The S&P 500 gained 2.16% this week with Friday's close at 3,585.15.
The index has now increased two consecutive weeks and Friday's close is a new all-time high daily and weekly close. The price action this week was rather wild.
The index exploded higher at the open on Monday, undoubtedly on the heels of Pfizer's vaccine announcement (click here). The S&P 500 itself opened 2.10% above the prior Friday's close while the SPDR S&P 500 Index Fund (ticker symbol SPY) jumped a jaw-dropping 3.94% at the open, the seventh largest opening gap SPY has ever recorded. Naturally, the S&P 500 followed suit and within seconds the index traded all the way up to 3,645.99, a decided new all-time high. Euphoria was in the air.
However, the euphoria didn't last, it wore off over the course of Monday's session. The index was once higher by nearly 4% on Monday but it closed Monday back down at 3,550.50, recording a gain of just 1.17%. By Tuesday morning we were trading back down at 3,511.91, meaning everything we gained following the Pfizer news was gone in an instant. What was once euphoria had quickly turned to despair.
But despair didn't last long either. We traded back up to 3,581.16 on Wednesday, only to then reverse back down to 3,518.58 on Thursday, only to then reverse again to finish the week on a positive note, climbing as high as 3,593.66 on Friday. The price action was dizzying.
To be frank, we're not exactly sure what the main takeaway was this week. Monday was euphoric, then disappointing, and now leaves firm resistance in the ~3,650 price region. But the price action Tuesday through Friday was resilient, encouraging, and leaves us optimistic that the bulls still have possession of the ball, meaning it's likely we will trade back toward the ~3,650 price region over the week(s) ahead.
Referencing the chart below, it appeared that we broke out to the upside on Monday (price poking above the red shaded region), analogous to scoring a touchdown, but clearly the touchdown was called back (price closing back down in the red shaded region). That said, it remains 2nd-and-goal from the 1-inch yard line, we're still in position to score. As we wrote last week:
Not only was the price action this week dizzying, but it also serves as a reminder between the disparity of what happens for investors while they're asleep versus what happens for investors while they're awake.
Using ticker symbol SPY as our reference, SPY gained 2.27% this week all while closing -1.61% below its weekly open. Therefore 100% of this week's advance is attributed to SPY's price change in the after hours, or when the market is closed, and more specifically during Sunday night's futures session, or when virtually all of us were asleep.
Interestingly, this is actually the norm over the long term. Comparing SPY's cumulative returns across the after hours (i.e., when the market is closed), defined as buying today's close and selling tomorrow's open, against the regular trading hours (i.e., when the market is open), defined as buying today's open and selling today's close, reveals that long-term investing is all about making money while you sleep!
The chart below is a hypothetical equity curve comparing the performance of allocating $10,000 to three investing strategies on January 29th, 1993, SPY's inception date. The first strategy is investing in SPY during the after hours only (green line, buying today's close and selling tomorrow's open), the second being the regular trading hours only (red line, buying today's open and selling today's close), and the third is simply buying and holding SPY (grey line, i.e., investing in both the regular trading hours and the after hours).
Perhaps the most ironic part about this study is the fact that it doesn't give any thought to what long-term investors do while they're awake. In other words, investing for success over the long term requires you to not only hold your investments overnight in order to make money while you're asleep, but it also requires you to not screw things up while you're awake! This is far easier said than done and it's why investing is hard (and it's also why you absolutely need a plan for the ongoing management of your portfolio).
We'd say 2020 has been one of the most challenging market climates we've ever witnessed and there were plenty of times to screw this year up, with the most recent example being the desire to sell everything in advance of the election. There's a good chance that we all know someone who did this, and since virtually the entire year-to-date advance for the S&P 500 has come over the last 10 days, anyone who sold everything made a costly mistake.
That said, the S&P 500 has a chance to give us all a happy ending to a year we'd probably all like to forget.
S&P 500 Primary Trend - Up
Our work continues to label the primary trend as up or "bullish".
During uptrends, long-term investors are generally best served relying on an equity overweight across their portfolios' asset allocation and mostly passive investing methodologies. It isn't until the primary trend can be labeled as down, or "bearish" that long-term investors should invest more conservatively. Long-term investors always have to decide which of the two primary risks of investing is most prudent to accept: the risk of losing a lot of money or the risk of not making a lot money.
The month of November is off to a blistering start with the S&P 500 currently higher by 9.64% through the first 10 days of the month. Recall from our Update two weeks ago that we mentioned months like October create "boom or bust"-like predicaments for the price of the S&P 500 over the very next month. It's with the luxury of hindsight that we can now say we're absolutely booming rather than busting.
November's opening 10 days are the third strongest 10-day start to calendar month for the S&P 500 dating all the way back to 1970.
Looking forward, we feel exactly as we did last week, and that's if we don't close the month of November at a new all-time high then the month will be remembered as a huge disappointment.
Based on the price action thus far in November, and really the totality of the price action the last seven months, we remain optimistic about what lies ahead for the S&P 500 over the coming six months. We want to see market participants, collectively, remain eager buyers of equities the remainder of November.
Vaccine News Sparks Internal Rotation
From an internal perspective, the price action across the S&P 500's sectors this past week was a polar opposite of the price action from election week.
As we wrote last week, election week internals were more of the same, with the largest market capitalization sectors like technology, health care, and consumer-oriented sectors dominating, while the smaller market capitalization sectors like energy, real estate, and utilities brought up the rear. This week was the exact opposite.
The S&P 500 energy sector gained 16.46% this week, the S&P 500 financial sector gained 8.28%, and the S&P 500 real estate sector gained 5.19%. Meanwhile, it was the S&P 500 technology sector that declined -0.40% this week. The narrative here is fairly straightforward: the Pfizer news helped participants buy into the idea that a post-covid world will probably be most favorable to the areas that were beaten down the most during the covid world. The airlines, hotels, and cruiseliners all ripped to the upside this week, while the technology-centric companies all underperformed. Whether or not we're truly headed toward a post-covid world any time soon is what's a bit more debatable.
The implications here for long-term investors are rather meaningful. The bifurcation over the last five years has illustrated the importance of overweighting your portfolio toward the areas within the universe of stocks that are showing the most relative strength. In other words, the rising tide hasn't lifted all boats and we're not sure it's reasonable to expect the rising tide to lift all boats into the future. Some boats have thrived, like the technology sector and growth stocks, while others have sunk, like the energy sector and value stocks. Investors who were overweight technology and growth have been rewarded, and investors who were overweight energy and value have been severely penalized.
But it's almost as certain as death and taxes that this relationship will reverse one day, and if that reversal is coming sooner rather than later then what's worked best the last five years isn't going to work best the next five years. Tracking market internals via the relationship of SPXEW to SPX is one way to identify when this relationship reverses course to see whether it's sooner or later. We're obviously not there yet, and there's a long way to go, but this week's price action in SPXEW relative to SPX was at least an encouraging start.
Reflation Trade Update - Small Caps, Interest Rates & Gold At Crossroads
The heart of the reflation trade centers on the areas that are most sensitive to the future of both the economy and inflation. Three areas that come to mind are small cap stocks, interest rates, and gold. Let's have a look at all three.
Small Cap Stocks Breaking Out?
Interest Rates Ready to Breakout?
Gold Holding Support?
Happy Sunday!Steve & Rick
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