The S&P 500 gained 1.51% this week with Friday's close at 3,348.42. Our four-week losing streak is now a thing of the past.
The index got off to a great start on Monday, gaining 1.61% and climbing above the prior week's high at 3,323.35. We then traded as high as 3,393.56 on Wednesday and 3,397.18 on Thursday before finding selling pressure to finish the week essentially right next to Monday's close.
On Thursday evening it was announced that President Trump was COVID positive, and the futures market didn't react too kindly. The S&P 500 opened Friday at 3,338.94, down -1.24% from Thursday's close, but there was no follow-through to the downside during Friday's session (the index actually traded up from the open to the close). Given sentiment Thursday evening, Friday's price action was certainly resilient.
So, our four-week losing streak is over and the S&P 500 got back to its winning ways.
As we wrote last week, four-week losing streaks that see the S&P 500 decline -4% or more have a recent propensity to mark lasting bottoms for the index. The trillion-dollar question at this point is, did we bottom for the remainder of 2020 at 3,209.45 on Thursday, September 24th? It's impossible to know as of today, but given this week's springboard higher off a somewhat nasty four weeks, we can't help but wonder.
For now, the price action mostly resembles an emerging trading range between the ~3,200-3,400 price region. Given the fundamental fragility across the political climate, it's easy to envision this range persisting until the election. That said, what's easy to envision isn't always how things unfold when forecasting financial markets. All of us with eyes on the charts have horizontal lines across ~3,209 and the red shaded region on the chart above. Whichever breaks first will set the course for the next meaningful move for the S&P 500.
From an internal perspective, it was a week of "rotation", with Friday's price action being most impactful.
Our favorite analogy when describing "rotation" always revolves around sports. With our San Diego Padres actually in the playoffs (and winning!) they're the perfect analogy to describe what's transpiring across market internals.
The Padres have two dominant players (Fernando Tatis Jr. and Manny Machado), just like the S&P 500 has two dominant sectors (technology and consumer discretionary). When these two players/sectors are playing well, it's highly likely that the Padres/market wins. These areas alone have demonstrated they can carry the load. However, there are times where these players/sectors are not going to play well (prices don't move linearly forever and players always meet slumps), and it's then up to the remainder of the roster to carry the load. For the Padres, that means guys like Hosmer, Pham, and Moreland need to step up. Across markets, it means sectors like the financials, industrials, and materials need to do their fair share.
Friday was a perfect example of this. The S&P 500 Technology Sector fell -2.55%, but the S&P 500 only fell -0.96%. Why? Because everyone else stepped up. Financials gained 0.79%, industrials gained 1.12%, and materials climbed 0.89%. Smaller sectors (analogous to the players coming off the bench) like the utilities, real estate, and energy all gained 0.96% or more, with real estate being the winner on the day rising 1.62%.
In other words, the reason the S&P 500 didn't collapse -3% or -4% on Friday - one day after it was announced the president of the country has COVID - is because everyone else stepped up. We've seen this sort of day a lot over the last few months, and the key to the S&P 500 climbing its way back toward the ~3,600 level and beyond is if we can have a stretch run where everyone is doing their job. We are yet to see this in 2020, but maybe the future includes a bid toward both the technology and financial sectors.
S&P 500 Primary Trend - Up
The S&P 500 closed the month of September on Wednesday this week, finishing at 3,363.00. The index declined -3.92% in September after being down as much as -8.31%. Interestingly, September's decline of -3.92% is now the single largest monthly decline to immediately follow a 5-month winning streak, so 2020 can add that to its list of unprecedented price action. Monthly rotational strategies get some flack given the speed of modern market declines (i.e., declines that used to transpire over a year for the S&P 500 can now transpire over one month), but September is yet another example of mid-market weakness resolving itself favorably into month end. The index bends often, it rarely breaks (March 2020 was the exception...).
Our work continues to label the primary trend as up, or "bullish". We view September as a corrective price decline, that is a temporary decline that only interrupts the primary trend, it doesn't end it.
From a quantitative perspective, September records as a sharp, fast, swift decline from all-time highs.
This is the definition of "distribution". However, when quantifying the price action the last two months, the S&P 500 has historically found upside following corrective months like September.
We defined the last two months as a two-month pattern that matches the following criteria:
Last month: all-time high monthly close
This month: new all-time high
This month: -5% drawdown from the prior month's close
This month: red monthly close (a monthly close below the prior month's close)
As always, since the table above is 11 prior instances of something happening in the past - it can't possibly be used to predict what lies ahead. We live in unprecedented times and we're witnessing unprecedented price action.
That said, the table above can be used to dispel the idea that "this can't continue". We've shared this concept often, but we continue to believe that there are a ton of long-term investors who want to "take the money and run" right now. They haven't lost money in 2020 (after being down meaningfully in the first quarter), the election is around the corner, and the future is as uncertain as it's ever been. It's easy to sell it all on Monday and sit tight. It's easy to feel like "we're doomed".
But the historical precedent that matches the price action we've just witnessed says that there's a chance we're not doomed. It suggests that selloffs like the one we saw in September have almost never operated as a predictive sign that "we're doomed". So, the table above can't tell us what's coming next, but it can tell us that anyone who believes the price action in September is predictive of more selling ahead is flat out wrong.
Gold Holds Steady, Bonds Poised For Huge Move
Gold gained 2.21% this week with Friday's close at $1,907.60. In last week's Update we wrote:
"While the primary trend remains up for gold, we'd like to see the metal find its footing over the week ahead. The idea of a "double bottom" is alive and well, and the 50-61.8% Fibonacci retracements sit in the ~$1,830-$1,880 price region. Like the S&P 500 last week, gold can bend this week but it can't break. We'd like to see the metal perhaps trade down toward the ~$1,800 price region, but then finish the week back closer to, or above, the ~$1,900 price level."
We mostly got what we wanted this week. The metal traded down to $1,851.10, a hair above the prior week's low at $1,851, and then regained the $1,900 level on a closing basis. With August's spike low at $1,874.20, this is a very encouraging sign regarding the idea of a "double bottom" for gold.
Over the week ahead, it's imperative there's upside follow-through.
Long-term Treasury bonds (USB) are a factor in the supply/demand equation for gold, and right now USB is coiled for a huge move. Subjectively, USB has been stuck in a narrow trading range for months. Objectively, the width between the Bollinger Bands on the daily chart of USB is presently a tad over 1% (1.03% to be exact). That's the lowest reading for USB at any point over the trailing 5 years.
One of the basic tenets of price action is that volatility compression precedes volatility expansion, and vice versa. Well, USB has just gone through a huge period of volatility compression. Expansion is on deck.
USB closed Friday at 176.89 with its yield at 1.48%. A close above/below either of its Bollinger Bands will attempt to kick-start volatility expansion. The lower band sits at 176.55 and the upper is at 178.38. It would seem the yield associated with USB has a date with 1%, or 2% in its not too distant future. Gold probably prefers the former, not the latter.
As always, another exciting week awaits.
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