Weekly Market Update 12/15/2019Posted Dec 15, 2019
The S&P 500 gained 0.73% this week with Friday's close at 3,168.80. Friday's close is a new all-time high daily and weekly close. In our previous Update, we wrote that last week's upside reversal reeked of "accumulation", and that it was suggestive of further drawup over this past week. The S&P 500 traded rather quietly through Wednesday, but then spiked higher on Thursday, climbing all the way up to 3,176.28. The catalyst seemed to be the following tweet from President Trump:
The index has now increased 9 of the last 10 weeks, and is higher by 7.34% over the trailing 10-week period. The persistent upside momentum the last two and half months has been quite impressive. As we've written previously, it's as if there's a complete and total lack of selling pressure across the collective behavior of market participants. Collectively, if participants aren't eager to sell their underlying securities, then it only takes the slightest of buying pressure to drive the S&P 500 to the upside. This is often referred to as a "melt up" and we anticipate that you'll start reading and hearing that phrase more and more over the days ahead (assuming the index continues to ascend).
While a normal, healthy pullback is overdue, it remains elusive and impossible to predict. Nobody can circle the date. There's no known resistance on the charts, so there's no telling just how high the S&P 500 can climb here in the short term. From a momentum perspective, the S&P 500's weekly Relative Strength Index (RSI) isn't even meaningfully "overbought", especially when compared to January of 2018.
For the week ahead, the index does face the possibility suggested by the old phrase "buy the rumor and sell the news". The news flow on Friday was that a "very large Phase One Deal" with China was done. The S&P 500 then found a bit of a reversal on Friday, trading as high as 3,182.68, but finishing the session -0.44% lower. Generally speaking, stocks often find selling pressure when the news flow in the present can't possibly be better in the short term. Therefore, it will be interesting to see how participants react on Monday, and whether or not they're finally ready to take a breather and consolidate recent gains.
S&P 500 Primary Trend - Up
We continue to label the S&P 500's primary trend as up, or "bullish". During uptrends, long-term investors are best served overweighting equities in their portfolio's asset allocation and relying mostly on passive investment methodologies. The degree of overweight is a derivative of someone's individual investor attributes, such as their age, time frame, and the minimum annualized return needed to achieve their financial goals.
Uptrends are defined and identifiable through a series of higher highs, higher lows, and higher closes for the price of the S&P 500 over any measurable time period (from minutes to hours to weeks to months). With the S&P 500 at all-time highs, an uptrend is evident. Primary uptrends are the sunniest of market skies, and where the large majority of investors generate returns that are equal to, or greater than, the returns they need to achieve their financial goals in accordance with their financial plan. It's imperative we all "make hay while the sun shines".
To be clear, the primary trend seeks to deal in months, and is not concerned with normal, healthy volatility over days and/or weeks. In other words, the overdue normal pullback we discussed in the prior section is probably of no significance to the primary trend for the S&P 500. And as long-term investors, it's most imperative we center our ongoing portfolio management process on the forest, and not the trees.
Seeing the bigger picture involves a thorough understanding of our individual investor attributes, and a process designed to label and/or identify the primary trends across all asset classes, not only the S&P 500. This can help long-term investors allocate their portfolios to not only produce the returns they need to meet their financial objectives, but also to minimize what's lost during primary downtrends. Zooming in on the primary trend for the S&P 500 is generally the most excitable, since it's the stocks asset class that typically offers the greatest of returns during primary uptrends. Thus, determining an appropriate asset allocation often begins by determining what portion of someone's portfolio should be allocated toward stocks, and that's obviously influenced by whether stocks are in a primary uptrend, or a primary downtrend.
It's important to remember that the sun won't shine forever in the world of investing, and there's no one set asset allocation in the present that can guarantee someone the returns they need over the long term. The forward-looking risk and return profiles across all asset classes, as well as our individual attributes, are forever changing. They're dynamic, not static. Therefore, it's imperative long-term investors manage their asset allocation in a dynamic way, or in a manner that seeks to build portfolios not only based on their individual investor attributes, but also based on the opportunities present across asset classes given their forward-looking risk and return profiles.
While we're confident in labeling the S&P 500's primary trend of today, we're less confident in labeling the S&P 500's primary trend of tomorrow, especially as the time frame expands in defining tomorrow. It's through these lenses where we can't find an intelligent thought or rationale behind a long-term investor purposefully planning to allocate 60% of their portfolio to stocks, and 40% of their portfolio to bonds, and keep it that way over the full market cycle. Barron's published an article that tends to agree (click here).
So, as we head toward the finish line of 2019, it's imperative that long-term investors understand that "this too shall pass" (unfortunately!). There's no better time than now, or during primary uptrends, for long-term investors to ensure they have an intelligent, prudent, and defensible risk management plan for primary downtrends. There's no better time than now to make sure your portfolio's asset allocation is truly durable, and not completely reliant on the stock market's next decade looking like the last decade, or the bond market's house of cards providing "diversification".
As they say in sports, it's generally defense that wins championships, and defense in the world of investing means having a portfolio management process in the present that won't ask you to lose your shirt at some point into the future. We've all built a great lead over the last ten years, and there's no better time than now to make sure our portfolios are built to keep it the next ten years.
Semiconductors Explode, Financials Set New ATH
The Philadelphia Semiconductor Index (SOX) gained 4.17% this week with Friday's close at 1,796.04. Friday's close is a fresh new all-time high weekly close for the SOX, and the index has gained 14.08% over the last 10 weeks, nearly twice the advance of the S&P 500 over the same time period. The SOX have now gained an astounding 68.42% since last December's low at 1,066.39...even with a near -20% correction along the way earlier this year.
The importance here lies in the idea that the price action in the SOX is both a measure of risk appetite across the collective actions of market participants, as well as a proxy for the status of the ongoing trade war with China. Therefore, booming SOX in the present is a sign of positive expectations forward-looking on both fronts.
In other words, participants bidding the constituents of the SOX to the north suggests healthy risk appetite in the present, which is a derivative of optimistic forward-looking expectations into 2020 (i.e., a trade deal will get done, Phase 2 included). While high- flying SOX will always make the hair on our arms stand up (i.e., high-flying SOX was a part of the tech bubble in 1999/2000), for now it's a sign of confirmation in labeling the primary trend for the S&P 500 as up, or "bullish". It is a slight sign of euphoria too, so we do have to keep that in mind.
We wrote a section last week titled "S&P 500 - Financial Sector is Close". Well, we're happy to report the financial sector (SPF) set a fresh, new all-time high this week at 512.24, eclipsing the prior all-time high from the summer of 2007 at 511.02. SPF didn't set a new all-time high weekly close, unfortunately. This week's close at 507.63 fell 1.24 points short of eclipsing the all-time high weekly close at 508.86. SPF is the third largest sector within the S&P 500, so we'd obviously like to see it breakout to the north to help provide further confirmation that the S&P 500 as a whole is onward and upward (you can never have enough confirmation).
As always, another exciting week awaits as we wind down 2019. Year-end is a great time to reflect, and if part of your reflection calls for a deep dive into your portfolio, or a "where are we now?", check in with your financial plan...that's what we're here for.
Steve, Rick, and the AlphaCore team
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