Happy Easter and Happy Passover!
The S&P 500 was essentially unchanged this week with Friday's close at 4,105.02, a decline of -0.10% for the week.
The index traded up to 4,133.13 on Tuesday, our high for the week, only to then trade down to our low of the week at 4,069.84 on Thursday, a decline of -1.53%. Strength to finish Thursday's session then left the index essentially right back where it started the week, marking the last four trading days a whole lot of nothing.
A whole lot of nothing has been most of what we've seen from the S&P 500 over the last two years.
Along the way there have been spectacular starts and stops, the strongest of rallies and sharpest of selloffs, but the S&P 500 has ultimately been stuck for more than 500 trading days now. Consider that the index closed Friday, April 9, 2021 at 4,128.80, and here we are two years later and the S&P 500 is basically in the same exact spot.
The price action since mid-March has been beyond surprising to us.
Even though we believe that the price of the S&P 500 will trade beyond the limits of imagination, it doesn't make it any less surprising when it actually unfolds. When the S&P 500 traded down to 3,808.86 on Monday, March 13 on the heels of the beginning of a banking crisis, the last thing we imagined is that it would be mostly off to the races to the upside from there.
There's been panic buying across a handful of technology stocks, something we referred to as "stupid" in prior Updates, and given market capitalization weightings it's played a key role in why the S&P 500's price action since March is best labeled as "resilient". Referencing the chart above, the retest of the ~4,100-4,200 region is now underway. The bulls have the ball, the bears are on the ropes, it's first and goal from the 5-yard line. Whether the S&P 500 can score (i.e., passes or fails the retest) is up in the air at the moment.
From a fundamental perspective, if we had to guess the narrative as to what's changed fundamentally since the banking crisis began and how it could possibly be a good thing for risk assets, we'd guess that it's as if market participants believe the banking crisis and the tightening credit conditions that will ensue (click here) are a remedy to the four-headed monster (inflation, Fed policy, rising interest rates and a strong U.S. dollar) that's kept a lid on the S&P 500 the last one year. The flow chart reads something like this:
Relatively Weak Economy ---> Add Tighter Credit Conditions ---> Even Weaker Economy To Follow ---> Interest Rates Plunge In Advance ---> More Disinflation To Come ---> This Guarantees The Fed Pause ---> The U.S. Dollar Will Weaken---> The Fed Pivot
The sum of the flow chart above equals ascending optimism, forward-looking, given the S&P 500's advance and it's caused some rare price action across the sectors within the S&P 500. Over the last four weeks, or just a few short days after the banking crisis kicked off, the S&P 500 Communication Services sector is higher by a gigantic 14.81% and the S&P 500 Technology sector (SPT) is higher by a 10.21%. Collectively, these two sectors make up ~40% of the S&P 500 so they've accounted for the majority of the S&P 500's trailing four-week, 6.30% advance.
Interestingly, all of the other top performing sectors over that same time span are the "defensive" sectors of the market. The S&P 500 Utilities (SPU) sector is higher by 9.08% the last four weeks and Health Care (SPHC) is higher by 7.86%, So, not only is the market being driven higher by a handful of high-flying technology stocks, it's also being driven by strong demand for "defensive" areas of the market as well.
Dating back to 1997, there are effectively only four prior calendar weeks that saw SPT, SPU and SPHC finish with trailing four-week returns of 7.5% or more. Calendar weeks ending:
We also have a tale of two stories unfolding between the S&P 500 (SPX) and its equal weight variant, the S&P 500 Equal Weight Index (SPXEW).
SPXEW has lagged SPX by -6.43% the last twelve weeks. That's incredibly rare, essentially something we've only seen previously in October of 2008 and March of 2020. It did persist in the fourth quarter of 2008 and throughout most of 2020, but this sort of divergence is not exactly a healthy sign of market "breadth". The generals are advancing, but without the depth of the troops...
