S&P 500 Weekly Update: Sector Rotation Keeps The Uptrend Intact

“There’s a way to do it better. Find it.” – Thomas Edison

It’s always good to stop, step back, and take a reality check. While I always like to look at what I am doing right regarding my portfolio management, it is better, but perhaps more painful to look at what I am doing wrong. Each investor should do a self-examination from time to time and take a good look at how they are managing the situation.

I can’t tell you how many times analysts, research firms, market pundits, and authors here on SA have called for investors to be wary that THE market top has been put in. It’s been years now that this phenomenon has been going on, and to date, all have been wrong.

There are a variety of reasons for this. Some just want to get the notoriety of being the person making that call. The skeptics keep stumbling over the same issue. EVERY charge higher is met with the idea that this is it. Maybe they believe a bull market has a time clock that has to be punched. I don’t know.

Perhaps it is the volatility that the world of ETFs has brought to the scene that keeps investors in a mood where they are constantly looking over their shoulder. Of course, the fact that investors have experienced two 50% drawdowns in the last 20 years followed this year by the S&P 500 losing a third of its value in a month hasn’t helped any investor’s psyche. It explains why many are so much more fearful of bear markets now than they were in the past. The mere existence of ETFs and how they are structured exacerbates market moves like many of us have never witnessed before. While we now see them as an integral part of the investment landscape, it is still hard to keep the emotions in check when we witness moves that would normally play out in days that take place in hours.

Whatever the case, it shows why investing with an open mind and changing how we view the situation as the landscape changes is a must. This year is undoubtedly different for all of us as the time spent with family and friends will be diminished due to the Covid event. However, it is the time to enjoy the fruits of your labor and to take the foot off the pedal, unwind, and if possible spending time with your loved ones, family and friends. The virus event has taken a toll on all of us mentally and physically. With only four trading days left in the year, settle back and enjoy the Holidays.

This is a good time to reflect on all of the lessons we learned this year.

The Week on Wall Street

Tesla (NASDAQ:TSLA) was added to the S&P 500 on Monday making the electric vehicle maker the sixth-largest holding in the index. Based on consensus EPS forecasts, Tesla’s high P/E will reduce the S&P 500’s 2021 and 2022 EPS by 1.3% to $166.84 per share and $194.81 per share respectively. The S&P 500’s forward P/E will increase by 1.4%.

This shortened trading week started with an extended stock market meeting a headline on yet another COVID headline. Frankly, this market doesn’t need an excuse to commence what would be a normal “giveback” period, but the media has to fill air time so the virus “story” fits the bill nicely.

Add in the fact that we are entering a relatively thin liquidity week with most investors sitting on large gains from recent quarters, the potential for profit-taking was high. That was the case except for the Financial sector which posted a big move on the day. Recent action by the Fed allowing the banks to buy back shares gave the green light to investors to wade back into this Bull market laggard.

No turnaround this Tuesday for the S&P as weakness continued during the day, but “rotation” trade pulled money out of other sectors and back into Technology, Retail, and the Small Caps. Both the Nasdaq (#52) and the Russell 2000 (#13) set new record highs, while the S&P closed flat on the day.

Money rotation continues. The banks were hot on Monday, cold on Tuesday, and were hot again on Wednesday. The NASDAQ set a new high on Tuesday but it was the lone index in the red on Wednesday. The one index that is showing money flowing in only ONE direction is the Russell 2000 which set its 14th high this year gaining 0.87%.

For the week, the major indices except for the NASDAQ and the Russell 2000 closed with small losses. With this latest push to new highs, the Russell is now up 20% in 2020 and ahead of the S&P which has posted a 14% gain. Both have been left in the dust by the NASDAQ which is up 42% for the year.

It pays to remain disciplined and at the same time flexible in the approach to the markets.

An “Overbought” World

The majority of global equity markets found a short-term bottom at some point in late October including the US. 23 ETFs tracking each of these countries’ equity markets, nearly all are up double digits since the end of October. A dozen have risen over 20% and Brazil (EWZ) has risen more than any other country, gaining over 40%. China (MCHI), on the other hand, is the only hold out as it has risen just 3.44% over the past month and a half.

