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Weekly Market Update 10/27/2019

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Weekly Market Update 10/27/2019

The S&P 500 gained 1.21% this week with Friday's close at 3,022.42.  Friday's close is the second highest daily and weekly close in the history of the index, and is just 3.44 points below our all-time high weekly close at 3,025.86 from July 26th of this year.  The index opened favorably on Monday and never spent a single tick below last week's close at 2,986.20.  Our weekly low recorded on Wednesday at 2,991.21 and we finished the week on a positive note, gaining 0.40% on Friday (unlike each of the past two weeks).  The S&P 500 has now increased three consecutive weeks, after declining three consecutive weeks over the prior three weeks.  We now head into the final week of October in prime position to breakout to the upside. 


Being a 400m sprinter my whole life, the chart below is analogous to coming off the final turn in the lead.  If we can finish strong (a big "if" if you've ever tried to sprint 400m), then we'll be writing about a fresh new all-time high daily, weekly, and monthly close in next week's Update.



As we've often written, the price action around widely followed levels of support, or resistance, is telling.  Every time the S&P 500 has crossed into the 3,000s, the index then saw a ghost.  Eager buying interest vanished, selling pressure emerged, and the index ran away from the ghost, crossing back below the 3,000s.  Now, we're all left to wonder if the ghost is gone, if the coast is clear, and the price action next week could give us the answer.  Further upward extension into fresh new all-time highs will suggest that buying interest hasn't vanished, selling pressure hasn't emerged, and that would suggest this time is different, the coast is clear, and the ghost is gone.  Just in time for Halloween.  Go figure. 

Remember, the price of the S&P 500 is a reflection of the collective actions of all market participants transacting in the index's constituents, and derivatives of the index.  When market participants, collectively, are eager to own the S&P 500's constituents, and derivatives of the S&P 500 (i.e., futures, or exchange-traded index funds) at prices we've never seen before, it's probably because their work has led them to expect even higher prices for the S&P 500 into the future.  While there can be a multitude of reasons why a participant chooses to sell a security, participants tend to buy a stock for one reason and one reason only - they believe owning the stock will be a profitable endeavor over time.  It's through these lenses where the collective actions and behaviors of market participants in the present are said to reveal their expectations of the future.  In other words, the coming price action is at the last level of known resistance on the charts, the final hurdle or test, and it's going to be telling regarding what participants, collectively, expect for the remainder of 2019 and into 2020. 

Why would this be an important development for long-term investors?  Because most long-term investors have a portion of their portfolio invested in securities that are closely correlated to the price of the S&P 500, so a breakout to new all-time highs is a material development for virtually all of us.  Alternatively, a selloff over the week ahead would obviously be disappointing, and perpetuate the idea that there's a lid on the S&P 500 at and around the ~3,000 price region.  Over the last two years, investments that are highly correlated to the S&P 500 have been spinning their wheels, slamming on the gas while in "neutral".  Maybe we're finally ready to slam on the gas, this time in "drive".   

Lastly, in last week's Update we wrote about a gigantic mismatch between sentiment (negative) and the S&P 500's price action (positive).  We wrote:

"Given the lid that's been in place for the S&P 500 at the ~3,000 marker in 2019, few can even imagine the idea of the S&P 500 truly breaking out over the weeks ahead.  That's why we think there's a decent chance it actually occurs..."

We wrote this because we believed there was a decent chance the index breaks out to fresh new-all time highs over the weeks ahead.  After this past week, we now find ourselves in the pole position, and hopefully we're face-to-face with the ~3,100 level over the coming 5-10 trading days.


S&P 500 Primary Trend - From Neutral To Up?

There are four trading days remaining in October, and the S&P 500 is in prime position to close the month at a fresh new all-time high.  As long as the index doesn't decline -1.40% over the coming four trading days, October will record as a new all-time high monthly close for the index.  From our perspective, a monthly close at and around ~3,070 would mark a decisive "breakout" on the monthly chart, and certainly confirm the primary trend as up or "bullish".



At the moment, the price action in October reeks of  "accumulation", and this is a good scent.  The month traded down by more than -4% from September's close, even trading well below September's low, and yet here we are, higher for the month by 1.54% with four trading days remaining.  Participants showed eager buying interest into lower prices in October, and, as we just discussed, that should only occur if participants, collectively, believe in the story of higher prices into the future.  So far, they've gotten their higher prices in October with the index now almost ~200 points, or 5.83%, higher than the monthly low. 

