Stocks Set New ATH's. The Primary Trend Is Up.

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:

"A breakout to the upside does feel inevitable at the moment, especially given where we are in the calendar year in terms of seasonality, but we'll need to see it to believe it."

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).

Investing during the regular trading hours only since 1993 would have turned $10,000 into just $8,086.47 nearly 30 years later. By contrast, investing in only the after hours would have grown $10,000 into $169,800.03. So, if you've ever wanted a way to make money while you sleep, here's your answer...invest in stocks!

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.

If we can close each and every trading day this week above the 3,580.84 marker, then it's likely we've scored a touchdown and broken out to the upside, at least on a closing price basis. That would be welcomed, and if Goldman Sachs is right about their 2021 forecast they released on Wednesday (a huge "if" since they're not right that often), then there's a lot of money to be made in 2021 (click here)...especially while we're asleep!

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 former is the risk we recommend long-term investors hedge against during downtrends by incorporating an equity underweight and more active investing methodologies, while the latter is the risk we encourage long-term investors to hedge against during uptrends by ensuring equities represent the single largest asset class held in one's portfolio. Long-term investors have to make hay while the sun shines, or they run the risk of not having enough hay when the winter comes. With the chart of the S&P 500 closing Friday at a new all-time high daily and weekly close, and now on pace to close the month of November at an all-time high monthly close, one can make a compelling argument that there's more risk to your financial bill of health by not investing in stocks than there is by investing in stocks.

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.

Only October from both 1974 and 1982 saw the S&P 500 gain more over the first 10 trading days of the month, with October 1974 gaining 14.48% and October of 1982 gaining 11.76%. If we zoom in on all calendar months since 1970 that gained 6% or more over the opening 10 days of the month we're left with just 16 prior calendar months. The S&P 500's forward 5-, 10-, and 20-day returns from there have then closed higher 12 of 16 times for average returns of 0.88%, 1.54%, and 1.46% respectively. We'd be remiss in not pointing out the only other election year November in the table, November of 1980. In that particular instance the S&P 500 traded higher by an additional 3% during the remainder of the month, but got absolutely clobbered in early December. We certainly don't want a case of deja vu there.

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.

We like to track the S&P 500's internals by measuring the performance of the S&P 500 Equal Weight Index (SPXEW) to the traditional S&P 500 market capitalization weighted index (SPX). SPXEW outpaced SPX by 3.06% this week, the second largest week of outperformance SPXEW has ever recorded (the strongest week of outperformance is from early June when SPXEW outpaced SPX by 4.50%). Ironically, that week marked the end of SPXEW's relative strength and is signified by the spike higher on the chart below in the June time period. The trillion dollar question at the moment is, is this time different? From a charting perspective, the picture is at least encouraging and would support the idea of the ratio of SPXEW to SPX retesting June's peak at 1.4013.

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?

Small cap stocks, as measured by the iShares Russell 2000 Index Fund (ticker symbol IWM) gained 6.04% this week with Friday's close at $173.50. Friday's close is a new all-time high daily and weekly close for IWM and the weekly chart now sports a clear bullish breakout. In the eyes of IWM, the reflation trade is just getting started, at least that was the message this week.

Interest Rates Ready to Breakout?

The yield on a 10-year United States Treasury bond (UST10y) closed Friday at 0.89%. That marks the highest weekly close since June. Prior pivots have occurred at the 0.91% and 0.94% marker, so UST10y is staring resistance in the face. If market participants in the Treasury bond space believe in the reflation trade, they'll continue to sell off bonds thus driving UST10y beyond the 1% marker (hurdling the red shaded region on the chart below). That too would be an encouraging sign re: where things are headed.

Gold Holding Support?

Gold declined -3.36% this week with Friday's close at $1,886.20. Gold almost gave back all of last week's advance and recorded a "bearish outside reversal week". The metal traded down to the $1,848 price region, a shade below recent lows at $1,851 and $1,859.20, only to then reverse to the upside. Gold has consolidated nicely following its summertime surge, so we'd like to see the metal find its way to the north over the remainder of 2020. The Fed's desire to run negative real rates for an extended period of time remains supportive of the reflation trade, and thus higher gold prices.

Happy Sunday!

Steve & Rick

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