Given these moves, most of these ETFs are overbought as defined as trading at least one standard deviation above their 50-day moving averages. Only Hong Kong (EWH) and China are not overbought by this measure while India (INDA) is currently the most overbought ETF trading 1.92 standard deviations from its 50-DMA.

That is even though it is at the low end of the performance range of these country ETFs listed. Top-performing Brazil, on the other hand, is the second most overbought ETF trading 1.85 standard deviations above its 50-day. In percentage terms, Brazil is also the ETF trading the furthest above its 50-DMA.

Economy

U.S. growth estimates for the first half of 2021 were revised down in the Philly Fed’s Livingston Survey of Professional Forecasters versus the projections made in June. They’re looking for annualized growth of 2.9% over the first half of next year compared to the prior 7.2% forecast. However, the outlook for the second half of 2020 was nearly doubled to 18.0% versus the prior 9.6%. The estimate for 2H 2021 is 3.7%.

The unemployment rate is now seen at 6.7% for December, well off of the 10.6% previously. The outlook for June 2021 is now 6.1% from 8.3%. CPI inflation should pick up a little to 2.1% next year from 1.6% with the June forecast. It’s also estimated at 2.1% for 2022. The 10-year Treasury yields should close at 0.89% this year and rise to 1.00% in the middle of 2021, according to the new estimate, versus the 1.07% prior projection.

Real Gross Domestic Product increased at an annual rate of 33.4 percent in the third quarter of 2020, according to the “third” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased by 31.4 percent.

A roller-coaster ride for sure, but if Q4 comes in at the forecast 11% or above, GDP will be close to flat for 2020.

The Chicago Fed National Activity Index was +0.27 in November, down from +1.01 in October. That report suggests slower but still slightly above-average growth in November.

Richmond Fed index rose 4 points to 19 in December, only slightly unwinding the 14 point decline to 15 in November. The bounce was broad-based. The employment component rose to 20 from 13, with wages increasing to 32 from 25. New order volume doubled to 24 from 12. But shipments declined to 12 from 20.

Durable goods orders increased 0.9% in November following an upwardly revised 1.8% October rise. It’s a seventh straight monthly gain. Transportation orders climbed 1.9% after the prior 1.5% gain. Excluding transportation orders, they were up 0.4% versus rising 1.9% previously. Non-defense capital goods orders excluding aircraft were 0.4% higher versus the prior 1.6% gain.

Personal income dropped 1.1% in November and consumption slid 0.4%, both weaker than expected but not surprising given the ongoing problems due to the pandemic. October’s 0.7% drop in income was revised up to 0.6%, and the 0.5% rise in spending was bumped down to 0.3%. Compensation rose 0.4% last month after increasing 0.7% previously. Wage and salary income were up 0.4% too versus the prior 0.7% gain.

Consumer confidence tumbled 7.5 points to 88.6 in December, disappointing expectations, after dropping 5.3 points to 96.1 in November. It is the weakest since August. Most of the weakness was in the present situations index which plunged 15.6 points to 90.3 after dipping 0.3 ticks to 105.9 last month. The expectations component slid 2.0 ticks to 87.5 after sinking 8.7 points to 89.5 previously.

The final University of Michigan sentiment figures showed a downwardly revised 3.8 point December rise to 80.7 from 76.9 in November and a seven-month high of 81.8 in October. This Michigan sentiment gain counters yesterday’s 4.3 point consumer confidence drop to a four-month low of 88.6 from 92.9.

Over the past few weeks, initial jobless claims have been fairly elevated in the 800K range and moving higher. Last week’s reading came in at the highest level since the first week of September and was revised even higher this week to 892K compared to 885K originally.

While claims remain elevated, they improved in a big way this week. Claims were expected to drop to 880K, but instead claims saw their largest one-week decline since the last week of August, falling to 803K.

Housing.jpg

Existing home sales fell 2.5% to 6.69 million in November, below expectations. This follows the 4.4% increase in October to 6.86 million and a 9.9% surge to 6.57 million in September. Single-family sales declined 2.4% to 5.98 million after rising 4.3% to 6.13 million in October. Multi-family sales were down 2.7% to 0.71 million versus the 5.8% rise to 0.73 million.

