Weekly Market Update 12/22/2019Posted Dec 22, 2019
The S&P 500 gained 1.65% this week with Friday's close at 3,221.22. Friday's close is a new all-time high daily and weekly close. The index has now increased four consecutive weeks, and 10 of the last 11 overall. The lone weekly decline since early October was a -0.33% decline over the week ending November 22nd. Relentless.
In last week's Update we pondered whether the S&P 500 would face a "buy the rumor and sell the news" type event this past week, and that most certainly wasn't the case. Once again, the price action this week was as if there's a complete and total lack of selling pressure across the collective behavior of market participants.
From a bigger picture perspective, the S&P 500 has clearly re-established a primary uptrend. It has felt like the index can't continue to ascend for a few weeks now, and the index continues to ascend; this is the epitome of a primary uptrend. This also exemplifies why feelings have no place in any investing decision-making process.
There will be some turbulence over the months ahead, perhaps sooner rather than later as we'll discuss below, but as long as the index can sustain above what used to be resistance (red shaded region on the chart below), which is now a confluence of support given the presence of the 50% and 61.8% Fibonacci retracement levels, we believe more new all-time highs are in the forecast into the first quarter of 2020.
We can also take the subjectivity away from the chart by quantifying the price thrust the past few months, both in its persistence and magnitude. If history is any guide (a huge if), both studies point to the idea of the S&P 500 finally taking a breather over the coming month.
In terms of persistence, S&P 500 has closed higher 10 of the last 11 weeks. Since 1970, this has happened just 13 prior instances, so clearly this sort of persistence is rare (nobody saw this coming 11 weeks ago). Interestingly, the S&P 500 has then struggled the very next week, having declined one week later 8 of the last 10 instances for average returns of -0.56%. The index has also shown weakness over the forward three weeks, having declined 7 of the last 10 instances for average returns of -0.48%. Obviously going 10 of the last 11 is generally subject to some sort of mean reversion, no matter whether it's on the basketball court, the blackjack table, or the price of the S&P 500.
In terms of magnitude, the S&P 500 has gained 12.79% over the last 11 weeks when measuring the return from the low of 11 weeks ago through this week's close. If we call out all instances where the S&P 500 gained 10% or more over a trailing 11-week period (as defined above) and also closed the week at an all-time high, we can see a good bit of red in the forecast. Since 1990, this has occurred 19 prior times, and the S&P 500's forward one-week return has then closed lower 14 out of 19 times for average returns of -0.73%. The index has also closed lower one month (4 weeks) later 8 of the last 9 times for average returns of -3.01%.
Putting it all together, the primary trend has reasserted itself as up, or "bullish", given the advance since October. This is a good thing. However, prices don't move linearly forever. Great returns in the not too distant past generally have to be paid back to some degree in the not too distant future.
We'd encourage our readers to understand any pullback from here is normal, healthy, reasonable, and long overdue. It's not going to be a reason to panic, and probably is not a sign of a major top for the S&P 500. If we're like the pilots of your portfolio, we're letting you know that it's reasonable expect some normal turbulence from here...before we actually have some turbulence.
S&P 500 Primary Trend - Up
Our work continues to label the S&P 500's primary trend as up or "bullish". During uptrends, long-term investors are generally best served including the equity asset class in their portfolio and relying mostly on passive or strategic investing methodologies. The game plan during primary uptrends is to buy 'em and hold 'em, and to be right and sit tight.
The degree of equity allocation, whether 10% or 100%, is a derivative of your individual investor attributes, such as your age, time frame, emotional competence (i.e., your ability to exercise discipline with your portfolio during the most volatile of climates), and the minimum return that's needed to bring your financial goals to life. And as we wrote last week, the primary trend is the most important trend, in our opinion, since it speaks to the directional bias for the S&P 500 over the coming months.
Looking out months allows long-term investors to put the blinders on to the short-term noise the S&P 500 creates over days and weeks. For example, any turbulence in the short term here is expected to be temporary and only interrupt the primary uptrend, it's not expected to end it, since the primary trend is up or "bullish" and we expect higher prices months out from today. Continuing with the flying analogy, while the seat belt light is on for the coming month, we anticipate that the turbulence will subside and that the flight will be back to smooth sailing after the turbulence.
Quantitatively, the S&P 500 is also on pace to deliver a very good omen regarding the sustainability of the primary uptrend. Assuming the Grinch doesn't make an appearance here into month-end, the S&P 500 is on pace to record its fourth consecutive monthly advance of 1% or more. Behaviorally, participants have been eagerly bidding stocks for four months in a row. The rationale behind this behavior can only be explained that participants, collectively, have the expectations for higher prices into the future. And historically speaking, that's almost exclusively what's unfolded.
Since 1970, there have been 16 prior instances where the S&P 500 gained 1% or more over four consecutive calendar months. Of those 16 instances, 15 have a full forward 12 months worth of price action (the most recent instance occurred earlier this year in April of 2019). In those prior 15 instances, the S&P 500's forward 12- month returns have never closed lower. The index closed higher one year later 15 of 15 times for average returns of 15.79%. All 15 instances saw the S&P 500 trade higher by at least 12.53% at some point over the forward 12 months, which would certainly a good omen for continued drawup at some point in 2020.
Trend and momentum in the world of investing is real, and it suggests that "strength begets strength", i.e., rising prices in the present tends to precede more rising prices into the future. So, if selling pressure remains non-existent for the remainder of December, it's likely the S&P 500 will record its 17th instance of four consecutive monthly advances of 1% or more, and historically that's been a good omen for the sustainability of our primary uptrend.
Small Caps Join The Party
One of the more interesting elements of 2019 has been the stubborn refusal of small market capitalization stocks to join the fresh new all-time high party. Small cap stocks, as measured by the S&P 600 Small Cap Index (SML), remain decidedly below their all-time high from 2018, even while their large cap counterparts march on to decisive new all-time highs. This type of non-confirmation has been ominous, and many pundits have written about it being typical late-cycle price action. Well, if the last couple of months are any guide, SML may finally be ready to join the all-time high party. The narrative will then be better late than never.
SML gained 2% this week with Friday's close at 1,022.88. This is the highest weekly close dating back to late summer of 2018, and last year's all-time highs are the only known resistance remaining on the chart. SML has passed the test at the ~990 price region, so it's logical to expect a retest at the ~1,098 level over the months ahead.
From a relative strength perspective, SML has obviously been a laggard. SML has underperformed the S&P 500 mightily over 2019 (and really since the summer of 2018). However, we often see major rotations across securities, sectors, factors, and styles for no rhyme or reason, oftentimes appearing for nothing other than a change in calendar year. SML recently traded down to a 5-year low relative to the S&P 500, underperforming the S&P 500 by more than a whopping -16% over the trailing one year, but it has stabilized the last six months.
In other words, SML is no longer losing to the S&P 500 in terms of performance, at least not over the last 6 months. This is analogous to the bleeding having stopped, and now the wound can heal and make a full recovery. SML relative to the S&P 500 has become so stretched to the downside that it could be a major area of outperformance in 2020 (assuming the market climate remains favorable). This would be welcomed, as the party for the S&P 500 is even better when SML is also in attendance.
Secure Act Is Here - What Does It Mean For Me?
Congress passed the "Secure Act" this week, which is being referred to as the "biggest retirement legislation in a decade". For some, it's very influential. For others, it's much ado about nothing.
Barron's wrote an article with a good overview: Click here to read it.
You can also get a great summary from the Ways and Means committee: Click here.
We hope you and your family have a wonderful holiday season!
Steve, Rick, and the AlphaCore team
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