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Five For Five, The S&P 500 Records A 5-Month Winning Streak

The S&P 500 gained 0.39% this week with Thursday's close at 5,254.35. Thursday's close is a new all-time high daily, weekly and monthly close.

The index traded as low as 5,203.42 on Tuesday and as high as 5,264.85 on Thursday, setting a weekly high/low range of just 1.18%. That's the narrowest and quietest trading week of 2024 thus far.

The lack of volatility this week was an encouraging sign that market participants are discounting the future accurately. We saw GDP data support the idea that the economy is healthy (click here), inflation data came in as expected (click here), and Fed Chair Powell didn't throw any curveballs in his speech on Friday (click here). Fundamental data like this helps provide support to the S&P 500's rally since last November, meaning the data coming forward today is not running counter to the collective expectations of market participants, i.e., there isn't yet anything to "correct".

Fundamentally, the most likely scenario through the remainder of 2024 remains a robust economy, stable labor market, continued disinflation and a more accommodative Fed. Combined, those ingredients make for strong collective earnings for the S&P 500, and that's our best guess as to why the index is trading at new all-time highs week after week.

Technically, the S&P 500 remains "overbought" and few would deny that the healthiest course for the index is to take a break and "cool down" for a month or so.

Bespoke shared a great chart showing the longest streaks of consecutive daily closes in "overbought" territory for the S&P 500. The current streak of 50 daily "overbought" closes (with "overbought" defined as a daily close at least one standard deviation above its 50-day simple moving average) is the second highest streak since February 2018's streak of 50, and before that April 1998. It goes without saying, but it's been a rare heater for the S&P 500.

The S&P 500 has climbed more than 1,000 points from October 2023's low to our current all-time high set on Thursday. There hasn't been a hint of selling pressure along the way, not even a -3% pullback at any point since October 2023's bottom. We keep moving the shaded red circle on the chart below up and to the right. Any pullback now would seem to target first the ~5,000 region.

Should there actually be a material catalyst that runs counter to the collective expectations of market participants, such as scorching hot inflation data or the Fed taking summer cut(s) off the table, then we can easily see the index trading down toward the ~4,800 level. That would mark a decline of roughly -9% from Thursday's close, and it will absolutely feel like the world is ending, but it will present a fantastic buying opportunity in our opinion.

There were more good developments on the market-breadth front this week. In last week's Update we wrote:

"Putting it all together, new leadership is emerging, breadth is improving and more and more stocks are joining the party. This is a good thing regarding the intermediate-term outlook, something we've always said appears quite favorable."

More stocks joined the party this week too.

The S&P 500 Equal Weight Index gained 1.64% this week, more than four times that of the traditional market-capitalization weighted index S&P 500. Small-cap stocks, as measured by the S&P 600 Small Cap Index (SML), gained 2.52%. The technology sector was actually down -0.75% this week and the consumer discretionary sector was down -0.24%, but everything else was in the green and that's indicative of what's happening under the surface right now - the rally is broadening. We're particularly fond of small-cap stocks going forward, especially when factoring in valuations where the S&P 600 Value Index is as "cheap" as it gets in this market.

As for the week ahead, we're on to April and we kick off the month with a week absolutely loaded with market-moving economic data and Fedspeak. April has been one of the top performing months for the index, having a win-loss record of 52-22 since 1950 for average returns of 1.45%. Of late, the month of April has only closed lower once in the last 10 years, and only six times since the year 2000. Given the tailwind gusting behind the S&P 500's back as well as favorable April seasonality, perhaps the index can venture into the 5,300s this week.

S&P 500 Primary Trend - Up

The S&P 500 finished the month on Thursday. The index gained 3.10% in March, with March's monthly close coming in at 5,264.35. March's monthly close is a new all-time high monthly close and also marks a five-month winning streak for the S&P 500. Our work, and virtually everyone who is analyzing the S&P 500 through technical lenses, will label the primary trend as up, or "bullish".

During uptrends, long-term investors are best served investing in the most traditional sense of the word - sticking to their target equity allocation and relying on mostly passive equity investing strategies.

