The S&P 500 declined -0.63% this week with Friday's close at 3,298.47.
The index has now declined four weeks in a row for the first time since August of 2019. Weakness this past week wasn't overly surprising given what we shared last Sunday about the "weakest week of the weakest month". What is surprising is that the last four weeks, in aggregate, mark a four-week losing streak immediately following an all-time high weekly close at 3,508.01 from August 28th. We've written a lot over the last few years about how the S&P 500 has developed a propensity to trade like it has an on/off switch. Recording a four-week losing streak and declining by -5.97% over the last four weeks (on a closing price basis) is as if the market's switch got turned off four weeks ago.
However, the price action this week was constructive in our opinion.
In last week's Update, we wrote that we wanted to see this past week finish on a positive note, and the market gods were listening. We also suggested we "plan for weakness the remainder of September, and then strength the front half of October", and we're still on script here with there being upside momentum as we head into the week ahead.
The S&P 500 gained 1.60% on Friday, and climbed 89.02 points from Thursday's low at 3,209.45. Broadly speaking, the narrative this week is centered on market participants, collectively, showing eager buying interest into lower prices. At the low of the week the S&P 500 had declined -10.55% from September's all-time high at 3,588.11. This marked a standard "correction", and the upside reversal from this week's low brings a sense of optimism that the "correction" is now behind us.
While one day of upside is certainly not enough to have conviction in the idea that the worst is behind us, it is at least a start. The "boogeyman" still resides at ~3,425, and we won't find any conviction until there's evidence that the "boogeyman" is gone.
Updating the same chart from last week, the S&P 500 bent...but it didn't break.
We can also find some optimism about what lies ahead when quantifying the S&P 500's four-week losing streak. As the month of September reminded us, prices don't move linearly forever. Recall that we came into the month of September on a five- week winning streak, and we've done nothing but lose here in September. Ironically, we're headed into October on a four-week losing streak and, if history is any guide, it suggests that we'll do a lot of winning in the month of October.
Since 1990 we've seen the S&P 500 decline -4% or more over a four-week losing streak 23 prior times (this week marks #24). What stands out to us is that each of the last 7 times this has occurred (all of which come from the "QE era" since March of 2009), the S&P 500 bottomed in week 4 on a closing price basis.
That said, cherry-picking the results from the last 7 times this occurred isn't exactly prudent analysis. In aggregate, there is plenty of precedent in the above table to suggest that we're not out of the woods just yet. For example, we'd be remiss in not pointing out that the only other Septembers on the table above showed hardly any sustained upside after the S&P 500's four-week losing streak. In fact, both of them saw the S&P 500 decline an additional -9% at some point over the forward 4 weeks. That would be analogous to the S&P 500 trading down to the ~3,000 marker in October.
The technology sector (SPT) got back to its winning ways this week.
SPT avoided a four-week losing streak and gained 2.13% instead. We've referred to SPT as the LeBron James of the market for years now, and SPT certainly found its shot on Friday by gaining 2.40% (and LeBron had his shot working all last night). Naturally, it's imperative SPT continues to play well for the S&P 500 to get back to its winning ways. SPT closed Friday right at a confluence of "resistance" via a cluster of widely followed moving averages, so next week will undoubtedly be pivotal, one way or the other.
As we look to the week ahead, we'll get our first presidential debate on the 29th and then we'll turn the page to October, kicking off the month with the jobs report on Friday. We'd like to see the S&P 500 get off to a strong start next week by trading above 3,323.35 on Monday or Tuesday, which should open up the gates for a visit to the ~3,400 price region.
S&P 500 Primary Trend - Up
Our work continues to label the primary trend for the S&P 500 as up or "bullish".
While the S&P 500 is presently down -5.77% for the month of September, the index's trailing 3-, 6-, and 12-month returns are 6.39%, 27.62%, and 10.81%, respectively. As of now, September appears to be a healthy, normal, corrective price decline. Such declines are temporary more often than not, and they only serve to interrupt the primary uptrend, they don't end it.
