The S&P 500 gained 1.73% this week with Friday's close at 3,271.12.
The index traded narrowly for most of the week before surging into the close on Friday, jolted by strong price action in the largest of market capitalization stocks following their earnings reports (more below). Friday's close is the highest weekly close since late February and now moves the S&P 500 into positive territory for calendar year 2020.
However, this week recorded as an "inside week", that is a calendar week with a lower high and higher low than the prior trading week. This week's upside leaves the S&P 500 face-to-face with the "resistance" we discussed in last week's Update at the ~3,270 price region. We've used the football analogy a lot lately, and the S&P 500 is once again in position to break out to the upside. It's now 3rd-and-goal from the 1-inch yard line.
It feels like a touchdown is all but guaranteed, but nothing is ever certain when forecasting the price action of the S&P 500 (and football...hello a certain Russell Wilson interception). The chart below is the price of the S&P 500 inverted. It looks like a retest of our all-time highs is the logical next destination. That's where things will get far more interesting.
In last week's Update we wrote about the Nasdaq Composite (COMPQ) closing right on support via its 20-day simple moving average (20MA). We wrote that "The 20MA has marked the end of pullbacks for COMPQ since March (yellow highlights below)", and that appears to be the case once again. COMPQ gained 3.69% this week, and while Friday's close is not a new all-time high for COMPQ, and COMPQ also recorded an "inside week", Friday's close is at least a new all-time high weekly close.
The big story for COMPQ and the S&P 500 this week was the market's favorable reaction to the earnings beats of the giants, specifically Apple (AAPL), Amazon (AMZN), and Facebook (FB).
- AAPL gained 10.47% on Friday
- AMZN gained 3.70% on Friday
- FB gained 8.17% on Friday
Collectively, these three stocks account for roughly 25% of COMPQ and 13% of the S&P 500. They carried the load on Friday and put the market on their backs. COMPQ gained more than 1% on Friday and it was entirely attributable to the price action in these three stocks, as COMPQ's breadth was decidedly negative (i.e., there were a lot more stocks declining on the session than increasing on the session). This is very, very rare; we haven't seen a trading day like this since the year 2000, and the degree of COMPQ's bad breadth on Friday was actually unprecedented.
There are now only 17 trading days since 1978 where COMPQ gained 1% or more in a trading session with negative breadth, with Friday being number 17 and the first since 03/08/2000.
In the prior 16 sessions, the lowest breadth reading was -720 from 12/15/1999. Friday came in at -1,088 (meaning -1,088 more stocks declined in price than advanced in price on Friday), and yet COMPQ still gained 1.49% on the session. The market has been totally bifurcated since topping in February, and Friday's bifurcation is a perfect example of what the market has become - the haves vs the have-nots, with the haves having a much greater allocation.
COMPQ's forward performance following days like Friday has been skewed negatively over the short term (4-5 days) and extremely volatile over the forward 1 month with maximum forward 20-day drawups and drawdowns recording in the +6% and -6% range.
So, COMPQ and the S&P 500 remain in position to score as we enter the month of August. The question is whether the bears will then have a counter, perhaps taking the subsequent kickoff back to the house for a touchdown of their own, or if the indices will accelerate to the upside. Broadly speaking, the S&P 500 has been mostly consolidating for two months now (we're only ~1.3% above June's closing high at 3,232.39). We're admittedly in the dark about what happens from here over the short term, but our work is leading us to believe a big move is around the corner.
S&P 500 Primary Trend - Up...But Skepticism Is Warranted
The S&P 500 closed the month of July on Friday. The index gained 5.51% for the month and finished at a new all-time high monthly close. Interestingly, the S&P 500's high for the month of July was -3.35% below the index's anytime all-time high. We've never seen an all-time high monthly close paired with a calendar month that didn't even trade within -3% of our anytime all-time high. More signs of just how rare, and weird, the price action in 2020 has been thus far.
Broadly speaking, the primary trend for the S&P 500 is now labeled as as up, or "bullish".
During uptrends long-term investors are best served investing in the more traditional sense of the word, that is implementing and maintaining an equity overweight across their portfolios' asset allocation and relying mostly on passive investing methodologies.
The degree of equity overweight is obviously a derivative of both individual investor attributes and the relative momentum and trend relationships across asset classes. It isn't until the primary trend for the S&P 500 can be labeled as down, or "bearish", that long-term investors are best served investing far more defensively with a greater emphasis on active investing methodologies. With the S&P 500 on a four-month winning streak, and closing the month at a new all-time high, we're certainly not there yet, but a "double top" remains in the deck of cards if August is a reversal month.
As is often the case, we finished the month of July with mixed evidence about what lies ahead. In other words, there's a compelling case that we're about to find a reversal to the south, even if we trade up to the ~3,400 mark during the front half of August, and a compelling case to be to made that no matter whether August is a reversal month or not, the S&P 500 is onward and upward from here over the forward one year. Let's explore the evidence.
Warning Signs For August
The S&P 500 just finished the month of July by gaining more than 5% and finishing the month at a new all-time high. Since 1970, there are 32 calendar months that match. What stands out to us is that the S&P 500 has declined the very next month each of the last 6 times this has occurred, extending back to the summer of 1999. The index has declined more than -3% in five of the last six instances, and the index saw -10% of its value evaporate in days the last time this occurred (February of 2018). In aggregate, this isn't overly worrisome, but the recent trend is a bit worrisome for August.
