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S&P 500 New Highs

Despite the soft finish last week, the overall trend for the S&P 500 remains positive. In fact, it was really close to breaching its all-time high last week. And, as of now, futures indicate it should hit new all-time highs Monday.

The trend appears to be all that matters right now. How is the trade evolving?

In an election year, with a controversial pandemic, with the Fed printing money, and Congress debating more stimulus, there’s a lot of guesswork to this market. Stocks are pricing in what they can and waiting to see what new information shows up (what else is new? Stocks always do this). So, follow what the market is showing us.

As of today, there’s been a two-month ‘melt up’ with very low volatility for the SPX as it has recovered to near-all-time-highs again. And this has been in the face of all the economic uncertainty out there.

So the trend is pretty straight-forward: the markets march higher.

This has been a difficult market to have confidence in given the massive government intervention in the way the economy operates. Between major shut-downs in public facilities, schools, restaurants and recreation, we’ve seen some permanent changes in our economy. Some jobs are gone… like… gone gone.

And now the clock is ticking on unemployment benefits and the political gamesmanship is at hand.

Yet the trend is pretty straight-forward: the market marches higher.

If we’ve learned nothing over the past few years, it’s that the Fed has forced the market’s hand in many regards. By keeping rates low (ostensibly in the fight against deflation), money was left with little option but to seek risk in the stock markets. The risk/reward profile was — and is — simply unattractive for the rate of return what gets parked in cash or cash-like assets.

So, money flows into the stock market. Stocks go higher.

The kicker is, it keeps working until it doesn’t.

The Warren Buffets of the world — deep value investors — will say stocks are expensive and unattractive. This may even be true. But that doesn’t mean prices aren’t going higher from here.

When looking at the underlying quantitative data for the stock market, there is still a case to be made that prices go higher. Much of the performance in the indexes has been attributed to their over-weight to Large technology companies (do primarily to the way the indexes are constructed in the first place.) Smaller cap stocks and value stocks have had much less recovery that the large cap growth stocks. So there may yet be room for asset rotation and more growth in indexes.

So the first question is, does the market go higher? And if it does, do you ride get in here or wait for a more attractive entry point?

Only history will vindicate the answer to this question.

The quantitative story is somewhat in conflict with the economic narrative. The quant data says things go higher from here. Stocks are expensive, but the prices are justified by ultra-low interest rates and the fact that there is nowhere else to get much of a return on capital.

On the other hand, the economic narrative, at least in some circles, is one of structural economic damage on a global scale that will lead to a reduction in global GDP, an extended period of joblessness, soaring government deficits and debts, and large-scale credit defaults by both individuals, corporate entities, and unhealthy state and local balance sheets (and we won’t even touch the public pension debate on this one).

The question may be more one of time frame. All of the structural economic problems are real. And money printing doesn’t make them go away. Nor does infinity stimulus or universal basic income or any other free-money scheme. It just changes the pricing variables for the economy and temporarily masks a problem.

Nevertheless, the structural problems move slower than the markets. And markets can — and often do — get out well ahead of the economic data.

This appears to be the case right now as markets trend higher in spite of the uncertainties that lie ahead.

And, of course, in a week, this could all look different…

But for today, the S&P 500 is suggesting all-time highs this week, with a target number of 3422, and a challenge number of 3460. Support is at about 3333, although it appears unlikely we’ll test that low. Instead, look for generally lower volatility, new all-time-highs, and perhaps a string of a few all-time high closes for the index over the week.

And next week? We’ll do the analysis all over again. Until then, have a great week!

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Melt Up

I’ve always thought ‘Melt Up’ was a stupid term. Nevertheless, it appears to be applicable. By all measures my typical measures this market is overbought. The SPX is nearly two standard deviations above the monthly pricing average (and has been such for several days now). It’s well above it’s 50/100/200 day trading averages. And even more remarkable, there appears to be no end in sight.

Of course, there is an end. It may be just over the horizon. It’s just tricky to see in these conditions.

With the DJIA breaking through 29,000, there’s a general wave of optimism. A China trade deal? Optimism. And impeachment? Who cares?… The markets seem to have their eye on the ball right now.

Washington is a sideshow. Trade, while an issue, seems largely priced into expectations. So bad news is no news, and good news is worth pushing this market even higher. Every pull-back is met with buyers who want to get into the party.

Lets be clear: this won’t go on forever. And from a technical perspective, this thing is getting into rarefied air. Trying to peg numbers is a pretty exotic extrapolation.

On the high side, the SPX seems to be on a mission to break above 3300 — this week. That’s a pretty big deal considering the 2020 targets are 3573/3770 for the year.

On the low side, 3217 for the week. But there’s a much lower price point that may haunt us: 3145. This would be a much more material pull-back. But again, that number, while real, doesn’t seem to be on anyone’s radar this week.

In fact, this market seems to be looking for any reason to move higher. It would be a major concern if it weren’t for the general feelings of pessimism that still seem to be the flavor of the day. (Right about the time everyone feels pretty good about things should be the time we really start to worry)

Earnings season may begin to shift sentiment. But even that seems iffy. It seems as if this market is looking at earnings over a year out. As long as the global growth figures continue to climb, and the FED shows no signs of changing policy, the melt up has a good chance of continuing.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.