The S&P 500 fell -1.27% this week with Friday's close at 4,328.87. Friday's weekly close is the lowest weekly close since July of 2021 at 4,327.16.
The index has now declined six of the last nine weeks and is down -9.18% thus far in 2022. We often marvel at how things seem to change from year to year, and it's like the volatility switch got turned on the minute we flipped the calendar to 2022.
After last week's upside reversal we wrote that it was imperative we see follow-through to the upside this week, but we really didn't see any. The index traded down to 4,315.12 on Monday, a decline of -1.59% from last week's close, so we didn't exactly pick things up this week where last week left off. The S&P 500 did find some buying interest throughout the week, trading up to our weekly high at 4,416.78 on Thursday. Economic data was mostly strong this week and participants seemed to like what they heard from Fed Chair Powell (click here), but the index ended the week in the same fashion in which it began...by selling off.
The S&P 500 traded down to 4,284.98, a decline of -1.80% on the session, before rallying into Friday's close. This came on the heels of Friday's jobs beat (click here), and given the consensus expectation that "growth is slowing" it's easy to wonder if the economy of tomorrow can't be stronger than the economy of today. Throw in the Russian conflict, and the headline risk that's associated (click here), and the price action of the S&P 500 is best described as fragile.
The market just feels sick at the moment, as if it has a stomach bug.
Fragility in the sense that it feels like the S&P 500 is on the ropes each and every trading day. Ten of the last 15 trading days have seen the S&P 500 down by -1% or more at some point during the session. If we factor in the news flow, which has been decidedly negative, it feels like the S&P 500 is going to take a knockout blow any day now.
But the index has somehow managed to fight off the ropes more often than not. Take this week as an example: the S&P 500 traded down -1.59% on Monday during the day but closed down just -0.24%. On Tuesday we were down -2.16% at the low of the day but closed down only -1.55%. And on Friday the index was down -1.80% but closed down just -0.79%. This follows last Thursday's upside reversal where the index was down -2.62% at the low of the day but finished the session higher by 1.50%.
Clearly there's an element of "buy the dip" that's still alive and well, and in spite of the news flow thus far in 2022 the S&P 500 is comfortably above both the January and February monthly lows. There's a splash of resilience in the price action. We're just not sure if this is a good thing. Sometimes the only way to get past a stomach bug is to let it all out, and in terms of price action this is analogous to a "flush".
Turning to the chart, it's still a total mess. The index remains totally trendless, confined between clear levels of support and resistance.
As for sectors, the story this week was the same as the story of 2022 as a whole, with energy stocks roaring to the upside.
The S&P 500 Energy Sector (SPEN) gained 9.25% this week and is now higher by a massive 34.79% thus far in 2022. There isn't another sector within the S&P 500 in the green on a year-to-date basis, so SPEN's outperformance is otherworldly at this point. The downside here is prices at the pump have soared (click here), which is clearly a tax on consumers' ability to consume.
There were five sectors that outperformed this week and most of them are considered the "defensive" areas of the market. Utilities ripped 4.90% this week, and real estate and healthcare both gained more than 1% on the week, too. Consumer staples were flat, which is relative weakness compared to other defensives but relative strength when compared to the S&P 500.
Underperformers were most of the larger sectors within the index, or the areas we don't want to see underperform. Financials fell -4.78% this week as interest rates plunged given the emergence of the "flight to safety" trade. Technology stocks fell -2.98% and consumer discretionary declined -2.61%. Amazon fell -5.30% this week and has now given back most of its upside earnings beat. Collectively, these sectors comprise ~50% of the S&P 500, so if they're not playing well the team has little chance to win.
The relative rotation graph of the sectors within the S&P 500 with 10-week tails illustrate the above points well - energy and the defensives leading the way, technology and the larger sectors lagging behind.
Regarding the week ahead, it's a relatively quiet week on the economic data front until Thursday - that's when we'll get the Consumer Price Index an hour before the bell. Inflation is yet to prove all that "transitory", and the word "stagflation" is growing in popularity.