An interesting quantitative setup is on pace to view October in a favorable manner, too.  An October monthly close above 2,976.74 will record the month as a "bullish outside reversal month" (BORD).  BORDs are defined as calendar months with a lower low, higher high, and higher close than the month prior.  If we then add additional criteria to filter all BORDs by those with a monthly decline of -3% or worse from the prior month's close, and those with a monthly close that's 1% or more than the prior month's close, (i.e., BORDs with meaningful upside reversals) we're left with 13 prior instances.  The S&P 500's forward 3- and 6-month returns have then closed higher 12 of 13 instances for average returns of 5.40% and 9.42%, and the index's 12-month returns closed higher 11 of 13 instances for average returns of 14.09%.  Lastly, 6 of the last 8 times these types of BORDs occurred marked the lowest monthly close for the S&P 500 at any point over the forward 12 months.  An October close above 3,006.50 will mark the 14th instance of this occurring. 

As always, the past isn't consistently predictive of the future, especially when we live in unprecedented times.  However, in the present, we could be witnessing a clean breakout to start the next leg higher for the S&P 500.  It's been a challenging two years, but perhaps the traffic is ready to clear...finally.




Semiconductor's Breaking Out?

The Philadelphia Semiconductor Index (SOX) gained 3.68% this week with Friday's close at 1,648.67.  Friday's close is a fresh new all-time high daily and weekly close for the SOX.  The SOX appears to be leaping over its final hurdle...



The importance here is that the SOX are often viewed as a market bellwether for risk appetite.  SOX has a beta of 1.50, which in math means that for every 1% gain or loss for the S&P 500, it's expected that SOX will gain or lose 1.5% (it's a fancy way of saying the SOX holdings are comprised of extremely volatile stocks).  Therefore, when the SOX is outperforming, the idea is that there's a healthy risk appetite collectively across market participants in the present.  Participants appear hungry to own the constituents of the SOX at the moment. 

The SOX have also become a proxy for the ongoing trade war with China, since many of the SOX constituents' underlying profitability is liked to China relations.  Therefore, this week's relative strength can perhaps be interpreted as an encouraging sign re: the forward-looking prospects of an actual trade deal, especially since Texas Instruments (the third largest holding in the SOX) declined by -6.91% this week.  From here, we'd love to see the SOX continue to ascend.  While it's not a sizable index (comprised of just 30 companies), a healthy risk appetite is needed to help the S&P 500 breakout and sustain above the ~3,000 price region.


Next Week - Earnings, The Fed, and The Economy

The week ahead is completely and totally jam-packed with market-moving events, which means there are catalysts all week long to create a narrative for the S&P 500's price action.  Here's what's ahead this week for three of the most important variables affecting the collective behavior of market participants...


Earnings, Earnings, and More Earnings

The earnings calendar for next week is absolutely crammed.  There are 158 companies reporting on Monday, 235 on Tuesday, 332 on Wednesday, and 240 on Thursday.  Things finally settle down on Friday with just 65 companies reporting (click here for the earnings calendar).  From our perspective, future earnings prospects are the main driver of the collective behavior of participants in the present.  We'd like to think the S&P 500's upside reversal in October was the market's way of pricing in optimistic earnings here in the end of the month.  It's time for companies to deliver. 


Fed on Wednesday

The Federal Reserve is expected to lower the federal funds rate by -0.25% on Wednesday.  As of Friday's close, participants are pricing in a 93.5% probability of a rate cut announced on Wednesday (click here).  It's fair to assume this is baked into the cake, which means all eyes and ears will be glued to Chairman Powell's press conference on Wednesday.  Choose your words wisely, Jerome.  The S&P 500 has developed a recent tendency to trade negatively following your press conferences...


Jobs on Friday

On Friday we'll get the jobs report for the month of October (click here).  This report tends to be market-moving.  Consensus economist forecasts call for an increase of 136,000 jobs with an unemployment rate of 3.5%.  Any meaningful surprise, whether to the north or the south, will undoubtedly increase volatility for virtually all asset classes.  Hopefully, this report puts a cherry on top of an all-time high daily and weekly close for the S&P 500. 

In summary, the S&P 500 is in position to breakout...directly in front of a mountain of fundamental catalysts.  We always find it fascinating when the technicals (price) and fundamentals (earnings, the economy, and the Fed) line up.  They're holding hands as we head into next week, and since price leads fundamentals, we anticipate price breaking out in the event the fundamentals do hold up their end of the bargain.  If the fundamentals disappoint, we'll be disappointed in the S&P 500 probably trading back below the 3,000s. 

Another exciting week lies ahead!


Happy Sunday!

Steve & Rick, and the AlphaCore team


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