Morning Notes — Near-Term and Beyond

Near-term: We have a cautious near-term outlook based on extreme bullish equity sentiment (contrarian indicator) and short-term overbought conditions. Bullish sentiment from last week’s AAII survey data remains elevated at 48.06 after reaching extreme levels of 55.84 on November 12.  The reading from November 12 was the second highest on record behind 59.75 made on January 4, 2018.  On January 18, 2018, the 5-day moving average of the CBOE Equity Put/Call Ratio reached extreme bullish levels of 0.51.  On January 29, the S&P 500 started a ~12% correction over the next ten sessions. On Monday, the 5-day moving average of the CBOE Equity Put/Call Ratio reached a 20-year low of 0.38 (now 0.39).  At a minimum, we expect a period of SPX consolidation toward technical pattern support in the 3490-3520 range (~4% downside from current levels), which should also push the index back to short-term oversold levels.

Next several weeks: The divided government tailwind requires the GOP to maintain its Senate majority after the results of Georgia run-offs on January 5. Some event risk should start to creep into markets soon, while a status quo outcome would become a meaningful short-term bullish catalyst.  The vaccine tailwind faces similar event risk in early January based on the presumed release of JNJ’s Phase 3 data.  The candidate’s single dose regimen and expected stability make it relatively more appealing than the already efficacious two-dose messenger RNA vaccines.  Of course, an additional vaccine approval will help ease current supply concerns and shorten the path to herd immunity.

Beyond: We expect the consensus 2021 S&P 500 EPS to migrate higher over the next 3-4 months from current levels of ~$169 to ~$178. The consensus 2022 estimate should also drift higher from ~$197 to ~$200.  After a period of consolidation, we expect the SPX to resume its bullish uptrend to ~3950 (+8.5% from current levels) with a larger melt-up toward 4,300 (~18% upside from current levels) possible before mid-year based: 1) year-over-year money supply growth of +24%; 2) additional fiscal stimulus of ~$800B; 3) vaccine distribution; 4) divided government; 5) easing of trade tariffs; 6) slightly weaker US dollar and; 7) increased/resumed shareholder capital return.