During uptrends, long-term investors are generally best served with an equity overweight across their asset allocation (i.e., allocating more toward equities than all other asset classes) and relying mostly on passive investing methodologies. It isn't until the primary trend can be labeled as down, or "bearish", that long-term investors should rebalance their portfolio toward a more defensive stance. We're not there yet, so long-term investors need to exercise discipline, patience, and strive to sit on their hands. It's easier said than done, but it's the most prudent choice for long-term investors to make at this point (in our opinion).
Using a systematic, rules-based approach to labeling the primary trend will help long-term investors incorporate a process that governs their portfolios' asset allocation decisions.
It will not help you predict where the price of the S&P 500 is headed, nothing will, but it will help you plan and manage your own investor behavior, or the actions you take with your investment portfolio. Furthermore, it's far more thoughtful and intelligent than simply governing asset allocation decisions based on your age, a birthday, the election, or a conversation with your local financial advisor.
While the primary trend for the S&P 500 remains up, the relative attractiveness of the S&P 500 compared to other asset classes remains a bit less convincing.
If the idea of "diversification" is to take money away from investment A and place it in the hands of investment B, then this should only occur in the event one believes investment B can either make more, or lose less, than investment A over a given time period. A fancy phrase to measure this is called "relative momentum", and right now both gold and long-term Treasury bonds are showing positive relative momentum.
Gold, as an example, has been outpacing the returns of the S&P 500 for a few years now, i.e. gold has been making more than the S&P 500 (note upward sloping blue arrows on the chart below).
Anyone who has allocated a portion of their portfolio to gold, no matter whether it's 5%, 10%, or 15%, has "diversified" into an area that's enhanced their portfolio's returns relative to a concentrated position investing exclusively in stocks.
In our view, the building blocks of successful portfolio management require investors to identify the prevailing trends across asset classes, and to identify which asset classes are demonstrating relative momentum amongst each other. This will help long-term investors avoid diversifying just for the sake of diversifying, which is useless, and instead diversify when the investment B's of the world appear to have a reasonable chance at either making more or losing less than only holding investment A.
We refer to this as "smart diversification", and we believe it's part of the ongoing management responsibility of all investment managers.
Gold Was Coiled, Huge Move Lower This Week
In last week's Update we wrote that:
"Gold remains coiled, or poised for an expansion in volatility, as we look forward. A breakout in either direction is certainly in the deck of cards for the week ahead."
While the primary trend remains up for gold, we'd like to see the metal find its footing over the week ahead.
The idea of a "double bottom" is alive and well, and the 50-61.8% Fibonacci retracements sit in the ~$1,830-$1,880 price region. Like the S&P 500 last week, gold can bend this week but it can't break. We'd like to see the metal perhaps trade down toward the ~$1,800 price region, but then finish the week back closer to, or above, the ~$1,900 price level.
We never truly know why the price of something does what it does, but the easy narrative for gold this week was strength in the U.S. Dollar (USD).
USD gained 1.86% this week, its largest weekly advance since early April. Note how USD has been in free fall, declining in a near straight line from the 97.58 to 92.39 level, thus providing a narrative for gold's advance. And since prices don't move linearly forever, USD is now finding a countertrend rally to the upside, while gold is finding a counter- trend selloff.
Looking forward, even with gold's struggles this week it's still down slightly less on the month than the S&P 500. However, it's been well correlated to stocks for quite a bit of time now, with trailing 100-day correlation running at 0.84. That relationship was challenged this week, mostly on Thursday and Friday where gold didn't participate in the S&P 500's upside reversal, but if the S&P 500 is going to get its act together in the short term, we're hopeful that gold too will get its act together in the short term.
The fundamental factors driving the recent convergence in correlation between gold and stocks, such as depressed interest rates, a mountain of liquidity, ascending inflation expectations from policy makers, and fiat currency instability, are all here to stay.
As always, another exciting week awaits.
Happy Sunday!
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