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Weekly Market Update 12/01/2019

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Weekly Market Update 12/01/2019

The S&P 500 gained 0.99% this week with Friday's close at 3,140.98.  Friday's close is another fresh new all-time high weekly close.  The index has now increased seven of the last eight trading weeks, and is higher by 9.98% from October 3rd's low at 2,855.94.  This week saw the first trade of the week (i.e., the weekly open) record as the low of the week, and we didn't trade below last Friday's close at any point during the week.  We traded as high as 3,154.26 on Wednesday this week, a fresh new all-time high, before pulling back a bit on Black Friday's holiday-shortened trading session. 

The narrative remains unchanged from last week - any and all price action above the shaded red region is constructive and sort of promises new all-time highs over time.  There's no resistance left on the charts, so there's no telling how high the S&P 500 can trade.



The primary takeaway from the price action since early October is the resumption of a primary uptrend for the S&P 500.  Whether referencing a daily, weekly, or monthly chart of the index, they all sport a series of higher highs, higher lows, and higher closes over the last two months.  This is a derivative of the collective actions of market participants and can only be defined as "accumulation". 

Participants "accumulate" when their work (whether fundamental, economic, technical, quantitative, or anything else out there) leads them to believe equities will trade higher over time.  The collective actions of participants in the present are said to reveal their expectations for prices into the future.  If that's correct, then clearly market participants, collectively, think the S&P 500's primary uptrend has room to  run.  However, prices don't move linearly forever.  There will be a pullback, the S&P 500 will take a seat to catch its breath, the next eight weeks probably won't look anything like the last eight weeks. 

As we wrote last Sunday, in the event the S&P 500's pullback arrives sooner rather than later, we'd like to see the index find support in the ~2,990-3,024 price region.  In the event we don't even make it down to the ~2,990-3,024 region, then that's the healthiest and friendliest of pullbacks...and we're certainly OK with that, too.  For now, the most probable outcome would seem to be that we're slow and steady to the north until some meaningful red actually appears on the screen.


S&P 500 Primary Trend - Up

The S&P 500 closed the month of November on Friday at 3,140.98.  Friday's close is not only a fresh new all-time high weekly close, but also a fresh new all-time high monthly close.  The index gained 3.40% in November and has now increased three months in a row, and nine of the last eleven.



The primary trend for the S&P 500 is up, or "bullish".  During primary uptrends, long-term investors are best served including the equity, or stock, asset class in their portfolio's asset allocation and relying mostly on passive investing methodologies.  You have to know when to hold 'em, and know when to fold 'em, in order to invest for success over the full market cycle.  The idea is to hold 'em during the "bullish" portion of the market cycle, and then fold 'em during the "bearish" portion of the market cycle.  It's much easier said than done, since market cycles are nearly impossible to consistently predict. 

However, market cycles can be identified with a bit more consistency, especially when using rules that are void of emotion, speculation, or gut opinion.  There's a myriad of prudent, intelligent, and defensible rules that are out there.  Ironically, which rules a long-term investor chooses isn't as important as an investor's ability to adhere to the rules during the most challenging of market climates.  Maniacal discipline trumps just about everything in the world of investing for success over the long term. 

Looking forward, 2019 marks just the 10th calendar year since 1970 to see the S&P 500 close higher for the months of September, October, and November.  Interestingly, the index's forward returns over a variety of time periods is almost unblemished...there's virtually no red on the table below.  Given the sample size, this obviously is a crime of small numbers and provides no inference (i.e., I can hit 10 free throws in a row, so you might think i'm a good free throw shooter, but I'm not a good free throw shooter).  That said, our confirmation bias enjoys looking at tables that are predominantly white.



So, we're on to December.  December of 2018 was a December to forget - hopefully December of 2019 is actually a December to remember via finishing 2019 with an all-time high monthly close.


Small Caps, Ready to Make Big Moves?

One of the more ominous signs over the last year has been the relative weakness visible in the performance of small market capitalization stocks.  Looking at the chart below, you can see the S&P 600 Small Cap Index (SML) isn't close to breaking out to a new all-time high.  In fact, the index is yet to even breakout decidedly above January of 2018's high at 979.57.  This is analogous to the S&P 500 only trading around ~2,872, and that index is nearly 300 points above ~2,872!



However, SML is starting to show signs of life.  SML gained 2.20% this week, more than double that of the S&P 500.  SML gained 2.44% on Monday alone, and is now in prime position to "breakout" to the upside.  Referencing back to the chart above, over the last two years SML has pivoted to the downside at 979.57, 987.29, and 989.22.  Therefore, with Friday's close at 993.51, we'll get to find out if "this time is different" over the weeks ahead.  Collectively, participants haven't had any eager buying interest at the ~990 price region for all of 2019.  Perhaps that's about to change...

But, what's the point?  Small cap stocks are considered a measure of risk appetite across market participants.  SML's top 10 holdings are companies the large majority of us have never heard of, and they're anything but "blue chips".  These companies' future streams of cash flow (both revenue and expenses), and their future outlook for business, are far more volatile than that of the constituents held within the S&P 500.  Therefore, SML's relative performance is a proxy of risk appetite, or sentiment, across the actions of market participants.  A breakout for SML would help provide more confirmation for the S&P 500's recent breakout and outlook.


Random Happenings - Interest Rates, Gold, and Fed Update

An update to some of the other areas of the investable universe:


Bonds Bounce, But Will It Last?

30-year United States Treasury bonds (USB) are a picture-perfect example of the idea that past resistance can become current support.  Note USB's bounce from the 155.84 price level, a tad above former resistance in the 155.76 prior region (noted by the horizontal line).



However, the overall structure of the above pattern appears as a descending triangle.  Furthermore, if the eagerness to buy/sell USB is influenced by the relative attractiveness of the interest rate USB pays, then we're right back at the same level where participants collectively were eager sellers of USB.  The yield on USB closed Friday at 2.18%, a shade above the 2.17% level that recently saw yields jump to 2.43%. 

If participants, collectively, believe the economy and corporate earnings are going to reignite into the future, then we'd expect them to be eager sellers of USB in the present.  Broadly speaking, the bond market is as unattractive as it's ever been.  Long-term investors are best served looking into the world of alternatives to find actual diversification, or truly uncorrelated investments, that can offer competitive returns over time...not 2.18% for 30 years.


Gold - Idling In Neutral

Gold continues to consolidate following its summertime breakout.  The pattern here appears as a sort of "bullish" flag.  We don't know what the catalyst to a move higher for gold will be, but certain participants believe there's a chance gold is surging to $4,000 in the future (click here).



Fed's On Hold - But "Inflate Or Die" Is The Plan

Participants in the federal funds futures market believe the Federal Reserve is on hold as we head into 2020.  Rate cuts aren't in the forecast until September of 2020 (click here for the link to the CME group):



However, the overriding theme following the Fed's mid-cycle adjustment here in 2019, and their re-establishment of quasi "QE", is that the Fed and all global central banks are prepared to do what they can to "extend the expansion".  The late, great, Richard Russell coined modern-day monetary policy as global central banks' desire to "inflate or die" (i.e., to avoid deflation at all costs), even if it means ascending future inflation.  If that's the case, then it's easy to see where and why there's a gold $4,000 bet that was recently placed...

We hope you all had a wonderful Thanksgiving holiday!


Happy Sunday!

Steve, RIck, and the AlphaCore team

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