The S&P 500 gained 0.64% this week with Friday's close at 3,372.85.
The index has now increased three consecutive weeks, and six of the last seven, with Friday's close recording as the second highest weekly close in the history of the index. We traded as high as 3,381.01 on Tuesday as the S&P 500 began to retest our all-time highs from February. The S&P 500 would then sell off -1.40% into Tuesday's close at 3,333.69. Tuesday recorded as a "bearish outside reversal" day a stone's throw away from all-time highs, so it appeared the start of the retest was less than ideal. However, objects on charts aren't always exactly as they appear.
The S&P 500 would climb 1.40% on Wednesday, recovering all of Tuesday's decline, and trading up to our weekly high at 3,387.89. Wednesday's high was just 5.63 points below our all-time high at 3,393.52. However, there was no follow-through on Thursday or Friday, with both sessions failing to eclipse Wednesday's high. This left the week ending as a cliffhanger: was Tuesday's downside reversal a sign of impending "resistance" into all-time highs, or was Wednesday's sharp upside reversal, combined with the lack of subsequent selling on Thursday or Friday, a sign that participants are making sure the coast is clear before bidding equities to new all-time highs? The odds would seemingly favor the latter, and we'd be surprised if we don't set new all-time highs over the week ahead.
Behaviorally speaking, the market was ripe for further downside continuation on Wednesday. The index had reversed lower from all-time highs on Tuesday, and was riding a seven-day winning streak just prior to Tuesday's reversal. On the surface, the conditions seemed to suggest we'd see further selling on Wednesday with the week recording a normal, healthy -2%-3% pullback from its first attempt to clear its last hurdle. But that's not at all that happened, which we found surprising. This week recorded as yet another trading week that illustrated eager buying interest into lower prices and a total lack of selling pressure. While the market tends to have a short memory, the bearish narrative is saying "maybe next week" a lot over the last two months.
We saw more rotation this week with the industrial (SPI) and energy (SPEN) sectors leading the way, gaining 3.19% and 2.72% for the week respectively. We've written how the technology and consumer discretionary sectors have been the Lebron James and Anthony Davis of the market, carrying the major market indexes on their back. Naturally, any and all leadership from the role players like SPI and SPEN will help the team reach new heights.
Speaking of the consumer discretionary sector, it's actually both consumer-centric areas of the market that have been on an absolute tear lately.
Both the consumer discretionary and consumer staples sectors (as measured by the exchange-traded fund ticker symbols XLY and XLP) have increased for seven weeks in a row - and that's never happened before. XLY and XLP both closed at new all-time high weekly closes, and XLY has gained 16.03% the last seven weeks while XLP has gained 12.31% over the same seven-week stretch.
For the last two months, participants, collectively, have been totally eager to own equities tied to the health of the consumer. This can only be interpreted as participants, collectively, are optimistic regarding the forward-looking health of the consumer and consumption. The reasons behind this are anyone's guess, but it's quite clear that the actions of our government play a gigantic role, a multi-trillion dollar role. Retail sales came in at an all-time high on Friday (click here). In an era of free money, it's perhaps no surprise that consumers will consume.
As we look to the week ahead, the narrative is just how high will the S&P 500 trade, and will the index then be able to sustain at never seen before prices. There's a lot that's gone right for the index the last seven weeks...we're higher by roughly 12%. And that's part of why we remain skeptical about the index's staying power at the 3,400 level over the short term. Rapidly rising prices in the not too distant past generally need to give back some money to the house in the not too distant future. It's rapidly falling prices in the present that tend to precede the most durable of returns, not rapidly rising prices.
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 generally best positioned 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.
It isn't until the primary trend can be labeled as down or "bearish" that long-term investors should "batten down the hatches" by relying on an equity underweight and more active investing methodologies. We're obviously not there yet, no matter how much it feels like that's where we should be given what's happened economically.
Broadly speaking, we are huge proponents of tactical asset allocation (TAA) models that systematically govern asset allocation and security selection decisions for long-term investors.
Over the full market cycle, we believe most prudently designed TAA models can help long-term investors achieve the minimum annualized return that's necessary to fund their financial goals, while doing so with less volatility.
This then optimizes behavioral adherence, i.e. a long-term investor's ability to adhere to their long-term investing plan, which is always the most important ingredient. Ironically, sticking to a sound long-term investing strategy is more important than the strategy itself! What good is the best strategy with the highest of expected returns if the risk and volatility of said returns is so great that the average investor can't stick with it over time?
If long-term investing is analogous to a plane ride across the country, then TAA seeks to fly from San Diego to New York in roughly five hours with as little turbulence as possible. Over the last 50+ years TAA has proven it's been able to get this done, thus solidifying its role as a strategy warranted in virtually all long-term investors' portfolios.
