By WALLACE WITKOWSKI at Marketwatch
Investor sentiment has suffered with the recent correction and is not likely to improve in the short term, setting stocks up for a volatile September as international concerns overshadow domestic ones.
Stocks took a big hit last week with the Dow Jones Industrial Average DJIA, -1.66% dropping 3.3%, the S&P 500 index SPX, -1.53% shedding 3.4%, and the Nasdaq Composite Index COMP, -1.05% falling 3%.
International factors are feeding market volatility more than any other domestic factor, according to Brad McMillan, chief investment officer at Commonwealth Financial.
McMillan said that Germany’s weak manufacturing orders report likely had more to do with Friday’s selloff than the jobs report’s effect on a September rate increase from the Federal Reserve.
What could affect the Fed’s decision is a continued stock market selloff. McMillan said if investors come back from the Labor Day holiday and decide to take risk off the table, the S&P 500 could break down through 1,870 as low as 1,790. If that happens, then the likelihood for a September rate increase falls below 50%, he said.
“We’ve got another month or so before confidence bounces back,” McMillan said. “A lot of damage has been done to sentiment.”
Others believe the correction still has a ways to go, with one indicator showing that investor sentiment has fallen to “panic” levels.
Citi Research’s Tobias Levkovich said his Panic/Euphoria model, which brings together such indicators as short-interest ratios, margin debt, compiled bullishness data, and put/call ratios, broke into “panic” territory for the first time since late 2012.
While that may not seem good in the short term, Levkovich said that historically stocks have gone up 96% of the time over the next 12 months when the indicator has reached that level.