The great Wayne Whaley also shared an interesting tidbit is his weekly commentary (www.witterlester.com to sign up. No, we don't get anything from it). Wayne noted that if the S&P 500's price-only return was higher from the end of April through the end of July (i.e., entering the month of August with positive trailing three-month returns), the month of August was then higher 18 times and lower 25 times for average returns of -0.80%.
Looking beyond the month of August, July flags yet another quantitative setup that suggests the S&P 500 will trend higher over the forward one year.
You may recall the price thrust studies we shared at the end of May (2-month & 10% price thrust) and June (3- month & 15% price thrust). If we extend it even further now, we can also zoom in on a 4-month and 20% price thrust.
In monthly closing prices, the S&P 500 is higher by 26.56% the last four months. Since 1950, this marks the 9th time the index has gained 20% or more over a 4-month period. In the 8 prior instances the S&P 500 closed higher 100% of the time 6 and 12 months later for average returns of 12.28% and 17.80% respectively.
They say that the market will tell you everything you need to know to make a prudent, intelligent, and defensible decision with your portfolio. Well, right now the market is telling us that everything is going to be fine.
Eager buying interest in the present can only be interpreted as a vote of confidence in the idea of higher prices into the future. In other words, the fact that market participants, collectively, are eagerly bidding stocks the last four months can only mean their work is leading them to believe the S&P 500 will be higher into the future. If their work led them to believe otherwise, they wouldn't be eagerly bidding stocks in the present.
Fundamentally speaking, this is challenging to believe, but the narrative is at least easy to articulate. Governments remain "all-in", central banks remain "all-in", and perhaps the United States' handling of the coronavirus has been so bad in the present that it can only get better into the future! (If you want a quick laugh, click here).
The optimistic, or bullish, scenario is that consumers (collectively) are going to be flush with cash, businesses that survive are going to be flush with cash, and consumer confidence can only ascend as each day that passes is one day closer to a "vaccine" (even if it isn't truly a vaccine). Given the presumption of meaningful pent- up demand, there's the "bullish" case for 2021. It's the return to a new normal whereby consumers consume, corporate profits ascend, job creation ensues, and things start rocking and rolling in 2021. It's not the most probable scenario, but it's fairly easy to imagine when attempting to fit a narrative to the price action we're witnessing.
Gold & Long-Term Treasuries Set New Highs Too
While the S&P 500 gets most of the attention, gold and long-term Treasury bonds also closed the month of July at new all-time high monthly closes. Gold gained 4.66% this past week, rising for the 8th consecutive week. The metal gained 10.30% in July, its 5th consecutive monthly advance.
Gold's monthly close at $1,985.90 is a decided new all-time high monthly close. The "breakout" is confirmed, there's no known resistance left on the charts.
In the short term, gold is definitely "overbought" and due for some sort of pullback. Prices don't move linearly forever. However, we'll view any weakness for gold in the short term as only temporary, or corrective; it won't end gold's primary uptrend. Referencing the chart above, it's easy to envision a scenario where gold trades back toward the ~$1,800 region and consolidates for a few weeks. That would then set the stage for gold to continue its march to the north. Gold remains an "easy" buy from both a technical and fundamental perspective. "Easy" doesn't guarantee further profits, however.
For those curious about both gold and the S&P 500 closing the same calendar month at new all-time highs, that last happened in October of 2007. That's a bit spooky...
Long-term Treasury bonds also had an excellent month in July. 30-year United States Treasury bonds (USB) gained 1.89% and closed the month at a new all-time high too.
For those curious about a calendar month where gold, the S&P 500, and long-term Treasury bonds all closed at new all-time highs...well we can't find any of those (at least not since 1978 which is as far back as we have long-term Treasury bond data). July was clearly a sort of everything wins month, the likes of which we've never seen before.
From an investing perspective, USB remains in a primary uptrend, and given its inverse correlation to the S&P 500, combined with the Federal Reserve promising that they're not even thinking about interest rate hikes, we believe long-term Treasury bonds are a great portfolio diversifier at the moment. Ironic, especially given USB's yield.
From an interest rate perspective, USB closed the month of July yielding just 1.20%, and that's not a typo. This is why it is impossible to invest in USB for the long term at the moment, because investing in USB for the long term at current prices is going to essentially guarantee the investor 1.20% on their money the next 30 years.
However, this is why it's reasonable to borrow USB for the short term, especially during time periods of heightened volatility and uncertainty for the investable universe, specifically the stocks asset class.
There's nothing that says the yield on USB can't head toward 0%, and in that case USB should gain an additional ~20% in price. Wall Street has even begun to anticipate the likelihood of negative interest rates into our future (click here).
The message from the month of July is that long-term investors are best served being thoroughly diversified.
There's a lot that's working at the moment, from stocks, to bonds, to gold, and the beauty is that they're all uncorrelated to one another. We live in unprecedented times and the forward-looking climate remains best described as "radical uncertainty". Being diversified is your best hedge against said uncertainty. This won't be the case as the uncertainty descends, but we're just not there yet.
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.