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Stocks Sprint Through The Finish Line

Happy New Year! We hope you had a wonderful holiday weekend, and we look forward to a good and healthy 2022 for you and yours!

The S&P 500 gained 0.85% this week with Friday's close at 4,766.18. Friday's close is a new all-time high weekly close.

The index opened the week flying higher on Monday, closing the session at 4,791.19. We then traded to a new all-time high at 4,807.02 on Tuesday, a new all-time high daily close at 4,793.06 on Wednesday (our 70th new all-time high daily close of 2021), and another new all-time high on Thursday at 4,808.93. Minor selling pressure emerged on Friday to finish off the week in the red. The index has now gained 4.33% over the last 8 trading days spanning back to Monday, December 20th's close at 4,568.02. Clearly, Santa brought all the presents this year.

The main takeaway from the price action this week was the S&P 500's "breakout" to new all-times.

The breakout isn't confirmed as of yet, but it does appear that the index scored a touchdown this week as the ball looks to have crossed the goal line and the referee raised his arms. The price action next week will provide the answer to the "upon further review" that's required to know if the call on the field stands.

Quantitatively, the "3% rule" and "4-day rule" are our favorite ways to objectively define the word breakout. The "3% rule" requires a trade up to ~4,886 to confirm a breakout while the "4-day rule" basically requires the index to close above ~4,740 each and every trading day this week. 

Should both occur, then it's a safe bet that the highest prices in the history of the S&P 500 didn't bring eager selling pressure into the marketplace (i.e., "resistance" didn't emerge). It would be even more ideal if the S&P 500 traded down into the ~4,730s on Monday or Tuesday, only to then trade up in the ~4,800s on Friday. That would mark the presence of eager buying interest immediately following this week's trade up to new all-time highs, a picture-perfect sign of "accumulation". 

Collectively, this would suggest that the coast is clear for the S&P 500 and it's now "safe to move about the cabin". Remember, eager buying interest in the present is a derivative of the expectation for higher prices into the future.

Sector performance was interesting this week as seven of the eleven sectors within the S&P 500 gained 1% or more for the week, and four of those seven gained 2% or more this week. Real estate was the big winner this week, gaining 3.79% to cap off an incredible month (more on this below). On the surface, one would assume the S&P 500 roared to the upside this week.

But with the S&P 500 only adding 0.85% the obvious takeaway is that its two largest sectors (technology and consumer discretionary) didn't do all that much. Technology gained just 0.54% while consumer discretionary added 0.62%. This is a curious recipe as there remains somewhat of an on-off switch with market internals; either technology and discretionary perform well and everything else underperforms, or everything else does well and technology and discretionary underperform. 

"Breadth" is improving somewhat, but we're still a long way away from the whole team playing well together simultaneously.

Should this on-off switch persist into 2022, there exists the possibility of the S&P 500 crawling to the upside while the smaller sectors are sprinting to the upside. This would be a stark contrast to the last five years.

Taking the number of stocks that closed Friday above their 50-day moving average (50MA) as an example, just 354 of the ~500 stocks within the S&P 500 closed above their 50MA on Friday. By contrast, we've seen peaks well above the 400 marker over the last few years. That's when the team is really rocking and rolling.

So we're on to 2022. It's a new year, but it's a pivotal week and there's a ton of market-moving economic data coming forward to kickoff the new year. We'll get PMI on Monday, ISM on Tuesday, FOMC minutes on Wednesday and the jobs report on Friday. 

We continue to believe the economy is strong, and a recession isn't probably here in 2022, so if this week pairs together strong economic data with new all-time highs for the S&P 500 then we'll have more evidence that the S&P 500 is going to cross the 5,000 region in the first quarter of 2022. Hopefully the call on the field is confirmed.

S&P 500 Primary Trend - Up

The S&P 500 put 2021 in the books on Friday and it was another fantastic year for the index.

The S&P 500 gained ~26.89% in 2021 (28.7% when including dividends), its third consecutive double-digit yearly advance. The index gained 4.36% in December, its best December since 2010. We've now seen the S&P 500 set a new all-time high each and every month for fourteen consecutive months, a streak we've only seen two other times in the history of the index (August 2014, April 1955). The index is also streaking on the quarterly time frame, having just increased for the 7th consecutive calendar quarter and gaining 84.41% over the same time frame. That's the single best seven-quarter return the index has ever produced, and by a wide margin.

All year long we wrote that "this can continue", reiterating the idea that the S&P 500's stellar performance the last few years wasn't a sign that things needed to slow down in 2021.

Thankfully, the index sprinted right through the finish line. Our mantra is not going to change for 2022; the S&P 500 can continue to move higher and climb the proverbial "wall of worry". 