It will be another relatively loud week on the geopolitical front as the situation in Ukraine doesn't appear to be trending in a peaceful direction. The sheer fact that there is a greater than 0% probability of nuclear war is rather terrifying in and of itself.
All of this weighs on the S&P 500 via massive uncertainty as to what the world looks like a few short months from now.
S&P 500 Primary Trend - Neutral
We closed February on Monday with the S&P 500 finishing the month at 4,373.94. The index declined -3.14% for the month, marking it's second consecutive monthly decline. At February's monthly low at 4,114.65 the S&P 500 was down -8.88% for the month, so the S&P 500 at least found a way to put some month-end magic on the scoreboard into February's close.
Tactically speaking, February's monthly close leaves the S&P 500's primary trend as trendless, or neutral. The index's trailing 1-, 3-, and 6-month returns are negative, and the index closed below virtually all widely followed monthly moving averages.
A monthly close here in March below ~4,307 and the monthly chart will sport a lower low in terms of closing prices. That will lead us to label the primary trend as down, or "bearish", so to say the price action over the remainder of March is pivotal is an understatement.
In the world of sports, it's imperative your team gets off to a good start if they want to increase the chances of winning the game. Relating this to markets, history suggests it's imperative the S&P 500 gets off to a good start if it wants to increase the chances of having a positive calendar year.
Put differently, the S&P 500's slow start to 2022 calls out calendar years that don't exactly leave us feeling like volatility is suddenly going to disappear.
Since 1950, there are eight calendar years that have seen the S&P 500 close the month of February down -5% for the year but with positive trailing 12-month returns. This calls to slow starts to calendar years where the prior calendar year was strong. Interestingly, the remainder of the year has seen the S&P 500 close lower across five of eight instances.
Another way to quantify what we've seen thus far in 2022 is to reference all sharp, fast pullbacks from all-time highs.
As of February's close, the S&P 500 was down 8.23% from December's all-time high monthly close. This marks a three-month pattern of an all-time high monthly close three months ago followed by a monthly close that's between -5% to -10% a short two months later.
Since 1950, there are 18 prior calendar months that match. Like the prior study, it's definitely been a mixed bag forward-looking. The S&P 500 has recorded a -10% drawdown or worse from signal date monthly close ten of the last twelve instances. The average maximum forward twelve-month drawdown relative to February's close records at -13.26%, almost identical to the prior study, which further supports the idea of a trade down to ~3,800 at some point over the forward twelve months (and most probably here in 2022).
We'd be remiss in not pointing out that the above studies also suggest that the S&P 500 trades up by more than 10% from month-end signal date close at some point over the forward twelve months too. This would suggest a trade back up toward ~4,800 at some point over the remainder of 2022. It's hard to imagine at the moment, but perhaps a "retest" of the upper end of our trading range is in the cards. There will be a really, really nice rally here in 2022, that much we believe. The bulls always find a way to land a nice counterpunch.
As always, the past is not consistently predictive of the future! If knowing what lies ahead was truly a derivative of knowing what's happened in the past we'd all have a lot more money via much higher annualized rates of returns across our portfolio.
The above studies simply reinforce the idea that anything is possible and to avoid complacency. An exciting and most likely volatile remainder of 2022 awaits. Proceed with caution and respect for the unknown.
Commodities Gone Wild
The commodities asset class is absolutely ripping to the upside here in 2022. The table below lists the year-to-date returns of a variety of futures contracts. Virtually all of the gigantic green bars are commodities, while virtually all of the large red bars at the bottom of the table are major market equity indices.
The Invesco DB Commodity Tracking Index Fund (ticker symbol DBC) has increased an astounding 11 weeks in a row and even gained 15.08% this week alone after finishing last week on a 10-week winning streak!
DBC is scorching hot and has gained 34.85% over the last 11 weeks, but remember...prices don't move linearly forever. There will be a nasty selloff for DBC here in 2022, that much we believe too.
Happy Sunday!Steve & Rick
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