Below is a snapshot of last week’s market performance and what to watch in the weeks ahead from Chadd Mason, Cabana CEO and co-founder.
Last week we commented on the back-filling and testing of the 200-day moving average in the S&P 500 (SPY). We saw investors step in and buy at the end of the previous week to allow that broad index to close just above it. That was a positive sign, which resulted in equities across the board opening higher last Monday. Since then buying in domestic and international stocks has continued, pushing most indexes to five-month highs. All of the losses seen during December have been erased and we are now poised to reach the all-time highs, which occurred in U.S stocks late in the third quarter. For those watching the S&P 500 and its proxy ETF (SPY), we are currently above the last area of major resistance at $280. We closed today at $282.33 and the intraday high during September was $294. There is nothing in the way of us reaching that level again over the next several weeks, and buying momentum is on the bull’s side.
In February we pointed out the likelihood of money coming back into stocks if the major indexes could recapture their 200-day major averages. Professional investors follow rules-based strategies and often are required to be invested when markets are in bullish cyclical trends. We saw tremendous equity selling during the fourth quarter. All the money that went into other assets (like cash) had to come back in response to stocks stabilizing and regaining their uptrend. Sitting on the sidelines and watching markets move up and away from you is a professional investor’s worst nightmare. It is worse than watching stocks collapse while you are holding them. Trust me on this. I have been on both sides of it. The net result is that money comes back in and prices rise, even if there is no other objective reason for it. We are seeing some of that now. Last week there were huge inflows into ETF proxies for the S&P 500. These include the SPY, IVV and VOO. Billions of dollars flowed into those vehicles last week.
The trend in outperformance by international stocks and commodities is continuing. I suggested this is a good sign for equities overall. The same phenomena is beginning in small caps and other high beta assets, relative to large caps. This rotation is bullish and evidences an increase in appetite for risk across the spectrum.
Lastly, inflation remains muted and interest rates are contained. Some of this is related to relative weakness in Europe as well as dovish comments by our Federal Reserve. Whatever the reason of the day, it is putting some wind at our backs.
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