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Stocks Finish January At A New All-Time High

The S&P 500 gained 1.38% this week with Friday's close at 4,958.61. Friday's close is a new all-time high weekly close, the third week in a row to close at the highest weekly closing price in the history of the index.

The S&P 500 has now closed higher 13 of the last 14 weeks and has increased 20.43% over that same time span (more on this below). It's shocking to write and it's the perfect illustration of our favorite quote: The price of the S&P 500 trades beyond the limits of imagination.

The price action this week was anything but boring. As expected, the Fed held interest rates steady on Wednesday, but Fed Chair Powell's press conference (click here) sparked downside volatility. Things got spicy after Powell stated:

"Based on the meeting today, I would tell you that I don't think it's likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that's to be seen. So I wouldn't call -- you know, when you ask me about in the near term, I'm hearing that as March. I would say that's probably not the most likely case or what we would call the base case."

In last week's Update we wrote "We don't believe they'll cut in March..." in reference to the Fed, but clearly the market, collectively, was caught off guard by Powell's sentiment. The S&P 500 declined -1.61% on Wednesday and finished the session at 4,845.65. 

But Thursday saw the index get back on its feet, brush the dirt off its shoulder, and rise 1.25%.

After the bell on Thursday we then got earnings from some of the S&P 500's largest constituents and almost all of them came in better than expected (click here). Meta Platforms exploded higher by 20.32% on Friday alone after a massive earnings release (click here). Add in Friday's terrific jobs report (click here) and it's no wonder the S&P 500 surged more than 2.5% from Wednesday's close into Friday's high at 4,975.25.

Now, this week's upside doesn't change our view about how the index will trade over the weeks ahead.

In last week's Update we wrote about how a "heater" of this magnitude for the S&P 500 always experiences some form of "cool down":

"This is not to say the S&P 500 can't move higher over the days and weeks ahead, even trading up into the ~5,000s. But it is to say that we fully believe any eventual retracement, or mean reversion via some form of consolidation period, will ultimately erase such gains, leaving the S&P 500 equal to or below this past Friday's close at ~4,890."

We fully believe the index will retrace and/or consolidate over the weeks ahead given the idea that prices don't move linearly forever.

Any further upside from here is analogous to stretching the rubber band even further in one direction, and it only exacerbates the inevitable snap back. We firmly believe the healthiest path for the S&P 500 is to trade down -2%-5% and stop furthering the notion that "stocks only go up". A trade back down to retest the ~4,800 region, noted by the red circle on the chart below, would be healthy, constructive, and welcomed in our view.

Quantitatively, there's also evidence that suggests it's time for the S&P 500 to "cool down".

As we wrote earlier, the S&P 500 has gained more than 20% over the last 14 weeks. That is rare and is more commonly found after lasting market bottoms form from "bear markets". Fourteen-week stretches where the S&P 500 gains more than 20% and closes the week at a new all-time high weekly close are far less common, but that's what recorded as of this past Friday's close.

Since 1950, there are only seven other calendar weeks that match what we saw on Friday, i.e., seven other calendar weeks that finished with trailing 14-week returns of 20% or more paired with an all-time high weekly close. Interestingly, all seven of them saw the S&P 500 close lower four weeks later, with average declines of -2.18% on a closing price basis. Given the table's results, it stands to reason that the maximum average drawdown unfolded within the first four- to six-week period and that would suggest a decline of -4-5% over the coming four to six weeks, and to that we'd say "please and thank you!".

Now, a trade down to the ~4,700-4,800 level will undoubtedly feel like the world is ending, but should this actually unfold over the coming four to six weeks we'd encourage our readers to remember this week's Update. Turbulence isn't all that jarring when the pilot lets you know about the possibility of turbulence before the turbulence hits!

Further, if you reference back to the table above you'll notice that every single row in the column titled "SPX FWD 4 Week Return" is red, but almost every single row in the column titled "SPX FWD 12 Week Return" column is white. That tells us that, historically, any downturn over the coming month is likely going to be temporary and serve to recharge the S&P 500's battery. Once its battery is recharged the index can resume its "heater" as participants "buy the dip".