On the bond side of the aisle, bonds continue to remain well bid and the shouting match between stocks and bonds is reaching even higher decibels. The yield on a 10-year Treasury bond closed Friday at 3.30%, its lowest weekly close since September of 2022. The iShares 7-10 Year Treasury Bond ETF (IEF), iShares Core U.S. Aggregate Bond ETF (AGG) and iShares 20+ Year Treasury Bond ETF (TLT) all gained more than 1% this week. Duration risk was a costly mistake in 2022 - it's been paying interest here in 2023, at least for now. Pun intended.
As for the week ahead, first we'll get to see the market's reaction to Friday's jobs report (click here). Next we'll get to see how the shouting match between stocks and bonds unfolds. There are a gigantic amount of market-moving catalysts next week, from Fed speakers to inflation data to big four economic reports via retail sales and industrial production. The price action in April has the potential to be incredibly pivotal in determining "who's right?" in the ongoing debate between stocks and bonds.
At the moment, bonds continue to suggest a "hard landing", economically speaking, is on deck. Stocks continue to suggest "everything will be fine" and "relax".
The former is always more believable than the latter because it deals with what's known and knowable. The latter relies on the faith that "everything will be fine", even if there is no visibility into how everything can be fine.
One camp is right, the other will ultimately be proven wrong, but it's impossible to know who's who at the moment. Data this week and the price action throughout April will shape the narrative forward-looking. Cooler than expected inflation data this week, maybe then paired with stronger than expected retail sales to finish the week, and the odds will move to the stock side of the aisle. Alternatively, hotter than expected inflation data, and perhaps weaker than expected retail sales, and we expect the word "stagflation" to gain traction. If there's a sort of split, then perhaps the S&P 500 remains rangebound.
S&P 500 Primary Trend - Neutral
The S&P 500 finished the month of March last week at 4,109.31, a gain of 3.51%. At March's month end, our work labeled the primary trend as "neutral", or trendless.
However, much like the S&P 500 has first and goal from the 5-yard line on the daily chart, the index also has first and goal from the 5-yard line on the monthly chart too.
This is why the price action in April has the opportunity to be so pivotal, because the S&P 500 is sitting face-to-face with "resistance".
Past "resistance" at and around the ~4,100 region is a derivative of market participants, collectively, being more eager to sell than buy their holdings of stocks within the S&P 500 and exchange-traded derivatives tied to the S&P 500. The combination of eager sellers and hesitant buyers then moves prices to the south. Therefore, if the S&P 500 can break out and sustain above past "resistance" at the ~4,100 level then we can say that this time was different.
Importantly, what we're saying is different is the collective actions and behaviors of market participants. It's different this time in the sense that the only way the price of the S&P 500 can break out and sustain above "resistance" is if the demand that was once missing at said level of "resistance" is now present at this level of "resistance". And with the actions of participants in the present being a derivative of their expectations into the future, newfound demand at prior levels of "resistance" is how upside breakouts and primary uptrends re-establish themselves. Put simply, sentiment moving from "I'm not paying ~4,100 for that" to "I'll pay ~4,100 for that" is how the S&P 500 breaks out to the upside. That's how the primary trend flips from "neutral" back to "drive".
There were a few quantitative studies that fired at the end of March that we found interesting.
While the studies below are considered a "crime of small numbers" (that is they're too rare to have any true significance), the price action-based criteria draws parallels between the present day behavior of market participants and all instances in the past where they were behaving the exact same way.
One study that we'll share identifies all calendar months for the S&P 500 that ended with the index having gained 10% or more over the trailing 6-month period while also having lost -5% or more over the trailing 12-month period. As of March's monthly close the S&P 500 had gained 14.59% over the trailing 6-month period, but was also down -9.30% the trailing 12-month period, so March fits the bill.
Since 1950 there are only five prior calendar months that match, but they all have one thing in common: the S&P 500 never looked back.
As we wrote earlier, this is only five prior instances over 70-plus years so it guarantees absolutely nothing. That said, this study can at least serve to stem an overly "bearish" bias forward-looking. In other words, if you think the rally over the last six months is a fantastic reason to liquidate your stock holdings then we'd encourage you to think again. Stocks may very well be destined to fail forward- looking, anything is always possible, but it certainly won't be attributed to the rally over the last six months being a harbinger of doom. Yes, this can continue. Will it continue is another story, but unfortunately nobody knows how that story is going to end!