We hope you have a good holiday weekend!
The S&P 500 declined -3.29% this week with Friday's close at 3,924.26. The index has now declined three weeks in a row, falling -8.31% in the process.
The high of this week came on Monday (4,062.99), the low of the week came on Thursday (3,903.65), and the index found selling pressure almost every single day this week. For example, Monday closed -0.80% off its high, Tuesday and Wednesday closed -1.45% and -1.50% off their daily highs too, respectively. Thursday then saw the opposite as participants "bought the dip" with the S&P 500 closing 1.62% above its daily low, but Friday then gave it all back! If "they" bought the dip on Friday, then "they" sold the rip on Friday, with the index closing -2.34% off its daily high. If Thursday and Friday represented a wrestling match between eager buyers and sellers, then the sellers won this week.
In last week's Update we wrote:
"If the index can bend but not break, implying the index trades down into the 3,900s during the week but finishes the week back over the 4,000 marker, that would be a fairly encouraging sign."
We were encouraged on Friday morning when the index traded up above the 4,000 marker, especially after trading down to 3,903.65 on Thursday morning. It appeared the index was bending but not breaking, buoyed higher by Friday's jobs report (click here). But Friday's selloff, which seemed to be sparked by this headline (click here), left us finishing the week slightly discouraged. Good thing feelings have no place in the forecasting and investment decision-making process...
Looking at the charts, the S&P 500 is now below any and all widely followed moving averages. Further, Friday's selloff actually originated from a backtest of the 50-day simple moving average (50MA) which stood at the ~4,020 region. The market makes the news, so we can't help but wonder if it was actually the backtest of the 50MA that led to emerging selling pressure on Friday, and not the headline out of Russia.
The selloff the last three weeks does sort of leave the index in no-man's-land. We have a top (or "resistance") at 4,325.28 and we have a bottom (or "support") at 3,636.87.
The trillion-dollar question is which level does the S&P 500 reach first, 3,636.87 or 4,325.28? A retest of June's low or a retest of August's high? Nobody truly knows for sure, but it feels like the S&P 500 has been turned "off"...
We've written a lot over the years about how modern markets have developed a tendency to trade like they have an "on/off" switch, and the price action since the June low illustrates the point well. Three weeks ago the S&P 500 was on a three-week winning streak that gained 8.03% over the trailing three weeks. Now? The S&P 500 is on a three-week losing streak and has lost -8.31% over the last three weeks. It's as though seven weeks ago the index was turned "on" and four weeks ago the index was turned "off".
Since 1950, there are only five other instances of the S&P 500 recording a three-week losing streak that declined -5% or more immediately after recording a three-week winning streak that gained 5% or more. Interestingly, we've now seen this pattern occur twice in 2022, with the other five dates being:
If we change the criteria to identify all instances of the S&P 500 recording a three-week losing streak that declined -5% or more immediately after gaining 5% or more over the prior three-week period (i.e., it doesn't have to occur over a three-week winning streak), we still only find nine prior instances of this happening. In other words, strength typically precedes strength, and it's rare to see what we've just seen, which is the S&P 500 follow the strength of a gaining 5% or more over a three-week period with the weakness of a three-week losing streak that falls an equivalent amount on the downside in percentage terms (-5%).
As we mentioned, this is now the second time in 2022 the S&P 500 has recorded this six-week pattern. The price action following the last occurrence on 4/22/2022 was downright nasty. If we're experiencing a case of deja vu, the answer to the trillion- dollar question will be a retest of ~3,636. That's still a big "if" though, and it's not necessarily a bad thing! "Double bottoms" are always possible.
All eleven sectors within the S&P 500 finished in the red this week, and we can't recall the last time that happened.
Utilities were the top performing sector, only falling -1.47%. Technology was the worst performing sector, falling -5.03%.
S&P 500 Primary Trend - Down
The S&P 500 finished the month of August on Wednesday, falling -4.24% with a monthly close at 3,955.
The index fell flat on its face the final two weeks of the month, turning what was a 4.72% monthly gain at the highs of the month on Tuesday, August 16, into a -4.24% monthly loss. We haven't seen a monthly reversal like this since March of 2020, and February of 2020 before that.
In our Update from August 14 we wrote:
"But, it's not the end of August yet! Remember, monthly closing prices won't go official until August 31st, 13 trading days away. Thirteen trading days are an eternity for the S&P 500, especially when the Volatility Index (VIX) is hovering near 20. This too supports why we believe the remainder of August is so pivotal. If "they" don't sell 'em we're likely staring at our 12th "2 & 10% Price Thrust Reversal". If they do sell 'em, then the picture will become decidedly more uncertain."
Unfortunately, we didn't come close to recording a "2 & 10% Price Thrust Reversal". "They" sold 'em like mad these last few weeks and that's why the picture is now decidedly more uncertain.
We wrote last week about September's seasonality and how it's traditionally a poor performing month for the S&P 500. Well, all Septembers are not created equal! Sometimes the S&P 500 enters the month of September having been on a tear higher for the year, and other times it limps into September licking its wounds on a year-to-date basis. The year 2022 is clearly the latter.
The S&P 500 finished the month of August down by more than -10% for the year.
Of course, what happened in each of the above prior calendar years has no bearing on what will happen here in 2022.
But, the ingredients are clearly there for a crazy September and the table above is almost nothing but crazy Septembers. So, the seat belt light remains on.
As we've written all year, at least since the end of January, we believe long-term investors are best served investing more conservatively than they otherwise would if the primary trend for the S&P 500 was labeled as up or "bullish".
The forecast is cloudy with a chance of torrential downpour, massive thunder, and jaw-dropping lightning. It's anything but the sunny skies that dominated all of 2021. Therefore, if you're doing the same thing you were doing in 2021 and expecting the same results, that's not going to work.
We recognize that it's all but guaranteed that the sunny skies will return and the best of times do lie ahead for markets, but we openly admit we have no idea when that will be. Given that degree of uncertainty, and the consequences of passively investing during primary downtrends, or "bear markets", we believe long-term investors should manage the risk of getting stuck outside in torrential downpour. We believe strategy diversification is an answer. Strategic and tactical asset allocation strategies can sit at the same dinner table and have a grand old time (h/t Manish Khatta).
In the world of long-term investing, risk is all that's guaranteed, returns are only expected.
Bonds Remain Dead, Commodities Get Hit, VIX Snoozes
Random happenings across the investable universe this week:
The Reuters/Jeffries CRB Index (CRB), a broad-based measure of commodity prices, fell -4.59% this week. Unlike the bond market, this jives with the "peak inflation" narrative, which only furthers the mystery behind the recent bond market rout.
One of the more perplexing aspects of this week's selloff was the fact that the Volatility Index (VIX) actually declined on the week, the same week where the S&P 500 declined -3%+! That's definitely not the norm.
We haven't seen this happen since February of 2009, but the VIX was in the mid-40s at that time. The last time we saw the VIX sleep through a week where the S&P 500 declined -3% or more (meaning the VIX finished the same week red and closed below the 30 level) was March of 2003. And before that was August of 2001...
From a narrative perspective, we interpret the pairing of falling stock prices with the lack of a VIX spike as a relatively bad omen. If participants aren't rushing for protection via opening put option contracts and/or selling covered calls, all while stock prices are falling, it would seem that participants are more interested in liquidating their underlying securities rather than hedging their underlying securities. That's not exactly a vote of confidence regarding what lies ahead for those underlying securities.
It will be interesting to see if we get some sort of VIX spike over the weeks ahead. "Bear markets" have a way of producing outliers that catch market participants off guard, and that's usually enough to ignite the demand for protection. Time will tell!
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.