The S&P 500 exploded higher by 5.85% this week with Friday's close at 4,358.34. Wow...what a difference a week makes!
The S&P 500 opened higher on Monday morning and never looked back. The index never traded a tick below last Friday's close and closed higher every single day this week. This is the strongest weekly advance thus far in 2023, and the strongest weekly advance since almost exactly one year ago with the week ending 11/11/2022's advance of 5.90%. The study Wayne Whaley shared that we referenced in last week's Update now appears prescient.
We can't pretend to have seen this week's upside explosion coming, but we absolutely noted last week that the S&P 500 found itself in a total "boom or bust predicament" as of last Friday's close. Turns out the answer was "boom". In last week's Update we wrote:
"In more simple terms, given how weak the S&P 500 has traded of late nobody should be surprised to see a "rip your face off rally" over the weeks ahead - or a market crash over the weeks ahead!"
So, in case you weren't familiar, now you know what a "rip your face off rally" looks like!
Interestingly, everything we wanted to see last week unfolded this week! "They" stepped up and bought 'em in a major way. The fundamental catalyst for this week's upside was Fed Chair Powell's press conference (click here) as the presumption is that the "Fed pause" is here. Following Powell's speech, market participants in the federal funds futures market now no longer believe there are any additional rate hikes headed our way for the remainder of this cycle (click here). The probability of any future rate hikes absolutely plunged this week.
In terms of price action, the recent downdraft now shows as a false breakdown to the south, and there's an old phrase that reads "from false moves comes fast moves". The index was absolutely sprinting back to the north this past week. The S&P 500 recaptured its 200-day simple moving average, the index bottomed in the vicinity of the 61.8% Fibonacci retracement when connecting March's low into July's high, and everyone now has a horizontal line drawn through 4,103.78. The picture has cleaned itself up quite a bit.
The trillion-dollar questions now are whether or not 4,103.78 will hold as the bottom for the remainder of 2023 (and perhaps also throughout all of 2024), and whether or not this week's upside explosion is an "all-clear" sign for the S&P 500.
This week's move feels like the train left the station this time and it's not circling back, but things also felt pretty bleak last Friday. (Feelings are always the worst predictor of what's to come and instead are a great tell of what already happened). Price and breadth thrusts are firing, and in five short days sentiment has somehow flipped from feeling like the S&P 500 can't go up to feeling like the S&P 500 can't go down!
Quantitatively, we are huge proponents of analyzing price thrust reversals. We define them as strong upward price thrusts within the context of falling prices over higher time frames.
Our favorite is the "2 & 10 Price Thrust Reversal", which calls out calendar months that finish with trailing two-month returns of 10% or more with trailing six-month returns in negative territory. Therefore, and given this week's move, we decided to identify all calendar weeks for the SPDR S&P 500 Index Fund (SPY) that gained 5% or more and finished with negative trailing 12-week returns. Perhaps that sort of price thrust would be indicative of a continued advance for SPY...
Since inception for SPY, there are only seven calendar weeks that match our criteria. Interestingly, six of seven instances all saw SPY close higher three weeks later, on average by 1.70%. This would suggest a weekly close at ~4,432 on November 24.
Another fundamental catalyst this week was Friday's jobs report, which was viewed as softer than expected, thus supporting the "Fed pause" narrative (click here). This helped put the finishing touches on a strong week for the iShares 20+ Year Treasury Bond Index Fund (TLT), which gained 4.22% this week with Friday's close at $87.63. We fully believe the risk/reward relationship for TLT remains incredibly attractive over the coming months, even with this week's 4%+ move to the upside. If correct, then this is a catalyst to higher prices for the S&P 500 over time.
As for the week ahead, it's all about follow-through, follow-through and more follow- through!
Ironically, we'll hear from Fed members all week long. The inflation story still holds all the cards as it's arguably the main driver of forward-looking Federal Reserve policy decisions.
S&P 500 Primary Trend - Neutral
The S&P 500 closed the month of October below its 12-month simple moving average (12MA). Using this as a proxy for rotational, risk-on risk-off tactical asset allocation models, we now label the primary trend as "neutral". Our work suggests investors are best served having a moderate equity weighting in their asset allocation rather than a full-blown equity overweight.
Think of this as analogous to a traffic light moving from green to yellow. August through October's three-month losing streak, combined with the lack of follow-through after October's initial surge, suggested that it's time to slow down as of October's monthly close. Assuming the road is clear, the light will change back to green and investors can then step on the gas once again. If the start to November is any indication, then that is what's going to happen. That said, remember the first few weeks of October too, where the S&P 500 was trading essentially at the ~4,400 level and in positive territory for the month by nearly 3%. That certainly didn't mean much when the S&P 500 traded down to the ~4,100 level in late October. The point is, there's nothing yet that's telling us we're back to a green light, even if it feels like we are.
Happy Sunday!Steve & Rick