Given the growing popularity of TAA over the last decade, websites like allocatesmartly.com have emerged, making it easy to track the collective performance and tactical rotations of the individual strategies they track. One of our favorite charts on the site aggregates the "risk on" vs. "risk off" assets that are held in the TAA models they follow. This gives an overview of how TAA models are changing based on the prevailing trends and characteristics across asset classes, not changes in individual investor attributes.
From our perspective, part of why we love TAA as much as we do is rooted in its philosophy: Why build a portfolio based solely on individual investor attributes (i.e., age, time frame, risk tolerance etc) and ignore everything going on across asset classes? That seems like a rather silly way to invest for the long term. Instead, TAA seeks to combine both individual investor attributes and everything going on across asset classes. That seems like a rather smart way to invest for the long term.
Zooming in on TAA's aggregate "risk on" vs "risk off" illustrates that TAA, collectively, has been steadily increasing "risk on" assets since the May time period. TAA, collectively, has undoubtedly underperformed thus far in 2020 given the substantial whipsaw where there's been no sustained aftershock to the month of March's volatility earthquake, but those who are well-versed in TAA understand that that's to be expected. TAA thrives during strong uptrends and strong downtrends, trends that actually persist, not market climates that are essentially a strong uptrend other than a one-month market crash (i.e., 2020 in a nutshell). If things do indeed persist from here, TAA will continue to participate for as long as that trend is alive, something that's much more challenging for discretionary investment philosophies to execute.
As we look ahead, we continue to believe TAA is positioned to outperform the more traditional, static, run-of-the-mill 60/40 globally diversified portfolio approach over the full market cycle.
Valuations across both the equities and fixed income asset classes suggest there are a few more land mines in our future over the coming decade. If TAA can avoid stepping on these land mines, then it will help you arrive at your final destination and have a mostly pleasant flight.
Gold & Bonds Pullback
In last week's Update we noted how gold has increased nine consecutive weeks in a row and wrote that "turbulence is expected".
We made the case that both the United States Dollar Index (USD) and the yield associated with a 10-year United States Treasury bond (UST10y) appeared poised to move higher, thus pressuring the price of gold. That's close to what we saw this week as gold declined -3.86% with Friday's close at $1,949.80. The metal traded as low as $1,874.20, a decline of -9.05% from the weekly high at $2,060.80. Corrections during uptrends are known to be sharp, fast, violent, and terrifying. That fits the definition of the price action we saw in gold from Monday's high into Wednesday's low.
The narrative behind this week's sell-off was the surge higher in UST10y. UST10y gained 24.56% this week (or 14 percentage points for the sticklers) with Friday's close at 0.71%.
This type of thrust higher solidifies the idea of a "double bottom" on the chart of UST10y. UST10y has stopped going down, at least for now.
With yields being a derivative of bond prices, it's clear that bond prices were in free fall this week. Virtually everywhere we look, bond prices are on a fairly sizeable losing streak. The iShares Core U.S. Aggregate Bond Index Fund (ticker symbol AGG) is down five days in a row. The iShares iBoxx Investment Grade Corporate Bond Index (ticker symbol LQD) is down 6 days in a row (the Fed can't be too pleased with this). And the iShares 20+ Year Treasury Bond Index (ticker symbol TLT) is down 6 days in a row too, shedding -4.58% in the process. Now, AGG, LQD, and TLT have been on an absolute tear to the upside from May/June through early August, so recent weakness isn't anything out of the ordinary. That said, should bond prices continue to fall, interest rates will then continue to rise, which will keep some pressure on gold.
From a support perspective, gold gave back 50% of its recent advance this week by trading down into the $1,880.30 vicinity. 50% Fibonacci retracements are often key areas of support during uptrends for the metal. Gold also found support at and around its 20-day and/or 100-week simple moving average (orange line on the chart below). There is some evidence that the bleeding stopped this week, but it's still too early to tell.
In the event where the bleeding hasn't stopped, and things continue to be turbulent over the week(s) ahead, we can envision gold trading down to the $1,780-$1,830 price region, which would represent an additional -6%-8% decline from Friday's close. We'd envision UST10y needing to trade toward the 0.80%-0.90% region for this to unfold, or the USD to find a move higher since USD actually traded down on the week. We anticipate participants, collectively, being eager buyers of gold in the event the metal does trade down toward the $1,780-$1,830 price region, meaning prices would likely then surge back into the $1,900s.
Moving forward, we anticipate gold needing some time to catch its breath.
A nine- week winning streak that gains ~25% is one heck of a sprint. But when you sprint that fast, you're going to be exhausted shortly thereafter. You'll need a breather before you can muster up the energy to go on your next sprint.
This is where gold is at the moment...it's taking its breather. Ideally, this breather will last 3-4 weeks, which is about half the length of the preceding nine-week sprint. We believe the nine-week, ~25% advance, is a sign of a primary uptrend for gold, which bodes well for the metal over the intermediate and longer term. Heck, even Warren Buffett made investments tied to gold in the second quarter (click here). So, while the seat belt light remains on for gold over the short term, we believe the flight will still be traveling to the north over the longer term.
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.