The S&P 500 ripped higher by 7.32% this week with Friday's close at 3,509.44.
The best we can say at this point is that we're now in position to test and break out of the range - if there's follow-through to the upside over the week(s) ahead.
From an internal perspective, the chaos surrounding the election only manifested itself in reinforcing more of the major price action theme we've seen for years - the largest market capitalization sectors like technology, health care, and consumer- oriented sectors dominating, while the smaller market capitalization sectors like energy, real estate, and utilities pull up the rear.
The S&P 500 Technology Sector (SPT) gained 9.70% this week and increased Monday through Friday. Health care gained 8.25% and closed at a new all-time high weekly close, and the consumer discretionary sector added 7.39%. Meanwhile, the energy sector gained 0.81% for the week. The bifurcation across market sectors continues, for now. It's imperative that your portfolio is somewhat diversified, but it's also imperative that your portfolio emphasizes the areas showing the most relative strength.
From a volatility perspective, the chaos surrounding the election manifested itself in plunging volatility expectations. The Volatility Index (VIX) declined 13.16 percentage points, or -34.61%, this week, falling from 38.02 to 24.86. This is after gaining 10.47 percentage points, or 38%, the week prior. It's clear market participants, collectively, were hedging the event risk associated with the election. While that was the prudent thing to do, it clearly wasn't the profitable thing to do (hindsight bias!). Nonetheless, since 1990 there are only five other weeks where the VIX declined by -10 percentage points (4/3/2020, 07/01/2016, 11/28/2008, 10/31/2008, and 09/28/2001). The "Brexit" fiasco from 07/01/2016 might represent the closest parallel, and the S&P 500 was onward and upward from there, rising ~3.5% the next three weeks.
Alternatively, we can also quantify this week's price action in both the VIX and S&P 500 by defining it as a calendar week where the S&P 500 gained 3% or more and the VIX closed above 20 and below its upper Bollinger Band after having closed the week prior above its upper Bollinger Band.
Since 1990 there are only 10 trading weeks that match, but we were surprised with just how mixed the S&P 500's forward one-month returns were since we thought this study would skew far more favorably (i.e., a lot more white on the table below, as if weeks like this are an all-clear sign). Astute observers will notice that this is the first time this has occurred with the S&P 500 closing the week at a new all-time high weekly close, so this time is different in a way.
As always, 10 trading weeks can't predict anything, but they can be used to dispel the myth that the price action this week is an all-clear sign for the short term. It's just not that easy. There is no all-clear sign, and the the short-term forecast remains cloudy. That said, the clouds will clear on a decisive breakout to new all-time highs. Hopefully we'll be writing about that next Sunday!
S&P 500 Primary Trend - Up, Back In Drive?
Our work continues to label the primary trend as up, or "bullish".
The month of November is off to a torrid start, rising 7.32% through the first five trading days of the month. This marks the second strongest opening five days of a calendar month since August of 1984's advance of 7.99%. As of Friday's close, we're trading above our all-time high monthly close at 3,500.31. Put simply, if we don't close the month of November at a new all-time high then the month will be remembered as a huge disappointment.
We tend to follow a theme with our weekly commentary. We prioritize the "trees" in the first section, sharing our thoughts on the S&P 500's outlook over the short term, and then we move to the "forest" in the next section, where we always speak to the S&P 500's primary trend. In our view, the primary trend is easily the most important trend for long-term investors.
Having a rules-based, systematic process that is used to identify and define the primary trend is the key ingredient to prudent portfolio construction, or asset allocation decisions, for long-term investors.
And if there's one rule history has taught us, or that "evidence-based investing" emphasizes, it's that during a primary uptrend for the S&P 500 long-term investors are best served investing in the most traditional sense of the word. Primary uptrends are a time to buy 'em and hold 'em, nothing fancy is required, at least not until the primary trend is no longer labeled as up, or "bullish".
With the outcome of the election and the S&P 500's subsequent burst to the upside now behind us, we can ponder the bigger picture, or the "forest" to continue the analogy. First, it's important to reiterate that this week's price thrust to the upside is driven exclusively by the actions of market participants, from the retail investor buying a call option on their favorite stock, to the hedge fund investing billions into baskets of exchange-traded funds, to the market maker on the other side of both of these transactions.
Importantly, the actions of market participants are a reflection of the collective expectations of said market participants, with their expectations being a derivative of the work that's been done to analyze and evaluate a specific investment.
While the price action may not make sense, and we never truly know why the market does what it does, especially when it's borderline bi-polar week to week, there is only one reason market participants, collectively, buy stocks in the present. It's because their work leads them to the expectation of higher stock prices into the future.
Why might they feel this way at the moment? Because it's easy to envision that we're in a better place over the coming 6-12 months: from the coronavirus, where the probable path will be cases descending, therapeutics, and a potential vaccine, to our daily lives and spending habits, which will rotate and trend back toward "normal". It's also easy to envision a gigantic stimulus package being passed in the not too distant future, the size being the bigger unknown. It's easy to envision the Federal Reserve continuing to be as accommodative as possible the next 6-12 months. They echoed more of the same this week (click here). And it's now even easy to envision there being a steady calm out of Washington, especially if the Republicans hold on to the senate, which likely eliminates the possibility of tax hikes and creates gridlock.
Put it all together and it's hard not to be of the opinion that the future is a lot brighter than the present.
This is probably why stocks have done so well the last seven months, and this is why stocks will probably do well the next seven months. It pays to be an optimist in the world of long-term investing, especially when the null hypothesis is indeed that "stocks only go up" (on a long enough time line). It's impossible to dispel the null hypothesis without evidence, and right now there isn't any sufficient evidence that stocks are vulnerable to a large drawdown in the near future. Not when we're in prime position to close the month of November at a new all-time high.
So, we encourage all of our readers to never let the fear of striking out keep them from stepping up to the plate. While it might feel like "we're doomed", we're probably not doomed. Stocks remain the cleanest shirt in a basket of dirty laundry, and there is no telling just how high they can climb.
Interest Rates Show Volatility, Gold Finds A Bid
YCC will effectively distort, or disconnect, the relationship between interest rates and forward-looking economic and inflation expectations.
Putting it together, our takeaway is that the bond "bull market" is probably dead.
The implications of YCC are very, very favorable for gold in our opinion.
Three Post-Election Booms: Gambling, Solar, and Marijuana
Three areas of the market absolutely took off like a rocket ship after the election this week. We believe these themes should be on everyone's radar as we think about what areas stand to gain the most from a Biden administration.
Sports Gambling: Draftkings (DKNG) and Penn National (PENN) explode
It's been easy to gamble on sports for a long, long time, but it's now likely that it's going to be legalized in all 50 states over the years ahead. Hey, if you can gamble on stocks via options, why not be able to place a wager on Notre Dame beating Clemson? DKNG was up 19.55% this week.
Similar story for Penn National Gaming (PENN). PENN was up 18.30% this week. They have the momentum of Dave Portnoy whose personal stock has skyrocketed in 2020 given how he's monetized his viewership through the quarantine. Relative to DKNG, PENN is certainly the adult in the room, but it will be interesting to see who wins this battle for market share over the years ahead.
Solar Stocks Surge
Marijuana Stocks Get High (Pun Intended)
The ETFMG Alternative Harvest ETF (ticker symbol MJ) gained a whopping 27.43% this week. Like sports gambling, legalization is a thing. MJ has been a giant dog for years, perhaps its day in the sun is here.
Steve & Rick
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