The S&P 500 declined -2.86% this week with Friday's close at 3,009.05.
The index traded as high as 3,154.90 on Tuesday, a mere 0.63 points below the prior week's high at 3,155.53, before heading to the south the remainder of the week. The majority of this week's decline occurred on Friday, with the S&P 500 losing -2.42%.
If you read our Update from last Sunday, then this week's decline comes as no surprise. We shared work from both Charlie McElligott and Wayne Whaley, two respected market quants, that detailed a strong seasonal bias for the S&P 500 to trade negatively over the time period covering June 20th through June 27. We wrote:
"With the VIX closing the week at 35.12, and pairing together Wayne's work, Charlie's work, and Friday's downside reversal, it appears the S&P 500 is sprinting into a headwind."
The index put up a valiant effort the majority of the week, but the headwind ultimately proved to be too much.
Where are we now? First, the S&P 500 has now established clear "resistance" at the ~3,150 price region (and obviously at the year-to-date flatline of 3,230).
The index has traded between 3,153.45-3,155.53 three separate times since mid-June (red arrows below), and all three instances then saw the S&P 500's advance come to a screeching halt.
It's quite clear that market participants, collectively, are far more eager to sell, rather than buy, the S&P 500's underlying constituents and derivatives tied to the S&P 500 at the ~3,150 price region. For Fibonacci fans, the 61.8% Fibonacci retracement (when connecting June's high at 3,233.13 to June's low at 2,965.66) comes in at 3,130.96, just a shade below the ~3,150 price region. A top is a top until it's not and ~3,150 and ~3,230 now represent local tops. Nothing good can happen with the price of the S&P 500 trading below these levels.
On the flip side, there have not been any major levels of support broken yet for the S&P 500.
Referencing back to the chart above, the index remains above June's low at 2,965.66, and appears to be on the verge of simply retesting that price region. The 200-period simple moving average on the two-hour chart above sits at 2,980.76, and this often provides support to the price of the S&P 500.
Additionally, the S&P 500's 50-day simple moving average on the daily chart sits at 2,980.07, and is ascending (green line on the chart below). We imagine participants, collectively, are well aware of these price levels and we'd be surprised if eager buying interest doesn't come to the market if in fact things get off to a sloppy start on Monday and we trade down into the ~2,950-2,980 price region. "Turnaround Tuesday" is a popular phrase for a reason.
Given the news flow over the weekend thus far, there's a narrative to assign to the S&P 500's downside reversal - ascending fear concerning the implications of the coronavirus. Friday:
There were 45,255 new cases reported on Friday, the highest single-day number of cases the country has reported since the pandemic began (click here). The 7-day simple moving average (dark blue line above) is also a pandemic high, and its slope is anything but "flattened". We won't pretend to be epidemiologists and we have no idea whether this is mostly attributable to increased testing, or the country's nonchalant behavior surrounding the virus (from early reopenings to protests to a lack of prioritizing masks and social distancing), but the reason for the sharp increase in cases is mostly irrelevant, because uncertainty alone is the mother of fear.
Rising cases, even if mostly attributable to increased testing, will move the conversation toward reestablishing economic restrictions and will undoubtedly impact collective consumer behavior (i.e., consumers will voluntarily choose to stay home). As Warren Buffet said earlier this year:
"Fear is the most contagious disease you can imagine. It makes the virus look like a piker."
As we wrote last week, it's clear the S&P 500 has been pricing for perfection, forward-looking. Naturally, anything that isn't perfect will undoubtedly fuel a "correction". The perception surrounding the state of the coronavirus is anything but perfect at the moment.
Finally, this week did record as an "inside week", meaning this week's high was lower than the prior week's high and this week's low was above the prior week's low. Consecutive "inside weeks" are very, very rare, and the S&P 500 closed almost right next to its weekly low. We believe it's highly likely we'll trade below 3,004.63 over the week ahead. Therefore, the narrative for the upcoming week is for the index to bend...but not break.
In other words, it's perfectly healthy for the S&P 500 to trade down into the ~2,900-2,950 price region over the week ahead - but it's unhealthy for the index to then stay there. Eager buying interest into lower prices is a characteristic of any and all uptrends. We'd like to see that over the next week.
S&P 500 Primary Trend - Neutral
The S&P 500 is presently down -1.16% for the month of June. There are two trading days remaining in the month, and the takeaway is yet to be determined. At the moment, June looks like a major reversal month, the likes of which we've rarely ever seen. June began the month by gaining more than 6% the first 6 trading days of the month, and yet we're sitting in the red with two trading days to go. Since 1950, we've only seen three other calendar months finish in the red after having traded up by 6% or more at some point during the month: March 2020, January 2003, and June 1974.
Both January of 2003 and June of 1974 saw meaningful selling pressure over the months that followed. Meanwhile, March of 2020 has done the exact opposite, although March of 2020 is nothing like January of 2003 and June of 1974 in terms of monthly return, barring any crash-like price action on Monday or Tuesday of this week.
Broadly speaking, there's another way to look at the month of June, and that's consolidation following an incredible April and May. This view is supported by a positive monthly close, i.e. a reversal higher over Monday and Tuesday of the week ahead.
Regardless of how one looks at June, the primary trend for the S&P 500 remains neutral, or trendless. The index closed the month of June of 2019 at 2,941.76, and we're basically unchanged one year later (even with more volatility than we'd ever have imagined). There's a top and a bottom on the monthly chart, and until the index breaks out, no matter whether to the north or the south, the primary trend is going to remain labeled as "neutral".
We're beating a drum here, but when the primary trend is labeled as "neutral", long-term investors are best served leveraging the benefits of "diversification".
