Weekly Market Update 12/29/2019Posted Dec 29, 2019
The S&P 500 gained 0.58% this week with Friday's close at 3,240.02. Friday's close is yet another fresh all-time high weekly close. The index has now closed 8 of the last 9 weeks at new all-time highs, and has increased 11 of the last 12 weeks. Relentless remains the first word that comes to mind to describe what has transpired the last three months.
In our Weekly Market Update from December 15th, we wrote that:
"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)."
With the luxury of hindsight, the index has continued to ascend, even in spite of the short-term historical weakness associated with prior instances of similar linear advances that we shared last week. And the public's interest in the words "melt up" has definitely increased...
The narrative remains unchanged at this point, and it's best described as a case of the good and the bad. The good is that the primary trend has re-asserted itself as up, and the index is driving 70 mph in the left lane without any traffic in sight. But the bad is that prices don't move linearly forever. In other words, the last 12 weeks solidify the primary trend as up, or "bullish", no matter how someone chooses to define it, and no matter whether someone's time frame is centered on daily charts or monthly charts. But while a pullback has been elusive, and the advance has been relentless, that's all behind us.
Moving forward, a healthy, normal, 2-3% pullback is inevitable, and that's the best- case scenario. The worst-case scenario is unhealthy, a more violent pullback in the 5%-10% range. The former is always more probable than the latter, but the further we climb and the more "overbought" the index becomes, the more at risk we are for something unhealthy happening. Subjectively, as long as we sustain above the red shaded region on the chart below, the uptrend is clearly intact and we'll view any weakness as temporary.
Objectively, we're in pretty rare air up here. The S&P 500 has increased 11 of the last 12 weeks, and that's only happened two other times since 1980 (weeks ending 02/13/2004 and 12/13/1985). February of 2004 was *after* a nasty "bear market", but December of 1985 was also at fresh all-time highs.
The index has also closed 8 of the last 9 weeks at fresh all-time highs. That has only happened four other times since 1980 (weeks ending 01/19/2018, 11/3/2017, 04/03/1998, and 06/20/1997).
Unprecedented price action often begets more unprecedented price action, but the rarer things are from here forward (which can only unfold with a continued advance), the scarier the dose of reality will likely be in the early stages of 2020. Take a breather, S&P 500...take a breather.
S&P 500 Primary Trend - Up
The S&P 500's primary trend is up, or "bullish". During primary uptrends, most long-term investors are best served including an equity overweight across their portfolio's asset allocation, no matter whether it's in absolute or relative terms. Equity investing during primary uptrends leads to capital appreciation (i.e., rising account values). And capital appreciation is then a driver of long-term investors generating the returns they need to achieve their stated financial objectives. There's no known resistance left on the charts, and unlike the daily and weekly charts, the monthly chart is not "overbought" (yet).
Moving forward, it's imperative long-term investors use both their individual investor attributes and the prevailing trends across asset classes to build their portfolio's asset allocation. The S&P 500 Total Return Index is on pace to generate returns of close to 30% here in 2019. The large majority of long-term investors have seen meaningful returns directly alongside the index. Therefore, from an individual investor attribute and financial planning perspective, it's prudent to analyze how meaningful capital appreciation in the present has influenced the minimum rate of return that's required to fund your financial goals of the future.
This can lead to long-term investors re-balancing their portfolio by trimming, or reducing, the percentage of their portfolio allocated toward equities. However, that's where the prevailing trends across asset classes come into play. In other words, any decision to sell stocks requires there to be something compelling to buy with the cash proceeds. If there's nothing compelling to buy, it can influence or tilt a long-term investor's decision to not sell stocks in the present, no matter their individual investor attributes and/or financial planning needs.
At the moment, there's almost nothing compelling out there in the traditional investable universe. Cash yields, even in an online savings account, are below 2%. CDs and fixed annuities, in aggregate, offer yields below 3%. A 10-year United States Treasury bond yields less than 2%. A 30-year United States Treasury bond yields slightly more than 2.3%. Commodities, as a category, have been laggards for years. Therefore, if we break down the broad traditional asset class universe into cash & equivalents, bonds, stocks, and commodities, then stocks are without question the cleanest shirt in a basket of dirty laundry. This may lead many to ponder whether they should keep all their eggs in the stocks basket, and just watch it closely. Even CNBC anchor Becky Quick has taken the bait (click here).
