Weekly Market Update 01/05/2020Posted Jan 05, 2020
The S&P 500 declined -0.16% this week with Friday's close at 3,234.85. This week's decline is just the second weekly decline over the last 13 trading weeks. The index traded as high as 3,258.14 on Thursday, a fresh all-time high, only to then reverse to the downside on Friday. Friday saw the S&P 500 open at 3,226.36, trade down to 3,222.34, but close at 3,234.85. All of Friday's decline was attributable to the after- hours and overnight session before markets opened on Friday. The narrative here is easy: It was after market hours on Thursday when we learned about the death of Iran's Qassem Soleimani. Participants will now have the weekend to digest whether ascending tensions with Iran are a material event, economically.
In last week's Update we wrote that we wanted to see the S&P 500 "take a breather". If you believe the news makes the market, you believe Friday's selloff was influenced entirely by the uncertainty and fear associated with escalating tensions with Iran. If you believe the market makes the news, then perhaps Friday's selloff is the S&P 500's way of simply starting its "breather", after a tremendous rally the last 12 weeks. If you believe it's a bit of both, then we're in the same camp. We've been looking for the S&P 500 to pull back for two weeks now. The events with Iran simply spark the fuse.
That said, we do hope the "breather" is underway. The most durable of returns/advances tend to follow "oversold" conditions, not lingering "overbought" conditions (those are signs of durability over intermediate- and longer-term time frames). We continue to believe the S&P 500 is best served heading lower first, before heading higher.
From a price target perspective, there's a ton of support on the chart below. The first and most obvious area that stands out to us is the ~3,142-3,164 region. This represents the 50% and 61.8% Fibonacci retracement when connecting December's low to our current all-time high. We then also have the 3,154.26 marker which represents November's high, where, psychologically speaking, eager sellers wish they were not eager sellers. In theory, this would be a group of participants that would spur buying interest on any trade back down toward the ~3,154.26 price region. This would represent a move lower of about -2.16-2.84% from Friday's close, and we think that would be a reasonable "breather".
Finally, we can't help but feel like it's become a bit consensus for the S&P 500 to take a "breather". While a healthy pullback is as obvious as San Diego sunshine at the moment, sometimes what's obvious is obviously wrong in the world of forecasting the S&P 500.
For example, Friday's price action was eerily similar to the price action we saw on December 3rd of 2019. Both days recorded with a daily return of -0.50% or worse, with a daily close that was greater than the daily open. They marked trading sessions that saw panic and overreaction when the market was closed, paired with calmness and no eager selling pressure when the market was open. With the luxury of hindsight, December 3rd actually marked the end of the S&P 500's "breather"...
We don't think we're going to experience a case of deja vu here in January, but the lack of selling pressure during Friday's session was definitely curious, especially given the context of what has transpired the previous 12 weeks. An interesting weekend and Sunday night session awaits (no news is probably good news).
S&P 500 Primary Trend - Up
The S&P 500's primary trend is up, or "bullish". During uptrends, long-term investors are best served with an equity overweight across their portfolio's asset allocation and relying mostly on passive, or strategic, investment methodologies. There's no known resistance on the charts at the present moment. When we expand our mind to think in terms of months, and not minutes or days, there's no telling just how high the S&P 500 can climb. Remember, the price of the S&P 500 can and will trade beyond the limits of imagination.
The index finished the month of December with a gain of 2.86%, it's fourth consecutive calendar monthly increase of 1% or more. We'll call this the "four plus one" setup. We teased this a bit during the month of December, but this marks just the 17th time the S&P 500 has gained 1% or more over four consecutive calendar months since 1970. It also marks the second time this occurred in 2019, having also recorded in the January through April time period. If this doesn't illustrate just how strong 2019 was, nothing does.
There are 15 prior instances a "four plus one" setup has occurred where the S&P 500 has a full forward one year worth of price action. Following a "four plus one" setup, the index has then never closed lower one year later. Additionally, all 15 instances saw the S&P 500 trade higher by at least 12.53% from the S&P 500's monthly closing price to record the "four plus one" setup. With December's close at 3,230.78, this would suggest a trade up to 3,635.59 at some point during 2020. We imagine your first thought is "no way, Steve".
We'd respond by saying "yes way". While history can't predict the future, it can be used to provide context, and to illustrate the historical and factual precedent in an effort to help long-term investors leave feelings out of their long-term investing. Long-term investors who allow feelings to govern their investing decisions are destined for sub-par returns over the full market cycle.
