facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause

Stocks Rip Higher To Start November - Is The Correction Over?

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!

Ironically, all the S&P 500 did this week was trade back up to the same price it was at on October 18, a little more than two weeks ago. While it did so in spectacular fashion, there are no style points in analyzing the price action. The index closed Friday face-to- face with recent and relevant "resistance", so the price action this past week can't possibly be an "all-clear" sign in our view. Is it encouraging? Absolutely. But it's certainly not an "all-clear" sign given that we haven't even hurdled recent and relevant "resistance". Naturally, we'll need to see the S&P 500 hurdle "resistance" from a few short weeks ago to truly get excited. As we wrote a few weeks ago, it's once again now all about follow-through, follow-through and more follow-through!

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.

But we can also observe that six of seven instances all saw SPY close lower six weeks later, on average by -1.76%. That would suggest a weekly close at ~4,281 on December 15, which would mark a decline of -3.40% relative to the presumptive November 24 close at ~4,432. So, if history is any guide (always a huge if), then there's momentum persistence to the upside throughout November and a pullback in the month of December. If that sounds at all familiar, then it should; it's the same script from 2022 - the last time the S&P 500 gained anywhere near 5.85% in a single calendar week.

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.

TLT has been absolutely destroyed the last few years. Literally, destroyed. Maybe, just maybe, TLT bottomed last week at $82.42. Again, if correct, that would probably be great news for the S&P 500, and the economy, over the years ahead.

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. 

If the "Fed pause" is indeed here, and if the "Fed pivot" is on deck in the second quarter of 2024 - something that should only unfold in the event inflation data is aligned with the Fed's price stability mandate - then there's a good chance the S&P 500 is setting new all-time highs in the first quarter of 2024. Here's to the S&P 500 closing above the ~4,400 level next Friday. Fingers crossed!

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.

Alternatively, If the road isn't all clear then investors can come to a complete stop in an effort to protect themselves. Nobody (ourselves included, as well as Warren Buffet and Fed Chair Powell) truly knows what lies ahead. But just like driving, when you obey the rules (i.e., follow the traffic lights) you can mostly stay out of trouble. In this example, obeying the rules means sticking to your long-term investment plan with maniacal discipline regardless of how challenging that may be.

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.

Financial Advisor Websites by Twenty Over Ten Powered by Twenty Over Ten