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Weekly Market Update 01/19/2020

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Weekly Market Update 01/19/2020

The S&P 500 gained 1.97% this week with Friday's close at 3,329.62.  Friday's close is another fresh all-time high daily and weekly close.  The index has now increased 13 of the last 15 weeks, and has climbed 16.58% from October 3rd of 2019's low at 2,855.94.  The move over the last ~3 months has been astounding, and it's essentially responsible for all of the S&P 500's advance the past ~2 years.  She's making up for lost time, so it seems. 

The index didn't spend a single tick below last Friday's close this past week.  This week's low at 3,268.43 occurred shortly after Monday's open, and this week's high at 3,329.88 occurred just prior to Friday's close.  In other words, they bought 'em up all week long, even in spite of "overbought" readings across both daily and weekly charts.  There remains demand for the S&P 500's constituents and derivatives tied to the price of the S&P 500, even at all-time high prices.  This is a great sign regarding the collective expectations of market participants over the months ahead. 

However, the linearity of the advance the last three months is unsustainable.  There are only three time periods since 1990 where the S&P 500 increased 13 out of 15 weeks, the weeks ending:




It goes without saying, but a "heater" like this isn't the norm and won't last forever.  To expect it to continue is to bet on unprecedented price action forward-looking.  To predict something that has never occurred in the history of the S&P 500 is rather bold, but, as we often write, the price of the S&P 500 can and will trade beyond the limits of imagination. 

We prefer to lean on the historical probabilities associated with mean reversion.  We do believe most astute observers and investors are aware that a pullback is truly inevitable, albeit impossible to circle the date.  Thus, with this being a "when" and not an "if" situation, the better question becomes what type of pullback do we experience:  a normal, healthy -2% or -3% decline, or something more violent, along the lines of a -5% to -10% downdraft?  The former is always more probable than the latter, but we wrote a few weeks ago that further upward extension would increase the probability of a more violent pullback, and we've most certainly had further upward extension. 

Stepping way from subjective conjecture, we can turn to the charts.  Widely followed moving averages and Fibonacci retracement levels are all objective, and they're the same for all market participants.  Collectively, objective price levels often bring about uniform behavior across market participants, an example being how they tend to provide support to the price of the S&P 500 during uptrends. 

The chart below reveals a confluence of support in the yellow shaded region, ranging from ~3,036 to ~3,161.  The 100-day simple moving average (solid pink line) is presently 3,078.24, and ascending.  Given Friday's close, this price region represents a pullback for the S&P 500 of roughly -5% to -10%, which we'd describe as violent, and it will undoubtedly feel like the world is ending.  But given a near 17% advance over the last 15 weeks with only two weekly declines, it's pretty fair and historically typical. 

All of these levels are reasonable areas for the S&P 500 to land, or bottom out, after the pullback has run its course.  If we trade down to them, the S&P 500 will likely be nicely "oversold", which would set the stage for the index's next leg up.  Importantly, all of these price levels will ascend if the S&P 500 continues moving to the north. 

In summary, don't fall in love with your current account balances.  Unless this time is truly different, you're probably going to have to give some - but thankfully not all - of the money you've made the last three months to the house in the not too distant future.  That's a feature of investing; being tolerable to temporary losses in exchange for even greater gains over time.



S&P 500 Primary Trend - Up

The S&P 500's primary trend remains up, or "bullish".  The index is presently trading above any and all widely followed moving averages, and both absolute and relative momentum measures are positive.  The index sat in traffic from late January of 2018 to early October of 2019, then the traffic cleared in October and we've been driving 75 miles per hour in the left lane without a car in sight ever since.  It's been quite the ride.



During uptrends for the S&P 500, long-term investors are best served with an equity overweight across their portfolio's asset allocation and relying mostly on strategic, or passive, asset allocation methodologies.  It isn't until the primary trend can be labeled as down, or "bearish", that long-term investors should re-think their equity allocation and consider relying on more active, or tactical asset allocation methodologies.  We're certainly not there yet. 

There are 9 trading days remaining in January, and the S&P 500 is on pace to plant more "bullish" evidence on the board.  First, the index is on pace to record a five- month winning streak.  Five-month winning streaks have almost exclusively seen favorable market climates over the forward one year.  Second, the S&P 500 is on pace to increase by more than 1% each of the past five months.  Since 1970, the index has never closed lower one year later following five consecutive monthly advances of 1% or more.  The contrarian in us is actually a bit worried at just how overwhelmingly "bullish" the evidence is at the moment. 

As always, the past isn't consistently predictive, especially since the fundamental climate in the present is unprecedented.  No matter how much the price action in the present suggests "bullish" outcomes into the future, nothing is guaranteed in the world of investing.  We live in unprecedented times, from the duration of economic expansion, to interest rates, to the collective earnings of the S&P 500's constituents, to the president's use of social media.  Heck, there's even something called Bitcoin out there in the world these days. 

The reminder here is that the best course of action for all long-term investors to take right now is to ensure they have a prudent plan for the ongoing management of their investable portfolio, and then stick to that plan with maniacal discipline.  It's in this scenario where your portfolio can thrive, in relative terms, no matter the S&P 500's primary trend.


Wayne Whaley "TOY" Update - "Bullish" Signal Recorded

Wayne Whaley is one of the best quantitative analysts out there, and we greatly respect his work.  It was almost a decade ago when we read his paper titled ""Planes, Trains and Automobiles, A Survey of Momentum Thrust Signals", which won the Charles H. Dow award in 2010. 

In March of 2012 Wayne set out to identify the "kingpin of seasonal barometers".  Wayne stated:

"I implored my computer to take a few minutes to exhaustively study S&P performance over every time period of the year and determine which time frame's behavior was proprietor of the highest correlation coefficient relative to the following year's performance."

What he found was that the performance of the S&P 500 Index over the two-month time period from November 19th to January 19th was remarkably correlated to the forward-looking twelve month returns for the index, specifically from January 19th of this year to January 19th of next year.  He called this the "TOY Barometer" (with "TOY" being an acronym for "turn of the year"), given the computation period covering November 19th through January 19th.

The most important takeaway here occurs when the S&P 500 gains 3% or more in price-only return from November 19th of the prior calendar year through January 19th of the current calendar year.  (For computation purposes, if the 19th falls on a weekend, for either November or January, you use the prior Friday's close).  This is called a "bullish TOY" and this has occurred 35 times since 1950.  The S&P 500's forward returns, as measured by January 19th of this year through January 19th of next year, have then closed higher 33 times for average returns of nearly 16% (table below). 

The relevance here is that the S&P 500 closed at 3,120.18 on November 19th of 2019, and it closed January 17th of 2020 (the 19th is a weekend) at 3,329.62.  This is a gain of 6.71%, so we have our 36th "bullish TOY" since 1950. 

This is yet another good omen for 2020's forecast.  If you find yourself thinking "this can't continue", remember that it most definitely can continue.  "Will it continue?" is the better question.  That's unknowable, but our educated guess says the answer is yes.



Blackstone's 10 Surprises for 2020

We had the pleasure of hearing Joe Zidle, Chief Investment Strategist in the Private Wealth Solutions group at Blackstone, speak on Thursday.  He shared his top 10 surprises for 2020 and his presentation was fantastic.  While we can't press rewind and get all of our readers in the room with Joe, we can pass along his top 10 surprises for 2020! 

Click here to have a's thought-provoking if nothing else. 


Happy Sunday!

Steve, Rick, and the AlphaCore team



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