Today’s Bond Blunder? Parking Too Much Money Short Term

Weekly Market Guide

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

The S&P 500 has been able to sustain its strength, trending relatively sideways over the past week at all-time highs. In the process, short term stochastics have remained elevated which is often consistent with a strong underlying trend. While we remain constructive on the overall backdrop, we believe a period of consolidation is in order given the pace of the move higher and short term technical indicators at overbought levels. Also supporting our belief that a pause or consolidation is warranted, the put/call ratio (fear indicator) and volatility index are both at the low end of their two-year range. The past few times these have been at current levels, the market paused within the next few weeks with declines between 3-6%. This is well within the realm of possibility and should be viewed as a normal pullback. It is also worth noting that the market can continue higher for a few weeks before a pause. From current levels, a 3% pullback would put the S&P 500 near 3000. This coincides with horizontal support, as well as the current 50 day moving average.

Following a pause or consolidation, we expect the market to continue higher and would thus use pullbacks as buying opportunities. In the meantime, we recommend patience with new money and would be selective at the stock level. Seasonality is a tailwind, as the November – April timeframe is historically the best period of the year, particularly when the S&P 500 ends October in a strong position (as it did this year). Moreover, break outs to new highs have coincided with above average forward returns historically. The S&P 500 is currently 2% above its breakout point on October 28th.

Since the US 10 year yield put in a low on 8/27, there has been a violent rotation out of former leaders (including interest rate sensitive names) and into the former laggards. The higher interest rates have helped the Financials, while the steepening yield curve has eased concerns over the macro environment (contributing to improvement from the more cyclical areas). On average, S&P 500 companies with the most technical momentum prior to 8/27 have seen flat or negative performance since then. On the flip side, the “most beaten up” stocks in the market prior to 8/27 have seen significant strength. For example, the bottom 100 S&P 500 stocks on 8/27 (in terms of distance below their 200 DMA- worst momentum) are up 16.9% on average since 8/27; whereas the top 100 stocks on 8/27 (in terms of distance above their 200 DMA- most momentum), are up only 0.4% since then. Cyclical areas like the banks, industrials, and semiconductors have seen strong relative performance during the momentum shift. At this point, we would refrain from making "knee-jerk" reactions to these areas given their rapid rate of ascent. However, we would accumulate on pullbacks.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index's three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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