Primary uptrends are a time to "be right and sit tight" and watch the value of your investment accounts take flight. We're cruising at 30,000 feet at the moment, and while some turbulence is expected it's not going to prevent the index from landing at fresh new all-time highs in the back half of 2024, at least not in our view.

In our view, we're still in the early stages of this primary uptrend, but the S&P 500 did just record a five-month winning streak. A study of history suggests that "strength begets strength", which is partly how/why the S&P 500 is a trending mechanism. The collective actions of participants in the present are a reflection of their expectations into the future, and they've been buying 'em like mad for five straight months now. The takeaway is participants, collectively, believe in the idea of higher stock prices into the future. If they didn't, they wouldn't be buying 'em.

March marks the 30th five-month winning streak for the S&P 500 since 1950. The S&P 500's forward returns following five-month winning streaks are decidedly favorable across most time periods. The S&P 500's average forward 12-month return after a five-month winning streak is 12.55% and the index has closed higher 26 of 28 samples, or ~93%. The 29th five-month winning streak will record its 12-month returns at the end of July 2024, and that's likely to go in the books as a winner too.

If we dive deeper into the universe of five-month winning streaks, we can filter the table above to extract only those instances that saw the S&P 500 record a five-month winning streak and close at a new all-time high monthly close. The S&P 500 has never closed lower eight months later, and has only closed lower 10, 11 and 12 months later exactly one time - the most recent sample from June 2021.

If we take a different approach and instead prioritize the strength of this five-month winning streak by filtering the universe of five-month winning streaks to includes those that gained 20% or more over the five-month period, then we're left with only 10 instances since 1950. However, all 10 of these instances saw the S&P 500 close higher 9, 10, 11 and 12 months out.

This runs counter to the way our investing brains are wired, where we tend to believe incredibly strong returns in the present can't possibly continue in the future, and we want to "take the money and run!". But, as history would suggest, more often than not incredibly strong returns in the present are a precursor to more positive returns into the future. Why? Because "strength begets strength".

Now, to be clear, the tables above don't guarantee us positive returns forward-looking (unfortunately!). Investing just isn't that easy. But, that doesn't make them useless!

Knowing market history can help prevent investors from acting upon biases, such as the current general retail fear and uncertainty and skepticism that exists regarding where the S&P 500 is headed next.

Someone out there is going to "take the money and run" here in April. Why? Because they think "this can't continue!" given both the tremendous gains they've experienced the past five months and whatever fear they have about the future, perhaps fears surrounding the Fed, inflation or the election.

But if they read this Update and saw these tables perhaps then they'd leave the money to run, because history suggests there is a great chance we're going to run to the north over the next 6-12 months. History reinforces discipline, and it's discipline for the win when it comes to long-term investing.

Happy Sunday!

Steve & Rick

This material is being provided for client and prospective client informational purposes only. This commentary represents the current market views of the author, and Nerad + Deppe Wealth Management (NDWM, LLC) in general, and there is no guarantee that any forecasts made will come to pass. Due to various risks and uncertainties, actual events, results or performance may differ materially from those reflected or contemplated in any forward-looking statements. Neither the information nor the opinions expressed herein constitutes an offer or solicitation to buy or sell any specific security, or to make any investment decisions. The opinions are based on market conditions as of the date of publication and are subject to change. All data is sourced to stooq.com and stockcharts.com. No obligation is undertaken to update any information, data or material contained herein. Past performance is not indicative of future results. Any specific security or strategy is subject to a unique due diligence process, and not all diligence is executed in the same manner. All investments are subject to a degree of risk, and alternative investments and strategies are subject to a set of unique risks. No level of due diligence mitigates all risk, and does not eliminate market risk, failure, default, or fraud. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable, or will equal the investment performance of the securities discussed herein. The commentary may utilize index returns, and you cannot invest directly into an index without incurring fees and expenses of investment in a security or other instrument. In addition, performance does not account other factors that would impact actual trading, including but not limited to account fees, custody, and advisory or management fees, as applicable. All of these fees and expenses would reduce the rate of return on investment. The content may include links to third party sites that are not affiliated with NDWM, LLC. While we believe the materials to be reliable, we have not independently verified the accuracy of the contents of the website, and therefore can't attest to the accuracy of any data, statements, or opinions.

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