The S&P 500 gained 1.85% this week with Friday's close at 5,222.68.
The index opened higher to start the week and never looked back, and our weekly low was higher than last week's close. This has now occurred two of the last three trading weeks and the S&P 500 is trading as if there won't be any tremors following April's miniature earthquake. Friday's close is the third highest weekly close in the history of the S&P 500 and just 0.60% below our all-time high weekly close at 5,254.35. The index has now increased three weeks in a row following a three-week losing streak the preceding three weeks, and so the conversation now turns toward the retest of our all-time high and the potential breakout of our recent trading range.
The S&P 500 closed back above our 50-day simple moving average (50MA) on Monday and sustained above the 50MA the remainder of the week. All signs point to a retest of all-time highs in the 5,250 range and the price action there will be telling, in our view.
We find it especially ironic that the S&P 500 could be retesting all-time highs as we get the Consumer Price Index data on Wednesday before the bell. It was hotter- than-expected inflation data that drove the April selloff narrative - could we now get cooler-than-expected inflation data on Wednesday that drives a May breakout to new all-time highs? We certainly think (and hope) so.
Referencing back to what we've seen the last six weeks, the price action in the S&P 500 has been a roller coaster. The index has now gained 5.14% over its three-week winning streak after losing -5.46% over the preceding three-week losing streak. It's left us back right where we started at the end of March.
We decided to quantify this sort of "roller coaster" by identifying all calendar weeks where the SPDR S&P 500 Index Fund (SPY) ended with a three-week winning streak that gained 5% or more immediately following a three-week losing streak that lost -5% or more. It's rare...this week is only the 12th time SPY has recorded this pattern since its inception, but we found it interesting that the S&P 500 generally doesn't look back.
In other words, when the bears get the bulls down (i.e., the three-week losing streak that sheds -5% or more), but they can't keep them down (i.e., the three-week winning streak that gains 5% or more), it's usually a sign that the bulls have the advantage moving forward.
All 11 of the sectors within the S&P 500 closed higher this week. The top performing sector was actually the utilities sector, so that's something you don't see all that often. Utilities gained more than 4% on the week, and while many view this as an ominous sign given the sector's historically defensive attributes, it's been anything but of late. The last two times the utilities sector gained 4% or more in a calendar week?
11/03/2023
10/28/2022
What do these dates have in common? The S&P 500 absolutely roared to the upside over the months ahead following both instances. That's not exactly ominous.
Financials, materials, industrials, consumer staples and real estate all gained more than 2% this week. Naturally, it was a decent week for the "broadening out" narrative. Small-cap stocks kept pace this week too with the S&P 600 Small Cap Index gaining 1.76%.
Checking in on the four-headed monster, the bond market has found its footing so interest rates have stopped rising across the curve. The yield on a 10-year United States Treasury bond closed Friday at 4.50%, down from its recent peak at 4.74%. The United States Dollar Index (USD) rose for the first time in four weeks this week, but only added 0.24%. Using the price per barrel of crude oil (WTIC) as a proxy for inflation data, WTIC has fallen -8.38% the last four weeks which bodes well for this week's inflation data. Then there's the Federal Reserve, where recent weakness across economic data has added a second rate cut to the collective expectations of participants in the federal funds futures market (click here).
So, the four-headed monster looks a bit less scary as of today.
Looking to the week ahead, it's obviously a massive week for reasons previously discussed. The S&P 500 is staring at recent "resistance" from April's all-time high, a retest is upon us, and we have a ton of market-moving catalysts on the calendar this week. Fed Chair Powell will give a speech on Tuesday and inflation data will be released before the bell on Wednesday, right alongside retail sales data which provides a glimpse into consumer spending. Thursday will bring us housing and manufacturing data and more Fedspeak. Friday will finish with leading economic indicators and a speech by Fed Governor Christopher Waller.
S&P 500 Primary Trend - Up
The primary trend for the S&P 500 is up, or "bullish". During uptrends, long-term investors are best served maintaining their target asset allocation and relying mostly on passive investing strategies.
The degree of equity exposure one chooses to maintain is a derivative of their individual investor attributes. There is no one right asset allocation for the entire investment community, unfortunately.
It isn't until the primary trend can be labeled as down, or "bearish", that long-term investors should consider changing their tactics. Importantly, short-term market volatility is not enough to change the S&P 500's primary trend! What happens over a few days, or even a few weeks, generally can't provide valuable information regarding how to allocate a portfolio for the coming months.
If we get a breakout to new all-time highs here in May you're going to hear a growing chorus of pundits bring up the topic of "sell in May and go away". So, let's explore how an investment strategy of selling in May and going away has performed.
Allocate Smartly (AS) (click here) is an annual membership we maintain as we believe they do excellent work providing valuable information on all things tactical asset allocation, which mirrors our long-term investing strategy we execute as a firm. AS has run the backtest on selling in May and going away, so let's take a look at how the strategy has performed.
First, the strategy defined is as simple as it sounds: Invest 100% of your portfolio in the SPDR S&P 500 index fund (ticker symbol SPY) at the close on the last trading day of October, and invest 100% of your portfolio in cash at the close on the last trading day of April. This effectively has you investing in stocks over the six months from November through April and then going away from May through October.
Since 1970, selling in May and going away has actually performed admirably. Relative to the standard industry benchmark of a 60/40 stocks to bonds strategic asset allocation model, selling in May and going away has outperformed. That's right... investing for only six months of the year has produced annualized returns that exceed investing for the full 12 months of the year, at least over the past ~50 years.
Starting with $10,000 in 1970, selling in May and going away has grown an account to $1,873,383 while the 60/40 benchmark has grown to just $1,311,479.
Interestingly, selling in May and going away actually hasn't minimized the pain of long-term investing and meaningful portfolio drawdown, at least not relative to the 60/40 benchmark.
Both strategies have similar maximum drawdowns, similar times to recover (longest drawdown), and selling in May actually has greater annualized volatility than 60/40, undoubtedly attributed to the lack of inclusion of the bond market, an uncorrelated return stream that has helped smooth returns for the 60/40 benchmark.
Now, we share this not to suggest there is anything special about selling in May and going away, and we don't think it's prudent to consider here in 2024.
Rather we share it to show how sticking to a good investment strategy can produce great results! There is nothing magical about selling all of your stocks on the last trading day of April and then buying them back the final trading day of October.
But the magic happens when you simply follow the rules of a good investment process, and anyone who has been disciplined enough to adhere to selling in May and going away has produced results that exceed the industry standard benchmark of 60/40. So, keep this in mind if you're tempted to sell into further strength here in May. If that's not a part of your long-term investing plan, we strongly advise against it. Why? Because the only way to stay out of trouble in the world of long-term investing is to follow your rules!
Happy Sunday!
