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Stocks Open 2021 With More All-Time Highs

The S&P 500 gained 1.83% this week with Friday's close at 3,824.68.

Friday's close was a new all-time high daily and weekly close. The index actually started the year on shaky ground, falling -2.49% during Monday's session and trading down to 3,662.71. Monday recorded as a "bearish outside reversal" day, and a "bearish engulfing candlestick", leading us to wonder if the long-awaited pullback had finally arrived. But, as has been the case for months now, Monday's weakness was ultimately short-lived.

The S&P 500 went on to rise each and every trading day the remainder of the week, surging 3.35% from Monday's close through Friday's close, and leaving our weekly low on Monday for the fourth consecutive week in a row. As we wrote in our last Weekly Market Update:

"It's as if participants can't wait to buy 'em as soon as the market opens on Monday, especially if we're in the red."

The price action this past week cements the idea of support near the mid-3,600s. Recall that the S&P 500's weekly lows from December recorded at 3,633.40, 3,645.84, and 3,636.48. Perhaps it's no surprise then that this week's low recorded at 3,662.71. 

What made the price action this week so impressive (and surprising) was how the S&P 500 somehow managed to dodge every single bullet thrown its way.

It was like Neo from the Matrix (click here). From Tuesday's somewhat surprising election results to Wednesday's disgusting storming of the Capitol to Friday's jobs report that revealed job losses last month (click here), the S&P 500 was bombarded with a plethora of new information that is often viewed as a catalyst to sell off. Instead, we put a four-day and nearly 4% winning streak on the board. Monday's "bearish outside reversal" day went on to finish as Friday's "bullish outside reversal" week. Go figure. 

The primary trend remains up, or "bullish", across all time frames. Resistance will reveal itself at some point, there will be a pullback or a "correction", but the path of least resistance remains to the upside until the chart reveals some type of selling pressure. For now, we're absolutely enjoying the ride. 

As for small-cap stocks, they picked up 2021 exactly how they left off 2020: absolutely ripping to the north.

The iShares Russell 2000 index fund (IWM) gained 5.95% this week with Friday's close at $207.72. IWM has now increased nine out of the last ten trading weeks and has gained 36.11% in the process. IWM gained ~4% on Wednesday alone, so clearly market participants believe Tuesday's light "blue wave" election results are a catapult to the most cyclical areas of the economy.

The breakout in IWM has been textbook: a multiyear base that finally hurdles well-defined resistance is analogous to breaking out of traffic and finding a left lane without a car in sight. IWM slammed on the gas.

From a sector perspective, the S&P 500 energy sector (SPEN) led the charge this week, gaining a massive 9.31%. As we wrote in our last Update, maybe 2021 is the year for SPEN. Materials, consumer discretionary, financials, and healthcare all gained 3% or more for the week too. We're most intrigued by the financials here, since they're now in position to attempt to break out above decade-long highs. Maybe the financials can also slam on the gas then...

As we look to the week ahead, the question remains just how high does the S&P 500 have to climb before buying interest wanes and eager selling pressure emerges? We all understand that a portion of great returns in the not too distant past always have to be paid back in the not too distant future. And the S&P 500 has recorded great returns in the not too distant past.

Interestingly, this price action this week, at least through one set of quantitative lenses, has generally been associated with some turbulence over the forward ten and twenty days. If we define the last five trading days as a -1% or more daily decline that's then immediately followed by a four-day winning streak that closes at a new all-time high, we're left with just nine prior instances since 1980. However, seven of the prior nine instances closed lower ten and twenty days later.

As always, something that's happened nine times over the last forty years has no significance for what's coming here in January of 2021. The price of the S&P 500 is going to go where it's going to go, but perhaps there is indeed a pullback on deck the back half of January.

S&P 500 Primary Trend - Up

The S&P 500's primary trend is undoubtedly defined as up or "bullish".

During uptrends, long-term investors are generally best served investing in the most traditional sense of the word. As we often write, the recipe for success during uptrends is to buy 'em and hold 'em, while also making sure you have a plan in place to identify when to fold 'em. 

At the moment, those who have been able to buy 'em and hold 'em the last six months have been handsomely rewarded. And with the price of the S&P 500 at all-time highs, there's no evidence yet to suggest that continuing to hold 'em the next six months won't be rewarding too.

