Stocks Consolidate, Is The Next Big Move Higher Or Lower?

The S&P 500 was basically unchanged last week, rising 0.02% with Friday's close at 4,181.17.

The index's last three weekly closes are 4,185.47, 4,180.17 and 4,181.17, so we've been sprinting in place the last two weeks. The S&P 500 did manage to trade up to a new all-time high at 4,218.78 on Thursday, but price didn't stay there for long. This echoes what we've been discussing in each of our last two Updates, the idea that further upward extension for the S&P 500 isn't going to prove durable.

The price action this week was a perfect illustration of the great old phrase "sometimes what's obvious is obviously wrong". This week was jam-packed with market-moving catalysts including earnings from the top six components of the S&P 500, a Jerome Powell press conference and a sprinkle of economic data, and the obvious expectation was for volatility. Instead, the S&P 500 produced its narrowest trading week of 2021...go figure. Forecasting the market is forever humbling.

So we turn the page to May wondering if a two-week trading range is enough to refresh the S&P 500's advance, or if the index will face a bout of selling pressure in the month that goes by the moniker "sell in May and go away".

As we wrote last week, we continue to be of the opinion that it's healthiest for the S&P 500 to trade down -3% or so from Friday's close first, before trading up 3% from Friday's close.

We'd love to see May's low come in the front half of the month, ideally falling somewhere in the ~4,036-4,079 range.

Reviewing this week's market-moving catalysts, the top six components of the S&P 500 went 3-3 this week in terms of price action (i.e., three winners and three losers). The losers were Apple, Microsoft and Tesla, all of which beat on earnings only to see major reversals throughout the follow on trading. Facebook, Google, and Amazon all moved higher on the week, with Facebook leading the charge by gaining 7.95%.

On a fundamental basis, the revenue growth figures the top six reported were absolutely staggering. Year-over-year revenue growth recorded at:

Tesla: +73.6%

Apple: +53.6%

Facebook: +47.5%

Amazon: +43.8%

Google: +34.4%

Microsoft: +19.1%

(source: Charlie Bilello)

There is an element of this being "as good as it gets" for these companies, meaning these same figures into the future can't possibly be as strong given the "timing luck" associated with a year-over-year comparable from the second quarter of 2020 (i.e. peak COVID nothingness) through first quarter 2021. And we don't think we'll be looking at all-time high personal incomes one year from now either (click here).

We heard from Federal Reserve Chairman Jerome Powell on Wednesday and he was as accommodative as ever (click here). Perhaps this provided a boost to the "re-opening trade", which was the big winner this week.

The "re-opening trade" shines brightest when the energy and financial sectors lead the charge, which at least appears to be driven by rises in interest rates (i.e. falling bond prices). The yield curve (as measured by 10s less 2s) steepened this week by seven basis points, or 4.93%, ending its five-week losing streak. Naturally, the energy and financial sectors were the top two performing sectors this week, rising by 3.58% and 2.38% respectively.

By contrast, rising interest rates appear to operate as a headwind for the technology sector. Technology has been one of the top performing sectors over the last five weeks while the yield curve was flattening, so it's no surprise that the technology sector was the biggest loser this week, falling -2.12%.

This is why we continue to believe in the idea of a barbell approach toward equity allocations. This isn't to say there's anything wrong with simply owning the market as a whole, but it is to say that the recipe for success in the past (a massive technology overweight) is probably not the recipe for success into the future. The days of the market being a one-trick technology pony are behind us, in our opinion of course.

S&P 500 Primary Trend - Up

The S&P 500 finished the month of April on Friday, closing the month higher by 5.24% and finishing at a new all-time high.

Our work continues to label the primary trend as up, or "bullish". During uptrends, long-term investors generally benefit from keeping it simple and straightforward, with an equity overweight across their portfolio asset allocation and sitting on their hands. It's not until the primary trend can be labeled as down, or "bearish" that long-term investors can potentially benefit from enhanced sophistication. We're clearly not there yet.

The month of April became the sixth consecutive calendar month to set a new all-time high. There are no known levels of "resistance" on the month chart of the S&P 500.

So the S&P 500 has now gained a whopping 9.71% the last two months, and April recorded as a calendar month that gains 5% or more and closes at a new all-time high. Lately, this has spelled trouble over the very next trading month.

Since 1990, there are 21 calendar months that gained 5% or more and closed at a new all-time high. In aggregate, this is mostly a 50-50 proposition, a coin flip. However, over the last 9 instances the S&P 500's forward 1-month return has then closed lower seven of them for average declines of -1.73%. The last instance bucked the trend, gaining 3.71%, but the most recent history suggests that an advance the likes of which we saw in April generally gives way to some profit taking the very next month.

When thinking beyond the short term, the S&P 500 is off to a fantastic start through the first four months of the year.

If the calendar year is analogous to a boxing match between the bulls and the bears, then the bulls are absolutely hammering the bears through the first four rounds. They're landing the crisper, cleaner punches. This has generally been a good sign for the S&P 500's returns the remainder of the calendar year.

If we quantify the bulls' fast start by identifying all calendar years where the S&P 500 was higher by 10% or more through the month of April, we're left with 17 prior calendar years (2021 is number 18). The S&P 500's returns the remainder of the year are then 15-2 for average gains of 7.41% (i.e. we've closed higher 15 times and lower 2 times). The lone losers were 1987's crash and a mild -1.79% decline May through December of 1971.

As always, the past is not predictive, especially when we live in unprecedented times. The game will never be that easy.

But while the past can't tell us the future for the S&P 500, it can be used to help long-term investors keep their "fear" in check. For example, the table above proves that the S&P 500's fast start to the year is not a reason to invest more conservatively for the remainder of the year.

Right now, there's a general degree of "fear" across most mass affluent investors between the ages of 60-80.

This subset of investors has every right to be fearful; they've been burned so badly a handful of times over their investing careers that they understand the risks of investing.

The same can't be said for the younger subset of investors (specifically Gen X and millennials), and we think that's why there is a complete bifurcation in sentiment. The younger subset sports incredible optimism and speculation while the mass affluent boomer crowd believes this "can't continue". We remember the overall "greed" that filled the air in 2007 and the landscape is nothing like that here in 2021.

The "wall of worry" remains in place and while we do believe there will be some minor turbulence in the not too distant future, we believe the plane will still land at its final destination named "higher prices" by the end of 2021.

TRAN Makes It To 13, Bitcoin's Back, San Diego Housing Market Rips

We're a bit sick and tired of writing about the Dow Jones Transportation Index (TRAN), but the index extended its winning streak to 13 this week. The TRAN gained 1.41% with Friday's all-time high weekly close at 15,347. Prices don't move linearly? The TRAN says "hold my beer". What a run.

Bitcoin's back to booming! Sellers did not win the battle at the 100-day simple moving average, eager buyers did.

Technically, this section should be focusing on what's happening with Ethereum, but Bitcoin has been consolidating for the last twelve weeks so something big is headed Bitcoin's way in the not too distant future. If we had to make a prediction, we'd call for Bitcoin to trade up to $80,000 before the end of June.

Home prices have been absolutely exploding across the country given a supply-demand imbalance, plentiful liquidity, and friendly financing rates (click here). We're happy to report that San Diego home prices are higher by 16.96% over the trailing 12 months through February of 2021 (click here). This also feels like it "can't continue", but it felt that way last summer and yet here we are.

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.