We certainly think 2022 will be a more volatile year than 2021, and we'd be confident in predicting a -10% drawdown at some point over the course of 2022, but we also believe the S&P 500 should close 2022 in the green as well. With the S&P 500 having closed higher 12 of the last 13 years, and 17 of the last 19, calling for higher prices isn't exactly going out on a limb.

Interestingly, there are a lot of people we converse with who believe the S&P 500's advance in 2021 is/was "too good to be true", which generally implies this can't continue. We imagine some of our readers feel this way too, and we can't really blame them. It's human nature to believe what goes up must come down, especially after it's gone up this much.

Importantly, we have absolutely no idea if this will continue, and we can't predict the future. But we are absolutely certain that that S&P 500's yearly return in 2021 isn't a sign that it can't continue.

There are very bright, articulate arguments against the S&P 500's performance here in 2022. From the Fed tightening, to the economy slowing, to geopolitical risks rising, to the uncertainty surrounding inflation and midterm elections...not to mention that we're still in a global pandemic. Note what doesn't make the list though - the S&P 500's return in 2021.

Last year (2021) recorded as the 19th calendar year to see the S&P 500 gain 20% or more. In the prior 18 instances the S&P 500's return the next calendar year has closed higher 9 times in a row dating back to 1991, with 7 of them gaining more than 10%. Overall, 15 of 18 finished the next year higher for average returns of nearly 12%. Momentum is real in the world of investing, and the object in motion tends to stay in motion. Bulls have all the momentum right now.

We also note that the S&P 500 gained 10% or more in the fourth quarter of 2021 while also closing the quarter at a new all-time high quarterly close.

Since 1950 there are 19 prior quarters that match and the S&P 500's performance over the forward one year has actually been stellar. The index has closed higher over every time period measured (1, 2, 3, and 4 quarters later) at least 16 of 19 instances, with the 1st and 3rd quarter time periods closing higher 17 of 19 times. Average returns are above norm across all time periods measured.

We'd be remiss in not pointing out the Decembers on the table above, or all other fourth quarters that gained 10% or more and closed at a new all-time high quarterly close like we did here in 2021. That brings us to Decembers of:








Excluding 1999, the S&P 500's performance the very next calendar year was fantastic in all of the above instances.

As we head into 2022 we've all got 99 problems, but the price action in the S&P 500 isn't one.

(At least not yet...)

Supposed "Defensive" Sectors Go Nuts

There are sectors within the S&P 500 that conventional wisdom deem to be "defensive". They've earned this label based on their historical tendency to perform relatively well during volatility storms, or "bear markets", for the S&P 500. In other words, when the S&P 500 is in a "bear market", a "defensive" sector like the utilities sector is expected to outperform the technology sector. We believe this is a fair expectation, but what about the idea that extreme outperformance from the "defensive" sectors today is a sign of a volatility storm tomorrow? We find ourselves asking this question because of the extreme outperformance the "defensive" sectors of the market produced in December.

Consider the following "defensive" sector returns in December:

Consumer Staples: 10.45%

Utilities: 9.69%

Healthcare: 9.02%

Safe to say, the "defensive" sectors took off to the upside in December like a rocket ship.

Market participants, collectively, were bidding the "defensive" sectors like mad in December. And since the "defensive" nature of these sectors has to do with these companies being able to maintain profitability during economic contractions, we couldn't help but wonder if what we saw in December, collectively, was the market's way of expressing growing concern about the economy in 2022.

Zooming in on the consumer staples sector (which is a bellwether of the "defensive" sectors) as measured by the SPDR's Consumer Staples Select sector ETF (ticker symbol XLP), we can identify 19 prior calendar months where XLP gained 5% or more. A quick glance at the table tells the story, and the overabundance of white suggests that when market participants, collectively, are eager to own the consumer staples sector it hasn't been a prescient sign of a volatility storm for the S&P 500.

If we add an additional filter and try to measure not only calendar months where XLP gained 5% or more, but months where XLP also outperformed the consumer discretionary sector (ticker symbol XLY), an effort designed to show not only eager buying interest for "defensive" stocks but also a preference of "defensive" stocks over economically sensitive stocks, the picture doesn't change.

There are 10 prior months where XLP gained 5% or more and also exceeded the return of XLY. The S&P 500's forward one-year return following such months has then never closed lower.

So, the answer to our question is when the "defensives" go nuts to the upside in the present it's not a sign that you truly need a defense into the future.

"This time is different"? Maybe, but it doesn't usually pay to invest that way.

Happy first Sunday of 2022!

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.

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