Historic Behavior the S&P 500 is Repeating

Bulls hope that the round 3,400 level on the SPX is as meaningless in terms of resistance

Senior Vice President of Research
Aug 24, 2020 at 8:41 AM
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“…the SPX battles its February high, while other major benchmarks battle other types of chart resistance. For example, the Nasdaq Composite (IXIC) first touched the round 11,000-millennium level on August 5, and has gone sideways since.”

            - Monday Morning Outlook, August 17, 2020

“…majority of the millionaires surveyed said the S&P 500 will end the year down…millionaires plan to put only about a third of their money into stocks, according to the survey…millionaire investors remain skeptical of the market’s V-shaped recovery. A majority of millionaires surveyed said the S&P 500 will end the year down, according to the semi-annual survey, which polls 750 investors with $1 million or more in investible assets. More than a third said the market will end the year down 10% or more…two thirds say it will take at least a year for markets to return to their all-time highs in February. One in four millionaires say it will take two years or more. The investment outlook by millionaires can have an outsized impact on the market, since millionaires own more than 85% of individually held stocks.”

            - CNBC, May 27, 2020

The S&P 500 Index (SPX -- 3,397.16) had been sniffing around its February all-time closing high since August 11, and the “pause” in the rally is simply a repeat of how it has behaved around other technical resistance levels since the March low. Tuesday’s close, however, was record setting, albeit barely, as the index closed above its previous all-time closing high in February of 3,386.15. Friday’s close was more convincing, with the SPX closing the week just shy of the round 3,400 century mark, and another all-time closing high.   

With the recovery from the February peak now officially complete, a CNBC millionaire survey from late May immediately popped into my head. You can readily conclude from the excerpt above -- that summarized this group’s view of the market -- that they had a not-so-rosy view on stocks, one that more than likely prevails at present. In addition to the fact that they had planned to only put about a third of their money into stocks, an opinion that stood out to me was the fact that two thirds said it would take at least a year for markets to return to the February all-time high. With Tuesday and Friday’s SPX close above its February closing high, equities are at least nine months ahead of schedule. 

The survey only polled 750 investors, a very small representation of the general population of millionaires. However, while I have noted enthusiasm for stocks among some market participants such as option buyers and active investment managers, I wonder if this group is accountable for the massive outflows from domestic mutual funds. This is a concept that I have discussed during the past couple of weeks as potential sideline money that could be supportive of stocks.

The one group that continues to be unconvinced is traditional domestic mutual fund participants, who might be glued to gloomy headlines and detached from price action.”

            - Monday Morning Outlook, August 17, 2020

In fact, in the graph below, we used data from the Investment Company Institute (ICI), a firm that analyzes and estimates fund flows from mutual funds. The chart below takes us through June, with actual numbers. It shows accelerating outflows from domestic equity funds this year, and estimates $54 billion outflows in July. Yes, some of these flows from traditional mutual funds may be directed into exchange-traded funds (ETFs), but per the three charts below, it suffices to say that when combining the outflows of traditional funds with the inflows into domestic equity ETFs, these market participants are fearful.

MMO1 Aug 22

MMO2 Aug22


Data courtesy of Investment Company Institute (ICI) https://www.ici.org/research/stats   

Some of the biggest money managers are vexed by the same paradox troubling everyone else: U.S. stocks are near an all-time high, but the world seems to be falling apart.  Any number of looming threats could bring the historic rally in U.S equities to a screeching halt, top hedge fund and mutual fund managers said.  They include uncertainty over school re-openings, the November elections, tensions with China and the effect of monetary policy on inflation.”

            - Bloomberg, August 20, 2020

There are money managers who are in the market day in and day out that think the SPX’s rally is disconnected from fundamentals. But there are also those that have pointed out, including yours truly, that if you look closer, the market could be acting more rationally than some believe. 

For example, sectors such as energy, department stores, financials, airlines, hotels and casinos, and small-cap stocks have been punished and remain significantly below their highs. But other groups have been beneficiaries, particularly online companies, those powering online organizations, and companies in the race to create a vaccine or a drug to manage the virus. Finally, the dollar has been driven lower amid questionable supply chains and, as such, gold has been bid higher.

To the degree money managers cast a skeptical eye toward stocks, this too represents sideline cash. But the money questions are:

1) “What drives these fund investors off the sidelines?

2) “How much longer can traders, such as equity option buyers and active investment managers, sustain this rally, after the major short covering (see chart in last week’s commentary) that occurred?”

Is it a corrective move to a certain level that moves longer-term skeptics such as fund buyers off the sidelines, an event such as elections or a vaccine coming to market, or is it the fear of missing out if the SPX continues to make new highs? 

For bulls, the important takeaway is there is fear in certain parts of this market that represent future buying power, but there is an equal amount of uncertainty as to exactly what moves them into participating in this rally.

And this is why I remind readers that a shift in sentiment among equity option buyers or active investment managers is what could fuel a correction, if the longer-term players are looking for a deep pullback, or if  they remain on the sidelines waiting for some event to pass before making any major commitments to the equity market. 

But to repeat what I said last week, the price action has not yet given reason for short-term, momentum-based participants to panic out of equities or abruptly stop doing what has worked for months. Resistance levels have generated only brief pauses in the uptrend, with minimal draw-downs, resulting in little to no pain. 

Per my comments last week, I think it would take the SPX moving back below the 3,230-3,250 range to get the attention of short-term momentum traders, and reverse the enthusiasm on display amid these participants. 

The 3,230 level is the SPX’s 2019 close, which acted as a barrier in early June before its biggest decline since the March low. The 40-day moving average, in concert with the round 3,000 millennium level, acted as support at the end of that selloff.   

In the meantime, bulls hope that the round 3,400 level on the SPX is as meaningless in terms of acting as resistance as 3,300 was earlier this month. This does not imply century marks like this are useless, as it took the SPX from early June into late July before finally sustaining a lengthy move above 2,200. 


Todd Salamone is Schaeffer's V.P. of Research

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