From a fundamental perspective, market-based expectations for the future of the federal funds rate only changed modestly this week, which we found rather surprising.

Federal funds futures are still pricing in a ~40% probability of a cut in March, and a 94% probability of a cut in May. Given Powell's words this week, combined with stocks at new highs and the jobs report showing no signs of weakness, we'd say the probability of a cut in March is darn near 0%. Come May, that's where we believe the "Fed pivot" will get underway. Ultimately, participants believe the Fed will cut six times in 2024, leaving the federal funds rate finishing the year at 3.75%-4%.

Circling over to the bond market, long-term Treasury bonds were absolutely roaring to the upside all week long until Friday's jobs report. The CME CBOT 30-Year U.S. Treasury bond (USB) price fell -1.70% on Friday alone but gained 1.99% on the week. The yield on a 10-year U.S. Treasury bond fell this week from 4.15% down to 4.03%, but it also surged from 3.87% to 4.03% on Friday alone. The trillion-dollar question is which of these moves is the signal and which is the noise.

We're uncertain as of today - USB is rangebound between the 119 and 126 level - but the fact that the S&P 500 didn't care about plunging bond prices and roaring yields on Friday was pretty impressive.

As for the week ahead, we have a gargantuan amount of economic data, Fedspeak, and earnings on the calendar. As we discussed earlier, we believe it's time for the S&P 500 to "cool down". The workout is over, and it was beyond impressive, but prices don't move linearly forever. So, if you see some red on your screen over the days ahead, don't be alarmed. Another exciting week awaits!

S&P 500 Primary Trend - Up 

The S&P 500 finished the month of January on Wednesday this week, gaining 1.59% with January's close at 4,845.65.

January's close is a new all-time high monthly close for the index. The S&P 500 has now increased three months in a row and is higher by a massive 15.54% over the trailing three months (when using monthly closing prices). So, what's the strength the past three months telling us?

To answer, we have to start with the idea that "strength begets strength". From the stock market's perspective, it's completely rational. Strength today, a derivative of the collective buying interest across market participants' overwhelming selling pressure, should only unfold in the event that market participants expect higher prices into the future. Think about it: Anyone choosing to buy a stock today does so because their work leads them to believe in the idea of higher prices tomorrow (figuratively). Therefore, strength today can be perceived as the collective having conviction in the idea of strength tomorrow. Historically speaking, the collective's conviction is right far more often than it's wrong.

Since 1950, there are 15 calendar months that finished with trailing three-month returns of 15% or more. In all 15 cases the S&P 500 closed higher four and five months later, on average by ~8-10%.

There's really only one instance that even ran into any trouble at any point over the forward one year, and that's March 1987. Broadly, referencing the table below, the fact that it's almost exclusively white supports the notion that "strength begets strength".

Interestingly, our brains as investors are not wired to align with the idea of "strength begets strength". Instead, our brains tend to want to take the money and run after we see "strength" in the stock market, and traditionally we fall victim to believing "this can't continue" (click here).

Take Nvidia (NVDA) as an example: Someone out there bought NVDA at $5 a share and sold it for a 10x return at $50 a share solely because "this can't continue". Little did they know their 10x return would become a 100x return. We understand this is nothing more than "hindsight bias", but the example illustrates that positive returns alone, or "strength", is not a reason to arrive at a "sell" recommendation for an underlying holding! Deeper analysis is always warranted - it can't be "I've made a lot of money with this, lets sell it".

So, the primary trend for the S&P 500 is up, or "bullish", and long-term investors continue to be best served maintaining their target asset allocation and relying on mostly passive investing methodologies.

It's not until the primary trend can be labeled as down, or "bearish", that investors should drastically rebalance their portfolio in order to manage market risk. We have no idea when the primary trend will change from up to down, it can happen at any time, but based on the price action the last three months, and really the last two years, it feels to us like it's a long way away. Sit back, relax and enjoy the ride...with a risk management plan of course!

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.

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