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Weekly Market Update 11/10/2019

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Weekly Market Update 11/10/2019

The S&P 500 gained 0.85% this week with Friday's close at 3,093.03.  Friday's close is a fresh new all-time high daily and weekly close.  The index has now increased five weeks in a row and is higher by 8.17% the last 25 trading days (slightly more than one month).  Volatility was again muted this week with the S&P 500 trading as low as 3,065.89 on Wednesday, and as high as 3,097.77 on Thursday, a high-low range of just 1.04%. 

In last week's Update, we wrote that "we'd like to see the S&P 500 head toward the ~3,100 level over the week ahead to confirm the "breakout", and that's essentially what happened this week.  The longer the S&P 500 can sustain above the red highlighted region, the better.  The index doesn't seem overly interested in taking a breather just yet (although a breather is inevitable).

 

 

So that's five weeks in a row to the upside now, two consecutive all-time high weekly closes, and two consecutive weekly closes above the upper weekly "Bollinger Band".  We can count on two fingers the number of times we've seen this occur (July 1998 and January 1992).  However, five-week winning streaks paired with all-time highs are a bit more common and generally have been a short-term positive for the price of the S&P 500. 

This week marks the 29th time since 1970 that the S&P 500 has recorded both a five-week winning streak and an all-time high weekly close.  In the prior 28 instances, the S&P 500's average forward one-week returns record negative at -0.23%, but the index has also closed higher two weeks later 18 of the last 22 times, dating all the way back to 1986.  Average returns over the last 22 instances record at 0.62%, which would be suggestive of a November 22nd close at 3,112.17. 

History tells a story about history, but it can't bring pen to paper about the future.  But, if it could, it would perhaps be writing about our winning streak not making it to 6, and our losing streak not extending past 1.

 

 

Finally, the main takeaway the last two weeks is mostly centered on the complete and total lack of selling pressure at all-time high prices for the S&P 500.  If participants, collectively, were pessimistic about what lies ahead regarding the economy, the health of the consumer, and the earnings picture for the largest of constituents in the S&P 500, they'd be more than eager to sell those constituents at prices they've never seen before.  Instead, they're buying 'em and holding 'em, and that's a good sign re: the forecast for the S&P 500 as we head into 2020.

 

S&P 500 Primary Trend - Up?

The S&P 500's primary trend appears to be back in drive.  At the moment, we label the primary trend as up or "bullish".  During uptrends, long-term investors are generally best served with an equity overweight across their portfolio's asset allocation, and relying mostly on passive or strategic asset allocation methodologies (both of which are influenced by your individual investor attributes, your financial plan, and your ability to adhere to your investing plan through the most challenging of times).  As the great Jesse Livermore once said:

"After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: it never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight!"

There's no reason to overthink things at the moment. The best approach is often the simplest and most straightforward.  The recipe for success during primary uptrends for the S&P 500 is your "sitting".  It takes maniacal discipline to be right and sit tight, but that appears to be the most prudent plan of attack for long-term investors at the moment.

 

 

 

While the S&P 500's primary trend is back in drive, there's still work to be done for the S&P 500's relative primary trend to land back in drive.  The chart below plots the price of the S&P 500 Total Return Index (SPXTR) against that of the Dow Jones Corporate Bond Index (DJCB).  The ratio of the two peaked at the 15.40 level in 2018 as the Dow Jones Corporate Bond Index has outpaced the return of the S&P 500 Total Return Index since 2018. 

In other words, the most conservative investor (i.e., a portfolio comprised predominantly of bonds held within the Dow Jones Corporate Bond Index) has actually done better than the most aggressive of investors (i.e., a portfolio entirely tied to the S&P 500 Total Return Index), even with the S&P 500's recent breakout to fresh new all-time highs.  This is likely a derivative of global monetary policy actions here in 2019 (i.e., negative interest rate policy across the pond) and the Federal Reserve's three interest rate cuts here in 2019.  However, if participants believe in the story of the economy and corporate earnings reigniting into 2020, we'd like to see a fresh new all-time high in the ratio of SPXTR to DJCB.

 

 

Interest Rates Surge, Sector and Factor Implications

The yield on a 10-year United States Treasury bond (TNX) increased by a whopping 11.86% this week with Friday's close at 1.93%.  TNX left a clean "double bottom" on its weekly chart, over both the short term and dating back to the vicinity of the all-time low from 2016.  Few can imagine TNX sprinting back toward the ~3% level sooner rather than later, and the contrarian in us thinks it has a higher probability than most believe.

 

 

There are meaningful implications to rising interest rates, and it appears participants, collectively, are posturing their portfolio in the present as if higher interest rates and a steeper yield curve exist into our future. 

The financial sector, as measured by the S&P 500 Financial Sector Index (SPF), has not only increased five weeks in a row, but it's also outperformed the S&P 500 five weeks in a row.  While the S&P 500 is higher by 4.78% the last five weeks, SPF is higher by 8.52%, nearly double that of the index as a whole.  SPF is now face-to-face with its prior all-time highs ranging from 503.42 to 511.02 (from 2007!).  A breakout here would be a fantastic development for the forward-looking prospects for the S&P 500 as a whole.  It's been the technology and consumer discretionary sectors carrying the load for a while now.  The financial sector (the third largest sector weighting in the index) joining the party would be a welcomed sign.

 

 

 

In the short term, there's good reason to believe SPF's winning streak might make it to 6 next week.  There's a tendency for SPF to show strength calendar weeks after TNX surges to the upside. 

This week marked the 27th calendar week where TNX gained 10% or more, the bulk of which occurred in this cycle (since 2009).  In the prior 26 instances, SPF's return the very next week has then closed higher 20 out of 26 times, and more recently 14 of the last 16 times, for average returns of 0.88%.

 

 

Beyond the financial sector, there are also meaningful implications in the world of factor-based investing.  As we've written about before, the value factor has been out of favor for years, perhaps influenced by the persistent decline in TNX over the last few years.  In a world with no discount rate, participants have obviously preferred growth and momentum names over value. 

However, over the last five weeks the value factor, as measured by the iShares MSCI USA Value Factor ETF (ticker symbol VLUE), has outperformed the momentum factor, as measured by the iShares MSCI USA Momentum Factor ETF (ticker symbol MTUM) by 8.13%, with VLUE outpacing MTUM each and every week.  It would seem there's rotation taking place under the market's surface, and participants' preferences appear to be heading back toward value.

The ratio of VLUE to MTUM has pulled up to its 100-week simple moving average (100MA).  A decided break above the 100MA would be further confirmation that value is back. (Please note that VLUE and MTUM are referenced for illustrative purposes only.  They're not a current or past recommendation of the Adviser).

 

 

Finally, the importance in analyzing sector and factor trends lies in the idea that beta's best days are probably behind us.  In layman's terms, the S&P 500 is beta, and it's been booming for a long time, annualizing in the double digits the last decade.  But the last two years its boom has slowed.  Since late January 2018, the S&P 500's maximum drawup at any point in time is still just 7.83%.  Meanwhile, there have been sectors and factors that have ascended far beyond 7.83%. 

In other words, it might not be as easy as just owning large cap domestic stocks the next decade.  What stocks you own, whether sector and/or factor overweights and underweights, might have a much bigger impact in your portfolio's returns.  It's probably a path to "alpha". 

 

Happy Sunday!

Steve, Rick, and the AlphaCore team.

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