Lawrence Yun, NAR’s chief economist:

“Home sales in November took a marginal step back, but sales for all of 2020 are already on pace to surpass last year’s levels. Given the COVID-19 pandemic, it’s amazing that the housing sector is outperforming expectations.”

“Job recoveries have stalled in the past few months, and fast-rising coronavirus cases along with stricter lockdowns have weakened consumer confidence. Circumstances are far from being back to the pre-pandemic normal. However, the latest stimulus package and with the vaccine distribution underway, and a very strong demand for homeownership still prevalent, robust growth is forthcoming for 2021.”

The median existing-home price for all housing types in November was $310,800, up 14.6% from November 2019 ($271,300), as prices increased in every region. November’s national price increase marks 105 straight months of year-over-year gains.

Total housing inventory at the end of November totaled 1.28 million units, down 9.9% from October and down 22% from one year ago (1.64 million). Unsold inventory sits at an all-time low 2.3-month supply at the current sales pace, down from 2.5 months in October and down from the 3.7-month figure recorded in November 2019.

“Housing affordability, which had greatly benefitted from falling mortgage rates, are now being challenged due to record-high home prices. That could place strain on some potential consumers, particularly first-time buyers.”

First-time buyers were responsible for 32% of sales in November, equal to the percentage seen in both October 2020 and November 2019. NAR’s 2020 Profile of Home Buyers and Sellers released last month revealed that the annual share of first-time buyers was 31%.

Individual investors or second-home buyers, who account for many cash sales, purchased 14% of homes in November, identical to the share recorded in October 2020 and a small decline from 16% in October 2019. All-cash sales accounted for 20% of transactions in November, up from 19% in October but unchanged from November 2019.

New home sales undershot estimates with an 11.0% November drop to a still-solid 841K pace, after 115K in downward revisions that left rates of 945K in October 965K. Despite the revisions, the last six sales rates are still the highest since a 1,016K reading in September of 2006. Analysts expect a 905K new home sales pace in Q4 that would be a 14-year high were it not for the higher 974K Q3 pace.

Global Economy

In the chart below, we see orders for machine tools by major market. China’s recovery in demand continues to lead the rest of the world, with orders back to mid-2018 levels versus improvements from the US, very little recovery in the EU, and a continued advance for the rest of the world.

Source: Bespoke

Given the trajectory of COVID in China versus the rest of the world and relatively hot global export markets as well as the touted China-US trade war never actually impacting the scene, Chinese outperformance shouldn’t be a huge surprise. Of greater note is the very slow recovery in European demand so far.

The U.K. and the European Union secured an agreement over their future relations, setting the seal on the 2016 British referendum decision to leave the bloc and bringing to close years of economic uncertainty and fraught politics in the U.K.

The deal, coming just days ahead of an end-year deadline, calms the worst fears of a major economic disruption in coming weeks as Britain unmoors from its largest trading partner.

Canada.jpg

Canada’s GDP grew 0.4% in October, close to expectations, following the 0.8% gain in September and 0.9% clip in August. The economy surged 4.6% in May, an all-time high 6.2% in June and 2.5% in July as the reopening of the economy unleashed pent-up demand. GDP fell 7.1% in March and a record 11.4% in April as the economy was locked down. The moderation in the rate of growth through the fall is consistent with a fading of the initial reopening surge. Statistics Canada expects a 0.4% gain in November GDP, suggesting that the pick-up in infections and return of restrictions had yet to significantly curtail activity during that month.

The Political Scene

Congress reached a deal and is set to advance a $900 billion package including new funding for small businesses, the second round of individual checks, extension of federal unemployment benefits, and various funding for state/local programs which are expected to provide support for the economy through March.

Similar to the CARES Act, this bill was negotiated behind closed doors and is now being rushed to a vote with little chance for scrutiny, and at more than 5,500 pages (the second-largest bill in US history), there is a lot to scrutinize.

