomed out in March. The second was a roughly 4% to 5% pullback triggered by geopolitical tension and rising crude oil prices later in the spring. Both pullbacks were short-lived.

Putting all the above together, our normal level of vigilance will be few notches higher as we move through the balance of August. Should we see the indicators discussed above become even more stretched, market oscillators become deeply overbought, and both the S&P 500 and Nasdaq Composite venture into an overbought condition, we may elect to raise more cash.

With that in mind, we will continue to flesh out the Portfolio’s Bullpen so we are ready if and when such a pullback unfolds. Again, that’s if.

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At the time of publication, TheStreet Pro Portfolio was long ETN and MSFT.