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Stocks Make It 5 In A Row. The Primary Trend is Up

The S&P 500 fell -2.27% this week with Friday's close at 4,478.03.

The index closed higher by a smidgen on Monday but never found its way back into the 4,600s, and then declined each and every trading day the remainder of the week. The price action on Friday felt particularly negative, with the S&P 500 trading up to 4,540.34 during the session, only to then reverse lower by -1.37% into Friday's close. 

We're unsure "why" the S&P 500 reversed to the downside on Friday; the jobs report seemed mostly fine (click here), but this is the second large downside reversal we've seen over the last seven trading days considering the prior Thursday's U-turn from ~4,607 to ~4,537. Currently 2023 is a year where participants have been "buying the dip" all year long, but are they now "selling the rip"?

Now, in last week's Update we wrote:

"We continue to think the picture for the S&P 500 is mostly unfavorable over the near term, as we discussed last week. Our skepticism will clear when there's a refresh in fear, or a healthy pullback for the S&P 500. From a technical perspective, prices don't move linearly forever."

Through these lenses, we find this week's downturn to be normal, healthy and somewhat refreshing!

Prices don't move linearly forever, so when they move linearly for nearly five months it feels like we're being lied to. This week's downturn is the market's way of telling the truth.

The critical question now is when and at what price does this downdraft end? There are a variety of objective "support" levels below that are plausible destinations for where market participants, collectively, will be eager buyers of the S&P 500's constituents and derivatives tied to the S&P 500. 

We have the 50-, 100- and 200-day simple moving averages (solid blue, red, and green lines) ranging from ~4,100-4,400 and ascending. We have the 38.2% and 50% Fibonacci retracement levels ranging from ~4,200-4,300 when connecting the S&P 500's March low into the August high. Interestingly, the ~4,200-4,300 region also marks where "past resistance" can become "new support". We imagine most technical market participants have a bullseye in the ~4,200-4,300 range.

Fundamentally, the biggest news of the week was the credit rating agency Fitch's downgrade of the United States (click here).

Known as the "Fitch slap", we find this downgrade rather comical and believe the U.S. government is easily deserving of the highest credit rating an agency can offer given the fact that there's an element of relativity in credit ratings. 

That said, long-term Treasury bonds took it on the chin this week too with the iShares 20+ Year Treasury Bond ETF (TLT) falling -3.02% and closing at its lowest weekly close of the year. TLT was once higher by nearly 10% on a year-to-date (YTD) basis in 2023, but it closed Friday down -1.26% on the year so it's given all of its YTD gains back to the house.

As you might expect, interest rates moving higher across the curve spilled over into underperformance in the technology sector for the S&P 500.

The S&P 500 Technology Sector fell -4.14% this week. Given the tech sector's weighting within the S&P 500 as a whole, it's fair to say that the majority of this week's decline was attributed to the tech sector's underperformance. After all, there were only three sectors within the S&P 500 that declined more than the index itself this week: technology, communication services and utilities.

Putting it all together, we believe this week's downdraft is nothing but normal and expected turbulence.

The seat belt light remains on and in our view the S&P 500 will make its way back toward the ~4,200-4,300 region in August or September, an additional decline of somewhere between -4 to -6% from Friday's close. This would serve to refresh "fear" (the Volatility Index jumped 3.77 percentage points this week to 17.10), alleviate "overbought" conditions and set the stage for a nice fourth-quarter rally. Continuing with last week's analogy, it will put some people back in the middle of the boat!

As for the week ahead, it's all about Thursday and Friday's inflation data!

Speaking of inflating, crude oil rose 2.78% this week, its sixth straight weekly advance. Crude closed at $82.82, its highest close thus far in 2023, and is up 19.75% the last six weeks. So this will be a Consumer Price Index (CPI) report where energy prices have surged to the upside over the report period being measured. Take gasoline as an example: it roared higher in the month of July. 

Consensus economist expectations are only calling for a 0.2% change in CPI on a month-over-month (MOM) basis, and if they're wrong, say if CPI comes in at 0.4% or so MOM, then we envision the S&P 500 trading down into the high ~4,300s next week. Again, we believe there's a material risk that inflation data will heat back up on a month-over-month and year-over-year basis (YOY) over the coming months, and Thursday will help provide a glimpse into that risk. An exciting and pivotal week awaits!

S&P 500 Primary Trend - Up 

Our work labels the primary trend for the S&P 500 as up or "bullish". During uptrends, long-term investors are best served with an equity overweight across their asset allocation and relying mostly on passive investing methodologies.

Whether the degree of equity overweight is 51% or 100% of someone's portfolio is influenced mostly by individual investor attributes and the relative attractiveness of other asset classes. It's challenging to allocate 100% of your portfolio toward stocks when the risk-free rate of interest is more than 5%!

From a stock asset class perspective, the name of our game in long-term investing is to "know when to hold 'em" and "know when to fold 'em". Broadly speaking, the idea is to "hold 'em" during uptrends and "fold 'em" when evidence suggests the price of the S&P 500 is in a downtrend. This will pair together strong returns during uptrends with the trade-off being paying the price of false positives, or opportunity loss from folding 'em when there was actually a decent hand in the near future. However, it's not a wise decision to stop wearing a seat belt just because the seat belt locks down far more often than it actually needs to lock down! 

For now, the offense is getting on the field and it appears to be a time to "hold 'em" for stocks, even if things get bumpy in August and no matter how counterintuitive that may seem given the state of the economy. In fact, the counterintuitiveness is probably helpful to the idea of a continued uptrend beyond short-term turbulence. Downtrends tend to evolve when we're all convinced they won't evolve. Uptrends tend to extend when we're convinced they can't extend. It's why they say bull markets love to climb the "wall of worry", and the "wall" currently isn't as gigantic as it was earlier in 2023, but it's growing. There is still a metric ton of disbelief pertaining to the idea of the S&P 500 trading beyond the 5,000 marker in early 2024. 

From a momentum perspective, the S&P 500 is on a five-month winning streak. The month of July closed on Monday of this past week and the index gained 3.10% for the month. As we shared last week, five-month winning streaks have been a great sign of a continued advance over the forward one year.

The table below lists all five-month winning streaks for the S&P 500 that also closed below our all-time high monthly close. Since 1950, there are 10 such calendar months that match and the S&P 500's forward 9-, 10-, 11- and 12-month returns are all almost undefeated. Average returns over those time periods are beyond the 10% marker.

As always, we can't use the past to consistently predict the future...the game's just not that easy.

However, the point of any analysis is only to help an investor make an informed decision, it's not to predict the underlying price of an asset. The adults in the room know that consistently predicting the price of an underlying asset is an exercise in futility.  

At the moment, perhaps the biggest impact the table above can have for long-term investors is to help them stay the course with their long-term investing plan. 

It's imperative long-term investors do not let the fear of striking out keep them from playing their game. Given the chaos across the world at the moment, and perhaps a further trade down here in August and September, it'll be easy for someone to want to deviate from their long-term investing plan.

However, the table above illustrates why that could be a costly mistake, because there's a ton of precedent that suggests the price of the S&P 500 will trend higher over the forward one year. If long-term investors adhere to their investment plan, they'll likely be rewarded. There will be challenging times, there always are, but where there is no risk there is no reward!

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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