We're only human, and we're all predisposed to panicking in the fourth quarter of 2018, and we're all feeling pretty good right now (although we don't see euphoria anywhere). We're all predisposed to being risk averse with positive investment returns, too. That is, the more we have, the more we accumulate, the more we want to sell what we have when we have it during volatile times based on the fear of losing more. We then want to do the exact opposite after the volatile times, i.e., we tend to want to roll the dice with whatever we have left, after we've experienced meaningful loss.
This fuels a sentiment that we've come across a lot lately of "this can't continue", or the idea that the S&P 500 can't possibly continue to advance in 2020, the "no way, Steve". It's the epitome of the gambler's fallacy, and any long-term investors who are actually pressing the sell button solely because they "feel" that "this can't continue" are at risk of experiencing massive opportunity loss.
We implore our readers to reference back to the table above the next time you feel "this can't continue", or the next time someone at the watercooler tells you "this can't continue". History teaches us this absolutely can continue. Successful investing is not about identifying a feeling and aligning your portfolio accordingly. It is about picking a prudent, intelligent, and defensible investment strategy that's designed to win whether this continues or not, and then sticking to it with maniacal discipline. That's the game plan for 2020.
Gold Jumps Higher
In follow up to last week's section titled "Gold Jumps", we're happy to share that gold jumped even higher this week. Gold gained 2.26% this week with Friday's close at $1,552.40, its second consecutive weekly gain of 2% or more. Friday's close is the highest weekly close for gold since 2013. In last week's Update we wrote:
"Gold's weekly close leaves its 2019 high weekly close in sight, and we wouldn't be surprised to see the metal run toward the ~$1,540 price level in early January."
We didn't think it would only take 5 days, but here we are.
The technical picture for gold is very encouraging. *If* the metal can break out and sustain above the $1,566 price region, it would seem a re-test at the ~$1,800 level is the next stop. If we had to make a bold, surprise prediction for 2020, we'd write that gold trades back into the $1,800s at some point during the year.
In a world dominated by the acronym "TINA", or the idea that "there is no alternative", gold is quickly becoming an alternative. Its relative strength when compared to both stocks and bonds is making it an attractive candidate for portfolio diversification. Further, gold is not always correlated to the S&P 500. And days like Friday, where the S&P 500 is down -0.71% and gold is up 1.59%, illustrate the benefits of uncorrelated return profiles.
Looking over the trailing 100 and 200 trading days, we can see gold has been negatively correlated to the S&P 500 over the trailing 100 days, a correlation of -0.51, while being positively correlated to the S&P 500 over the trailing 200 days, a correlation of 0.55. This illustrates how gold marches to its own beat, and if the metal re-establishes a primary uptrend, as it's on the verge of doing, then it can be a great portfolio diversifier for those long-term investors whose individual investor attributes align...especially if our economic future includes escalating tensions with Iran.
Oil Surges, Energy Sector Watchlist
The price per barrel of crude oil (WTIC) surged 3.06% on Friday, and finished the week at $63.05, a weekly return of 2.15%. WTIC is certainly an area where the news made the market, as WTIC's surge is obviously correlated to Iranian conflict. WTIC is now flirting with retesting its 2019 high weekly close at $64.07. A breakout above would certainly support the idea of WTIC retesting its 2018 highs in the mid- $74s.
Interestingly, WTIC first traded into the mid- 60s in 2004. I can remember filling up my gas tank in 2008, and it was far more expensive than it is here in 2020. WTIC prices have been flat for more than a decade, and the common narrative here is that flat WTIC prices for a decade is a tax cut for consumers. We don't disagree...
This has undoubtedly played a role in the relative weakness exhibited by the energy sector within the S&P 500 (SPEN). Like WTIC, SPEN has done absolutely nothing for a decade, a decade that's produced tremendous returns for the S&P 500. Note how the price action of WTIC above is almost identical to the price action of SPEN below. SPEN closed Friday at 458.77, a level first achieved in 2007.
Now, the point here is actually not to articulate the view through the rearview mirror, as that's clearly known and knowable. It takes nothing more than time to tell you the story of what's happened to both WTIC and SPEN over the last decade. The point is to think about the opportunities present in SPEN on a forward-looking basis. What if participants, collectively, are underpricing "inflation risk"? What if, collectively, central banks continue to draft policy along the lines of "inflate or die"? What if WTIC has finally come back to life, and makes up for lost time, if you will? These are all plausible scenarios into the future that lead us to want to keep our eyes on both WTIC and SPEN. In the world of long-term investing, the future's often drastically different than the past.
Warren Buffet famously said "be fearful when others are greedy, and greedy when others are fearful". Well, it's apparent that investors, collectively, are fearful of owning the constituents in SPEN. Perhaps it's time to be greedy in exploring what the sector can offer, especially if higher prices for SPEN are a derivative of higher prices at the pump for us consumers.
Steve, Rick, and the AlphaCore team
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