It is heating up this week in the Midwest. Here in Indianapolis, temperatures are forecasted to be in the 90s, plus humidity. That is certainly a shift from the rather comfortable temperatures we experienced last week, but it looks like it should cool down by the weekend.
It appears that things are also starting to heat up in the markets, at least in a few tech-driven segments. Several large technology-related stocks have had some rough weeks. Through Friday’s close, Apple’s stock was down -11% from its July 31st high; Tesla was down -26% from its July 18th peak; and Amazon had given back a significant portion of the single day gain it experienced following its company earnings exceeding analyst expectations.
In other words, just like the weather outside, markets are starting to feel a bit uncomfortable for many investors. Bullish market sentiment is on the decline. According to the AAII investor sentiment survey, at the beginning of August, nearly 50% of investors surveyed had a positive “bullish” market outlook. That number is now down to 35%, while bearish sentiment has ticked up from 24% to 30%.
Large technology-related securities have been a boost to markets for most all of 2023. Now, those same stocks have caused markets to pullback in August. While markets may feel a little uncomfortable, market volatility has not expanded. While markets have declined in the month of August, the decline has been almost “orderly.”
One key indication of rising volatility is the appearance of “outlier” days. Outlier days are defined as any trading day beyond +/-1.50%. Statistically, during a normal and rational “bull” market, the S&P 500 should only experience between 10-20 outlier days in a calendar year. On average, that is about one outlier day every twenty trading days. Outlier days will typically occur in clusters and can either be to the upside or downside.
Even with the broad markets declining, the S&P 500 has not experienced an outlier day since May 5th. That is a streak of 72 trading days without an outlier—the longest since a streak that ended in January 2020. If the current streak lasts beyond this Thursday, it would be the longest streak without an outlier since 2015, and the 7th longest streak since 2000.
Just like the weather in the Midwest, the markets are starting to feel a bit uncomfortable. Investors are backing off the bullish sentiment they felt a few short weeks ago, and some of the technology-related stocks that have fueled the market this year are starting to pullback. That being said, volatility has not risen, and markets haven’t seen any outlier days yet. That could be a sign that cooler weather is ahead but be on the lookout for an outlier day. Markets seldom go this long without one.