Last week, markets reacted positively to inflation numbers and the prospect of rate cuts coming sooner, rather than later. As we all know, that did not end up being the biggest news story of the week.
Markets were perhaps inches away from a drastic move after the assassination attempt on Donald Trump over the weekend. Thankfully, the attempt was unsuccessful, and markets continued to trade rationally into Monday. Still, given the extreme low levels of volatility right now, I would have expected the market would have had an outlier day (trading day beyond +/-1.50%) in either direction following the historic event. When volatility gets to extreme low levels, like it is right now, it can feel like pressure is getting built up like the compressing of a spring. Eventually, that pressure will need to be released.
As it relates to markets, the assassination attempt goes to show just how muted major news events can be during bull market periods. Had the event occurred during a volatile bear market, markets would likely have experienced a large move in either direction.
The last presidential assassination attempt was the one on Ronald Reagan on March 30th, 1981. The market was in a bullish Market State, meaning it had low volatility and a generally upward trend. On the date of the assassination attempt (which occurred during the trading session), the S&P 500 only fell -0.27%. The next day, it was up +1.28%.
Similarly, John F. Kennedy was assassinated in 1963, changing the course of history. The assassination occurred during another low volatile Market State. How did the market react? It fell more than -3% the next day and was at a new high a few days later.
Meanwhile, President Eisenhower survived a heart attack in a more volatile market environment over the weekend on September 24th,1955. That following Monday the market opened down -9% and finished down -6%.
Investor Sentiment
I am curious to see what happens to investor sentiment, which gets released every Thursday by the American Association of Individual Investors. Those investors are surveyed each Wednesday. Given the news last week and over the weekend, it will be interesting to see how investor views react. More than likely, investors will remain positive, and perhaps become even more bullish. Last week’s survey showed that investors remain overly optimistic. Keep in mind that sentiment is a contrarian indicator. Most investors are more optimistic near peaks and more pessimistic at troughs.
What to Watch For
With the positive reading of the tea leaves last week, struggling small caps stocks got a big bounce. Prior to last week, the relative strength of the Russell 2000 index (small cap stock index) to the S&P 500 was its lowest point since the year 2000. Will that index be able to maintain the strength it saw last week, or will it revert to the consistent underperformance it has experienced the last 3 years?
Prior to last week, the markets had been rising while a majority of stock issues were actually falling. Market breadth had been weak, and the S&P 500 was being led higher by a select few names. Last week saw the Equal Weighted S&P 500 have its largest of week of outperformance over the S&P 500 this year. The equal weight S&P 500 has still substantially underperformed the cap weighted index year-to-date. Will the Equal Weight Index have a “catch-up” period?
One of the hottest stocks in the market over the last month has been Tesla. At one point in April, Tesla was down more than -40% for the year. It’s now back to breakeven following a +20% advance since just the start of July (8.5 trading days). This month, the stock has seen an explosion of volatility, featuring trading days of +6%, +10%, +6.5%, and +3.7%. Last Thursday, the stock fell -8.4% before rising +3% on Friday. From a longer-term perspective, the stock is trying to find some technical support after experiencing a lot of overhead resistance. Tesla is set to reveal its second quarter earnings on July 17th.
Will resistance become support?
Source: Chart created using Optuma Technical Analysis Software
Bottom Line & Summary
Markets saw strength from lagging segments last week, which fueled investor sentiment and improved market breadth. Will those laggards continue to hold up? Keep an eye on several stocks this week, like Tesla, as their respective companies report earnings. Earnings reports can cause a reaction in individual stocks, in either direction.
A presidential assassination attempt is historic, but not unprecedented. Trump and Reagan both survived attempts during bull markets. In the case of Reagan, markets did not seemingly react much. For Trump, although the future is uncertain, markets have not reacted much yet either. John F. Kennedy was killed during a low volatile market, and the market continued upwards following the major event. Bull markets have a tendency to mute news events, whereas even the smallest news event can cause a large swing during a volatile market.
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