While having all of your eggs in one basket and watching that basket closely can work (in a way, it is the basis for tactical asset allocation), making binary bets on one asset class or investment strategy isn't the best plan for the long term. Now perhaps more than ever, there's a need for investors to be educated, aware, and plugged into the world of alternative investments and/or uncorrelated investments and investment strategies. Investors have to build portfolios and investment strategy in the present to get the job done (i.e., generate the returns they need over the full market cycle) into an uncertain and unknowable future.
If your portfolio only has a few traditional tools at its disposal, it may not have the equipment necessary to thrive during a more difficult job. Alternatively, if your portfolio has everything it needs (a variety of tools that can be used for a variety of uncertain jobs), it's then prepared to show durability when the market climate (i.e., the job) is not as favorable. In other words, the forward-looking return streams of many alternative investments, whether liquid or illiquid, private or public, is presently far more competitive than that of cash & equivalents, bonds, and commodities. That means that these are tools you want to know how to use to make sure your portfolio can keep getting the job done as we head into 2020 and beyond. Yes, long-term investors can actually find a compelling case of something to buy in the world of alternative investments in 2020.
Technology Sector Is On Fire
Growing up in the mid '90s, I was a huge fan of a video game called "NBA Jam". My mother would bring me to the bowling alley and while she'd bowl, and I would play NBA Jam for hours. This was back when four quarters actually got you something. One of the more fun aspects of the game was that if a player hit a few shots in a row the game would say "he's on fire!" and the ball would then be covered in flames and the player is basically guaranteed to hit a few more shots. What does this have to do with the technology sector? Well, the technology sector is on fire!
The Nasdaq Composite (COMPQ) just went on an 11-day winning streak through Thursday's close. The index declined a measly -0.17% on Friday to keep the streak from reaching 12.
This marks the 12th instance of COMPQ recording an 11-day winning streak since 1980. In the 11 prior instances, COMPQ has actually never closed lower 20 trading days later. Many of these instances are not apples to apples to the present situation (i.e., they occurred a long way away from all-time highs), but the next month has been overwhelmingly favorable regardless. The average forward-looking 20-day return has recorded at 4.08%.
As a reminder, COMPQ is essentially a proxy for the largest sector within the S&P 500. Since COMPQ is on fire, it's no surprise that the S&P 500's on fire, too. When your best player can't miss from the floor, your team's probably going to win the game.
Gold gained 2.51% this week with Friday's close at $1,518.10. Gold has been mostly dormant after a summertime surge, so this week's upside caught our attention. While gold has been a horrible hedge against inflation over the long term, especially in relative terms, it's been a stellar hedge against inflation while inflation is actually ascending (think 1970s). In the Federal Reserve Chairman's December press conference (transcript here), he said the word inflation a whopping 79 times. He actually went as far as saying:
"And in order to move rates up, I would want to see inflation that's persistent and that's significant-a significant move-up in inflation that's also persistent before raising rates to address inflation concerns. That's my view."
So, while we never truly know why the price of an asset moves for any particular reason, we can't help but wonder if gold is being accumulated alongside ascending inflation expectations across market participants...
The chart pattern formation for gold is that of a "bull flag", and while chart patterns are subjective, and lack predictive qualities, they certainly can become self-fulfilling. Gold's weekly close leaves its 2019 high weekly close in sight, and we wouldn't be surprised to see the metal run toward the ~$1,540 price level in early January.
While gold's not necessarily an alternative investment, it is something that will march to its own beat, something that is often uncorrelated and can generate positive returns no matter what's happening in both the stock and bond asset classes. Therefore, it's something we believe all long-term investors should watch carefully and evaluate for portfolio inclusion as we head into 2020, especially if global central banks continue to pursue "inflate or die" monetary policy actions.
Happy Sunday! We hope you all have a wonderful turn of the year!
Steve, Rick, and the AlphaCore team
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