Fortunately for Americans, Congress has been caught “adding on” dollars that should be spent here in the U.S. We are now funding “gender” studies in Pakistan. Egypt, Cambodia, and Taiwan among others that were also beneficiaries of the U.S. COVID relief bill. According to some in Congress Museums, Transit systems and the like also seem to fit the “in need” category. In March, this approach of “secrecy” was more defensible given the uncertainty; this time, it really isn’t, and that’s especially true given the rush to passage is entirely self-imposed by Congress itself.

The bill or “football” has been punted back to Congress, to “fix” the “crime” and perhaps when they finally take a look at what they passed perhaps we will see changes. With unemployment insurance expiring in early March, the spring is likely the next catalyst for a follow-on package which may be geared more toward recovery measures depending on the health and economic situation over the next several months. Of course, the situation with the Georgia senate races may have an impact on that.

The market reaction to this circus was muted. My view on the stimulus issue hasn’t agreed with the consensus opinion that the economy was about to fall apart without it. In fact, it never did. This has been ongoing since the summer months, and while some of the economic data may be in “pause” mode, the bulk of statistics shows the recovery in place. Everyone seems to conveniently forget the economy is NOT fully open for business. When the lockdowns stop, the economic data will then once again pick up.

As far as investors are concerned, either the masses believe the next stimulus package under a new administration will get the job done for those in need or in aggregate believe the resilient economy will continue to muddle along and when the lockdowns end so will the misery for many small business owners.

Federal reserve 2.jpg

The Fed

The 10-year note was stable falling 0.01% for the week.

Source: U.S. Dept. Of The Treasury

The 2-10 spread was 30 basis points at the start of 2020; it continues to widen standing at 81 basis points today.

Sentiment

The American Association of Individual Investors reported that bullish sentiment was 43.5% vs. 43.4% in the prior survey. Bearish sentiment declined for the second week to 21.99% from 26.29% – the lowest reading since Jan. 2. Neutral sentiment jumped for the second week to 34.44% from 30.28% – the highest reading since Jan. 9.

There are plenty of other indicators that are now flashing yellow over some of the optimism that we are witnessing now. SentimenTrader shows it is the biggest concentration of indicators showing excesses in more than 15 years.

Chart courtesy of SentimeTrader.com

SPACs, Innovation Funds, and Bitcoin are leading a “parabolic parade” that will not end well. How much this affects the “general” market is something to ponder now.

Crude oil rose over 2% today, moving back above $48. That was despite EIA inventories which showed a smaller-than-expected draw. Whereas crude oil inventories were expected to fall by 3 million barrels, instead inventories fell by just over a half-million barrels. Production held steady at 11 million barrels/day as imports were slightly higher rising to 5.56 million barrels/day.

Gasoline inventories drew for their first time since the first week of November. Inventories fell by 1.125 million barrels compared to estimates of a 0.8 million barrel build. Exports were at the highest level since April leading net exports to rise to 3.78 million barrels per day, the 15th highest level on record.

With a close at $48.30, up by $0.69 for the week, WTI remains in a tight range just below key resistance.

The Technical Picture

Different week, but the same technical picture. The S&P 500 continues to ride just above the very short-term support trend line.

Chart Courtesy of FreeStockCharts.com

So far a pristine uptrend that mimics the July to September rally when the index never closed below that short-term support level. Back then you will recall that there was a warning of a correction all during the summer months.

There was a scare on Monday when on an intraday basis the S&P did in fact violate the trend line but rallied enough to close above it. Until we do get a close below that green line, it’s merely a guess that a correction looms.

I’d rather not play guessing games, instead stay with the trend while concentrating on the short-term market internals and pivots that are meaningful. However, the Long-Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.

Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should not be based on any short term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.

According to the Washington Post, there has not been a single documented case of COVID-19 transmission from surfaces. Also, it notes the 11 months it took to develop a vaccine for COVID-19 was the fastest ever. The shortest timeline previously was for the Mumps vaccine, which took four years. Other notable vaccines took much longer: Polio (seven years) 1948-1955, Measles (nine years) 1954-1963, Chickenpox (34 years) 1954-1988, and HPV (15 years) 1991-2006.

Cheers to Private, Enterprise, Capitalism. It is time to eliminate the “Big Bad” notation from the pharma companies.

