by John Rothe | Investment Research
While doing my daily chart review, I noticed an interesting change within the S&P 500 taking place.
The S&P 500 is clearly still in a downtrend as marked by the red, downward trend line.
But notice the MACD; in the past, the MACD had already formed a buy signal — well before the index “touched” the downward trend line.
This time around, we have a newly formed MACD buy signal as the S&P 500 approaches the trendline.
Is having a not-so-aged MACD buy signal a telling sign that investors are thinking the market will break above the trend? Only time will tell.
For now, it’s just one interesting observation of many.
by John Rothe | Investment Research
Monthly Market Summary
- The S&P 500 Index returned +5.6% during November, outperforming the Russell 2000 Index’s +2.2% return.
- Cyclical sectors outperformed during November, with Materials (+11.7%) and Industrials (+7.8%), the top two sectors. Energy (+1.3%) was the worst-performing sector as the price of oil declined -6.9%, followed by Consumer Discretionary (+1.5%), which was weighed down by Tesla’s underperformance.
- Corporate investment grade bonds generated a +6.6% total return, significantly outperforming corporate high-yield bonds’ +3.4% total return.
- The MSCI EAFE Index of global developed market stocks returned +13.2%, underperforming the MSCI Emerging Market Index’s +15.6% return.
Stocks & Bonds Trade Higher After Encouraging October Inflation Report
Stocks traded higher for a second consecutive month after another encouraging inflation report. Data showed the Consumer Price Index (CPI), which measures inflation, increased +0.4% month-over-month during October. While October’s +0.4% reading was a repeat of September’s +0.4%, it was below the market’s +0.6% estimate. Compared to October 2021, the CPI increased by +7.8% year-over-year.
It was the slowest annual pace of inflation since January 2022 and the fourth consecutive month that the pace of inflation slowed from the prior month. Investors cheered the report as fresh evidence that price pressures are easing after a period of high inflation.
The top story in the bond market was falling Treasury yields as investors wagered that a drop in inflation will allow the Federal Reserve to slow its interest rate hikes. Bonds traded higher as interest rates declined, and the U.S. Bond Aggregate generated a +3.8% total return.
The equity market also traded higher, and the S&P 500 followed up October’s +8.1% rally with another +3.6% gain during November. International stocks joined in on the rally and significantly outperformed U.S. equities as the U.S. dollar weakened. Overall, November was a strong month across asset classes.
Market Internals Highlight Broad Participation During November
A look beyond the S&P 500’s headline return reveals strong market breadth. Breadth measures underlying strength or weakness based on the number of stocks advancing or declining and can be used to analyze market trends. A rising index with strong breadth indicates a large group of stocks participated in the index’s rise, while weak breadth indicates fewer stocks participated.
During November, eight out of the eleven S&P 500 sectors outperformed the broad S&P 500 index.
In addition, 425 of the S&P 500’s 503 constituents traded higher during November. This data suggests investors are becoming more confident in the path forward. While it is encouraging to see such broad participation, markets will ultimately be looking for incoming economic data to support the latest rally.
by John Rothe | Investment Research
by John Rothe | Investment Research
Historical lookback of returns during the month of September. 1950 to 2022(as of 9/12/2022)
by John Rothe | Investment Research
One of the more “sticky” myths in the stock market is that of staying fully invested so you don’t miss the best days.
Charts like this are common among fans of buy and hold strategies:
However, what charts like this fail to mention is that the best days often follow the worst days.
There are some powerful arguments that missing BOTH the best and worst days can be beneficial:
How can an investor miss both the best and the worst days?
Applying a 200-day moving average as a signal to exit the market has worked surprisingly well.
The majority of the best and worst days occur when the stock market is trading below its 200-day moving average.
Below is the Dow Jones Index going back to January 1, 1929. The red arrows represent the 10 worst days and the green arrows are the 10 best days.
The orange vertical lines are the times when one of these 10 best/worst days occurred ABOVE the 200-day moving average:
16 out of 20 days occurred below the 200-day moving average. All occurring in the 1930s
If we move ahead to a more “modern” time and use the 1940s as a starting point, 19 out of 20 best and worst days occur below the 200-day moving average:
For investors looking for a way to better manage risk in their portfolio, using a 200-day moving average as an exit signal may add a layer of protection and allow them to sleep better at night.
by John Rothe | Investment Research
After a quiet June, stock market volatility returned in August. The summer’s counter-trend rally is over and investors are starting to watch some key support levels. A pullback to 38.2% or even 50% Fibonacci levels wouldn’t surprise me as economic data is starting to show the Fed still has a lot of work ahead of itself.
Monthly Market Summary
- The S&P 500 Index returned -4.1% during August, underperforming the Russell 2000 Index (-2.0%) for a second consecutive month.
- Energy (+2.7%) was the top-performing S&P 500 sector during August despite oil prices falling -9.7%. Utilities (+0.5%) was the only other sector to produce a positive return. Technology (-6.2%) was the worst performing sector as interest rates rose, followed closely by Health Care (-5.8%) and Real Estate (-5.6%).
- Corporate investment grade bonds generated a -4.4% total return, slightly underperforming corporate high yield bonds’ -4.3% total return.
- The MSCI EAFE Index of global developed market stocks returned -6.1% during August, underperforming the MSCI Emerging Market Index’s -1.3% return.
Stock & Bond Markets Endure a Bumpy August After July’s Gains
The S&P 500 produced a -4.1% return during August, but the headline number doesn’t tell the full story. Equity markets initially rallied during the first half of the month, with the S&P 500 gaining +4.2% through August 16th as July’s market rally continued.
However, the second half of August marked a sharp reversal as the S&P 500’s gave back all its gains plus more. Credit markets also experienced a reversal during August as interest rates reversed higher and bonds produced negative returns.
The increased volatility across stock and bond markets is being attributed to a wide range of investor views creating a tug of war effect in markets, as well as uncertainty regarding how long the Federal Reserve will continue to raise interest rates.
Federal Reserve Chair Pushes Back Against Hopes for Policy Pivot
Reducing inflation is likely to require a sustained period of below-trend growth … [and] will also bring some pain to households and businesses.
The Federal Reserve held its annual August Jackson Hole meeting, and Chair Powell used his speech to forcefully push back against the notion the Fed will pivot and cut interest rates if economic data starts to weaken.
Powell emphasized the central bank’s “overarching focus right now is to bring inflation back down to our 2 percent goal” and cautioned, “Reducing inflation is likely to require a sustained period of below-trend growth … [and] will also bring some pain to households and businesses.”
Investor hopes for a Fed pivot were one of the primary catalysts that propelled the stock market higher during July and August. Chair Powell’s speech dashed those hopes and sent the S&P 500 down more than -3% on the day of his speech.
Why?
Two lines from Chair Powell’s speech underscore the Fed’s goal, “There is clearly a job to do in moderating demand to better align with supply. We are committed to doing that job.” This focus on lowering demand for goods and services may increase portfolio volatility during the months ahead as investors debate how long it will take the Fed to achieve its goal and the impact tighter policy will have on the economy.