There is an extremely wide range of future outcomes for the S&P 500. To have a concentrated asset allocation in the present is to make a binary bet that you know which outcome we're going to experience into the future.
This can work when there isn't a wide range of future outcomes for the S&P 500, when the S&P 500 is trending. Getting this to work in our current climate, where the future is best described as "radical uncertainty", is nothing more than luck. There are two other broad asset classes in well-defined uptrends: fixed income/bonds and gold/precious metals. Excluding them from your asset allocation in favor of stocks, which have no primary trend, isn't a prudent, defensible, and intelligent decision in our opinion.
Looking forward, we're going to hit the halfway mark of 2020 at Tuesday's close. We've often written that the price of the S&P 500 trades beyond the limits of imagination, and the first six months of this year is a perfect example. The S&P 500 declined January, February, and March while recording one of the worst calendar quarters in its history. The index has now increased April, May, and maybe June, while recording one of the best calendar quarters in its history. If this were a football game, it would be like the AFC divisional round game between the Chiefs and Texans earlier this year. The Texans jumped out to a 24-0 lead in the early 2nd quarter - and were somehow trailing 28-24 at the half. The Chiefs went on to dominate the remainder of the game, analogous to the S&P 500 setting new all-time highs in the third quarter and finishing the year well into positive territory.
Finally, it's important for our readers to understand that six months from now we're all going to be victims of hindsight bias.
In the event the S&P 500 gets clobbered over the next six months it's going to feel like we all saw it coming, as if we absolutely knew the index would get clobbered the second half of 2020. We're all aware of the current predicament economically, and we're all aware of the fact that this recession has been the worst downturn the country has seen since the Great Depression. If the index is sitting at the ~2,300 marker in December there will be a laundry list of obvious reasons that we can recall from the month of June. "Well, what did you think was going to happen?"
Alternatively, if the S&P 500 roars higher the remainder of 2020, we're all going to believe we saw that coming too. Just look at the last three months; the S&P 500 has traded like the future is so bright we need sunglasses. Governments and central banks across the world have told us through both their actions and words that they'll stop at nothing, and they'll do "whatever it takes" to turn things around. A vaccine is a matter of when, not if, and it's an election year, meaning our politicians will stop at nothing to do whatever they can to "earn" your vote. Would anyone be surprised if we saw another multi-trillion dollar stimulus plan? Would anyone be surprised if there's another check in the mail coming? Would anyone be surprised if the Federal Reserve somehow, someway, begins a program to buy stocks/equities? We certainly don't think so. If the index is sitting at ~3,700 in December, there will be a laundry list of obvious reasons that we can recall from the month of June. "Well, what did you think was going to happen?"
We share this now to remind our readers that nobody knows what is coming the second half of 2020! Not us, not Warren Buffet, not Dave Portnoy, not the newspaper, not www.zerohedge.com, not any pundit you read online, and not you. We'll all need to remember this come December when hindsight bias tries to make us think the second half of 2020 was something we all saw coming. The reality is, we probably can't even imagine what's coming.
Banks Look Sick, Technology A Bit Worrisome
The financial sector, as measured by the S&P 500 Financial Sector Index (SPF) fell -4.33% on Friday, and declined by -5.25% for the week. SPF is unchanged since early April and has declined ~13.6% since testing its 200-week simple moving average (blue line on the chart below). The advance since March looks like a "bear market rally", and underperformance in the financial sector always makes the hair on our arms stick up as there's no crisis like a financial crisis (remember 2008).
When thinking about what lies ahead for the financial sector it's hard to not be concerned. Broadly speaking, the banks are in a predicament where it's as if they're carrying mountains of bad loans on their balance sheets (sound familiar?).
Mortgage forbearance programs have helped soften the blow for consumers and the financial sector at the moment, but what happens when those loans come out of forbearance? Collectively, will consumers be healthy enough to meet their financial obligations? Will financial institutions have set aside enough capital to weather the loan loss storm?
In the commercial market space, landlords are struggling with tenants who want to renegotiate their lease terms, and that's the best case scenario relative to tenants who've gone out of business and obviously won't be making their rent payments. In any scenario where end demand remains hesitant, there's nothing but trouble on the horizon for the banks and their customers (landlords) and the landlords and their customers (tenants).
Interestingly, the financial sector only accounts for 10% of the S&P 500 and the index has had a fantastic 10-year run even with the financial sector still trading below 2007's highs, so perhaps the S&P 500 simply doesn't need the banks to perform (it hasn't needed the energy sector to perform either).
What the S&P 500 most definitely needs to perform is the technology sector, the Lebron James of the market.
The S&P 500 Information Technology sector (SPT) is the single biggest sector within the S&P 500 and it's been carrying the market on its back for years. We've called the weekly chart of SPT the most important chart out there in prior updates, and we still feel the same way today. Interestingly, SPT is showing weakness and finding selling pressure right around its all-time high, leaving the vaunted "double top" chart pattern as a distinct possibility. It still showed relative strength this week, losing only -0.45%, but we can't help but wonder if the space is due for a breather. It's not easy to carry the weight of the market on your back for years without a breather from time to time.
Finally, Friday saw the single most volume on the Nasdaq Composite (COMPQ) in the index's history - on a -2.59% trading day that saw the index slip from the psychologically important 10,000 marker to below its prior all-time high close at 9,817.18. There is only one word to describe this predicament, and it's "distribution".
It's imperative both SPT and COMPQ find their footing over the week ahead, otherwise both sectors are at risk of a sharp, fast, swift price decline (hey, prices don't move linearly forever). It's in this scenario where the S&P 500 won't only bend this week, but it will break...
As always, another exciting week awaits.
Steve & Rick
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