Stock Market On A Roll Half the talk on Wall Street is about how the S&P 500 is up five straight months. The other half revolves around the question: when is the correction coming?
Since October of 2023, stocks have climbed the wall of worry and closed each month in the green. Blinders on, the market has managed to ignore vacillating inflation numbers, threats of recession, Fed speak, Fed silence, and the tea leaves of corporate earnings.
Most recently, advances were fueled by the Fed's latest remarks that maintained the central bank’s rate-cutting timeline for the year, as well as investors' ongoing enthusiasm for tech stocks amid the AI-powered rally. Overall investor sentiment remains above its historical average, reflecting persistent market optimism.
Since October of 2023, stocks have climbed the wall of worry and closed each month in the green. Blinders on, the market has managed to ignore vacillating inflation numbers, threats of recession, Fed speak, Fed silence, and the tea leaves of corporate earnings.
Most recently, advances were fueled by the Fed's latest remarks that maintained the central bank’s rate-cutting timeline for the year, as well as investors' ongoing enthusiasm for tech stocks amid the AI-powered rally. Overall investor sentiment remains above its historical average, reflecting persistent market optimism.
It’s understandable that sane investors might be questioning the sustainability of such a trend. Has the market moved too far too quickly?
The Case for Continued Momentum
In the stock market, strength begets strength. Put another way, assets increasing in price will likely continue to increase, and assets decreasing in price will likely continue to decrease. The concept of momentum (MOMO) is based on the observation that trends in the prices of financial assets tend to continue in the same direction – until they don’t.
History provides some support. As reported by Jared Blikre of Yahoo Finance, “…since 1950, there have been 30 five-month streaks in the S&P 500, including the most recent one. In all but two of the prior 28 cases, the S&P 500 was higher 12 months later, with an average gain of 12.5% and a 93% win rate. This compares to a 9.0% average one-year return with a 74% win rate.
The bullish advantage decreases over shorter time frames, but critically, it doesn't disappear.”
Well, you say. That does it. I’m backing up the truck… wait. This is the stock market. Any chance there are some contrary opinions?
The Case for a Pullback
You betcha there are some contrary opinions. Take David Rosenberg, economic consultant and former chief economist at Merrill Lynch.
In a recent note, he argued that there has been a lack of solid economic fundamentals to sustain the big rally since the end of last year, describing the market as driven by "complacency, greed, and momentum." Says Rosenberg: "The math just does not add up.”
Ditto for J.P. Morgan Chase Co.’s chief global equity strategist Dubravko Lakos-Bujas who says “Stocks are so crowded they may crack at any time.”
It’s worth noting that J.P. Morgan’s house view on US equities has been dead wrong for two consecutive years (Lakos-Bujas remained bullish throughout most of 2022’s rout and then held a bearish stance during last year’s 24% rally in the S&P 500). This, as reported by Bloomberg.
How is April Shaping Up?
Historically, April has been a friend to investors. Statistics show it to be the best month of the year on average for S&P 500 returns over the past 20 years.
That said, I’ll confess to being a little concerned with all the “blue sky” talk from the talking heads on Wall Street, Rosenberg and others notwithstanding. Tomorrow morning (Friday), we’ll get February’s PCE price index, the Fed's preferred inflation gauge. Given the Good Friday holiday, the market's reaction will be determined on Monday. I’m anticipating a muted response to the PCE data, but who knows?
There is still money coming off the sidelines. MOMO is real. I’m cautiously optimistic going forward.
And For What It’s Worth…
Those of us fearful that artificial intelligence will lead to a Terminator-style wasteland can breathe a little easier. The NYPD has pulled the plug on its Time Square subway police robot after a 6-month trial. [Popular Science]
Initially hailed by Mayor Eric Adams as a cost-effective way to “bring safety and order to the subways,” the K5’s squat presence - it stood 5 foot 3, weighed 400 pounds, and had a single unblinking camera ‘eye’ - was supposed to deter crime and offer help to subway riders.
A previous iteration of the big egg on wheels inadvertently knocked a teen to the ground at a California mall and ran over his foot. Another K5 rolled itself into a fountain in Washington D.C. and fried its circuits. In the NY subways, the police department was forced to assign officers to chaperone least it be vandalized. Unable to use the stairs, the robot mostly sat plugged into a charging station.
Now it’s gone. We’ve bought some time.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
The Case for Continued Momentum
In the stock market, strength begets strength. Put another way, assets increasing in price will likely continue to increase, and assets decreasing in price will likely continue to decrease. The concept of momentum (MOMO) is based on the observation that trends in the prices of financial assets tend to continue in the same direction – until they don’t.
History provides some support. As reported by Jared Blikre of Yahoo Finance, “…since 1950, there have been 30 five-month streaks in the S&P 500, including the most recent one. In all but two of the prior 28 cases, the S&P 500 was higher 12 months later, with an average gain of 12.5% and a 93% win rate. This compares to a 9.0% average one-year return with a 74% win rate.
The bullish advantage decreases over shorter time frames, but critically, it doesn't disappear.”
Well, you say. That does it. I’m backing up the truck… wait. This is the stock market. Any chance there are some contrary opinions?
The Case for a Pullback
You betcha there are some contrary opinions. Take David Rosenberg, economic consultant and former chief economist at Merrill Lynch.
In a recent note, he argued that there has been a lack of solid economic fundamentals to sustain the big rally since the end of last year, describing the market as driven by "complacency, greed, and momentum." Says Rosenberg: "The math just does not add up.”
Ditto for J.P. Morgan Chase Co.’s chief global equity strategist Dubravko Lakos-Bujas who says “Stocks are so crowded they may crack at any time.”
It’s worth noting that J.P. Morgan’s house view on US equities has been dead wrong for two consecutive years (Lakos-Bujas remained bullish throughout most of 2022’s rout and then held a bearish stance during last year’s 24% rally in the S&P 500). This, as reported by Bloomberg.
How is April Shaping Up?
Historically, April has been a friend to investors. Statistics show it to be the best month of the year on average for S&P 500 returns over the past 20 years.
That said, I’ll confess to being a little concerned with all the “blue sky” talk from the talking heads on Wall Street, Rosenberg and others notwithstanding. Tomorrow morning (Friday), we’ll get February’s PCE price index, the Fed's preferred inflation gauge. Given the Good Friday holiday, the market's reaction will be determined on Monday. I’m anticipating a muted response to the PCE data, but who knows?
There is still money coming off the sidelines. MOMO is real. I’m cautiously optimistic going forward.
And For What It’s Worth…
Those of us fearful that artificial intelligence will lead to a Terminator-style wasteland can breathe a little easier. The NYPD has pulled the plug on its Time Square subway police robot after a 6-month trial. [Popular Science]
Initially hailed by Mayor Eric Adams as a cost-effective way to “bring safety and order to the subways,” the K5’s squat presence - it stood 5 foot 3, weighed 400 pounds, and had a single unblinking camera ‘eye’ - was supposed to deter crime and offer help to subway riders.
A previous iteration of the big egg on wheels inadvertently knocked a teen to the ground at a California mall and ran over his foot. Another K5 rolled itself into a fountain in Washington D.C. and fried its circuits. In the NY subways, the police department was forced to assign officers to chaperone least it be vandalized. Unable to use the stairs, the robot mostly sat plugged into a charging station.
Now it’s gone. We’ve bought some time.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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