Electric vehicles certainly are the future, and the euphoric activity surrounding the EV space is, well, a bit mystifying. I wonder when some will finally realize they are investing in an automaker. In some cases, the one they have invested in may not even be around in a couple of years.

My stock market positioning starts and ends with the long-term trend that is in place. That trumps all of the conjured up reasons why the market is depicted as scary, vulnerable, and ready to crash. The objective has always been to put the odds in my favor when I form a strategy during any given market period. In this case that is accomplished by looking at evidence that has been on display for a while now.

There are always going to be periods of “giveback” and investors should ask themselves if they fall into the club that parses every word or political move taking place in D.C. and are they part of the crowd that wants to know every new detail on the virus situation. Is your focus on the daily market gyrations or the view from 30,000 feet? Are you waiting and waiting and waiting for the next cyclical bear or do you believe we’re in the midst of a long-term secular bull? Of course, many of us fall somewhere “in-between”.

When the major indices get to the stage where it appears a rally may start to fade or it seems there is a period of weakness ahead, it is always a difficult time for investors to make decisions. The greed area of the brain says to stay fully invested, while the fear factor says it’s time to get out. Generally speaking, if you believe stocks look attractive in 2021, then the common sense part of the brain should be involved in the decision-making process. Concentrating on the very short-term picture adds stress, and stress leads to mistakes.

There are all “types” of personalities that make up the population of the investment world. What I do know is there is a fairly large contingent that is “spoiled”. It’s inevitable; the stock market rallies unabated for two-plus months setting new all-time highs along the way and the first 1% selloff garners more attention than the initial Brexit announcement. It is amazing to hear the “what’s wrong?” and “what’s happening?” comments.

Nothing is wrong. Every stock market chart tells us markets do not go up in a straight line. No matter, when stocks fall a certain faction in the investment world comes up with amnesia. They seem “surprised” at pullbacks, and of course, the “I told you so” crowd make their usual appearance. However there is little reason to listen to anything from the latter group, they’ve been proven wrong for quite a long time.

Now if an investor wants to ponder what might become an issue in this overbought market, I have one that is at the top of my list. Let’s set the stage for what I believe is something no one is talking about. So indulge me while I play the “I told you so” game. The recovery that has occurred after the complete shutdown of the economy has surprised many. At this point in the rebound, many economists projected a statistic like unemployment would be in the 9-10% range. In November it was 6.7% and last week I noted that during 2015/2016 the unemployment rate was 5%. If you recall the economy was completely open for business then. Relatively speaking and all things considered, this recovery will go down as one of the best recorded. It’s the main reason the stock market has achieved these heights in 2020.

Here is the point: this recovery is a function of the policies that were already in place, then bolstered by the actions of all of the existing parties involved. The real threat to the bull market in 2021 is a “Policy Error”. One that upsets the recovery process. This policy error could well be born in the aftermath of the January 5th Senate races. Then again that event may have nothing to do with a “policy mistake”. It could materialize due to a variety of factors.

So if you must have something to be concerned about, I would shun the virus noise and be on the lookout for how the new administration “deals” with the issues that will affect the corporate world.

While this issue is at the top of my list, it doesn’t keep me up at night nor is it causing me to change strategy at the moment. Next week I will follow my own advice, reflect on what I have done right and what I have done wrong. Be thankful for the gifts presented by the equity market this year and then welcome in a new year.

Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.

In different circumstances, I can determine each client’s personal situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.

Thank you #2.jpg to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

A  correction, or new market highs ahead?  Rest assured, 2021 will be another challenging year. My outlook and HIGH conviction selections for 2021 have been published. 

The Savvy Investor is here to assist. Since this is the season for giving, I am offering a 10% discount to a LIMITED number of followers that sign up for my service during the next two weeks. To participate in this offering please use the SA website to send a private message to me and I will personally reply with this select offer. 

2020 was a RECORD year for results. Time to graduate to the next level. 

Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.

IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.

Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.

The opinions rendered here, are just that – opinions – and along with positions can change at any time.

As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.

Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can’t expect to capture each and every short-term move.

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