Weekly Summary Analysis: Consolidated Version

Nov. 28, 2020

This is a consolidated (holiday) version of the weekly summary analysis.

The last time the AAII bull sentiment spiked above 50% was in January of 2018.  At that time, the SPX continued to climb for a couple of more weeks, and the bull sentiment made a second minor spike before the pullback developed (red rectangles on chart below).

When we look at the bull-minus-bear differential, however, we notice that the current up-spike is more similar to the one that occurred at the end of 2017 (blue rectangle below) than the 2018 spike.  In 2017, the SPX did not experience a significant pullback; it rallied for three months following the spike in bull sentiment (chart below).  A pullback next week, while probable, is not a foregone conclusion.


Further support for the thesis that the market is about to pullback, comes from the reserve-lag study; a lag-lo window opens this coming week (chart below).

The nonM1M2 money stock also supports the idea of a market pullback soon (chart below).

We get the same prediction if we shift the nonM1M2 forward by 4-weeks; a pullback in the SPX is implied (chart below).


The nominal total put:call ratio has spiked (red ovals below) like it tends to do near local SPX tops.  This supports the possibility of a pullback (chart below).


The SOMA has been increasing since July, although it dropped by $25B in the latest week (chart below).

The 20-day average of the daily deficit continues to increase; now at -$15B/day.  This is supportive of the market (chart below).

The Treasury cash balance in the general account has spent $200B into the economy in the past month, and the market has predictably moved higher (chart below).


If the "debt" (stock of Treasuries) continues to rise, then the cyclic pattern of the correlation (debt and SPX) predicts a pullback in the SPX that could reach 3300.  However, if the "debt" decreases, then we would see the correlation turn negative with the SPX rising like we saw in August (blue arrow below).

Aggregate bank credit has increased by $130B in the last 3-weeks (chart below).  This is positive for the SPX, and should limit the depth and duration of a pullback.

The dollar and reverse-repo have a strong positive correlation, while the dollar and the SPX have a strong negative correlation.  Since reverse-repo volume has increased in the latest week, the dollar is likely to follow which means the SPX is likely to fall (chart below).


Institutional money funds continue to withdraw funds ($9B in the latest week), and retail funds have stopped adding funds. Of the $1,125B that was taken out of the stock market and locked up in money market funds during the pandemic, only $459B or 42% has come back out.


In summary: The balance of probabilities is tipped toward a pullback in the SPX over the next coupe of weeks. However, a pullback is not a certainty, and neither is a pullback's depth; that is why we have not added to our hedges, but have taken some profits instead.  The fiscal support from the Treasury and the money available in the money market funds should limit the depth and duration of a pullback, if one develops.