The last roughly two years of price action for the S&P 500 is absolutely wild: from the fourth-quarter crash in 2018 to 2019's price-only returns of 28.88% to the COVID crash in the first quarter of 2020 to 2020's price-only returns of 16.26%, it's been price action that exceeds our imagination. It's been the worst of times, all during the best of times. The S&P 500's cumulative price-only returns the last two years record at 49.83%, the strongest two-year cumulative price-only return since the two calendar-year period ending in 1999's gain of 51.40%. There are a lot of parallels to the late '90s...

Now, we'd be remiss in not pointing out that there's been a ton of pain associated with long-term investors recording these returns. For passive investors, and even many active investment strategies, they've had to endure massive drawdowns, two unprecedented market crashes in a sense. However, one of the rules of trading, investing, or just life in general is...no pain, no gain. In order to make good money, we always have to risk good money. There's simply no other way. With markets roaring to the upside as if investing is risk-free, we'd simply like to remind you all that investing is never risk-free.

As we look at the year ahead, some fun figures about what we can expect:

  • Since 1950, the S&P 500's average annual return is 9.06%. The index has advanced 51 out of 71 calendar years, a ~72% win rate.
  • Since 1950, the average annual maximum drawdown relative to the prior calendar year's close is -9.66%. With 2020 closing at 3,756, that places a target at ~3,393 for the vicinity of 2021's low.
  • Since 1950, the average annual maximum drawup relative to the prior calendar year's close is +15.57%. That places a target at ~4,340 for the vicinity of 2021's high.

All in all, we believe it's likely that 2021 trades between ~3,393 and ~4,340.

If we actually reach both of these levels (a huge if), then the sequence of which level is hit first is impactful for long-term investors. It's unknowable, but it certainly feels like the traditional script is the most likely script: continued strength through the favorable period and turbulence during the unfavorable period. While there is evidence to support the idea of a pullback over the coming ten to twenty trading days, there's also evidence to support a positive first quarter of 2021.

The fourth quarter of 2020 gained 11.69%. Taking all fourth quarters that gained 10% or more since 1950 reveals that the subsequent first quarter of the next calendar year has then closed higher ten of eleven instances for average returns of 4.97%. The lone loser was a decline of -0.06%, so we're seven basis points away from a perfect first quarter when there's tremendous momentum to finish off the prior calendar year.

Finally, since 2008 the S&P 500 has only been able to complete a three-year winning streak once (2012, 2013, and 2014). Each of the most recent two-year winning streaks recorded red calendar years in year three (2015 and 2018). So, hopefully the third time is the charm here in 2021.

Interest Rates Surge, Gold Tumbles, Bitcoin Still Booming

The yield curve absolutely exploded higher this week.

The yield associated with a 10-year United States Treasury bond increased by 20 percentage points, rising from 0.93% to 1.13%. In our last Update we titled a section "Interest Rates Ready To Boom, Too?". With the luxury of hindsight, the answer was yes. 

An update from the chart we shared then. That's a clean breakout. There remains a bullseye at the ~1.3 - 1.4% marker.

Rising yields were clearly no help to gold this week. The metal declined -3.15% on the week, all of which was attributable to Friday's -4.09% decline. To be frank, the price action in gold is growing frustrating. The metal recently held critical support via its 50-week simple moving average (50MA), but this week leaves the metal basically unchanged since July of 2020. 

Gold has worked off any and all "overbought" conditions following the summer of 2020's rocket launch. After bottoming in November at its 50MA we felt that the conditions were "right", but the metal is yet to truly "ignite", especially after this week's plunge. If the reflation trade is a thing and participants believe the Fed will be successful running negative real rates (i.e., the rate of inflation persistently above treasury yields), then gold needs to get its act together and soon.

Another Update, another section on Bitcoin (BTC). Why? Because Bitcoin is still booming. Bitcoin is certainty challenging the idea that prices don't move linearly forever. The cryptocurrency's weekly RSI(14) presently records at 95.30(!). A reading of 100 is not mathematically possible, but the price action in BTC is certainly trying to make it a reality. When the music stops here, the retracement is going to be spectacular to watch.

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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