Recently I've been hearing more and more from market participants about how impressive the returns have been thus far in 2019. However, it's all relative, based on your starting point. Those who implemented a portfolio at the beginning of 2019 are most likely quite happy with the returns the market has given year-to-date (YTD). On the other hand, I can imagine there are many who invested at the beginning of 2018 who are frustrated by the relatively minimal net movements of the market since their investment. We have been stuck in a large trading range for quite some time now.
Over the past two years, there’s been a whirlwind of volatility. And just when things appear to be clearing up, the washing machine gets turned on again and takes us for another spin cycle. Will this be the time we have a sustained breakout and continue to push onward and upward? Or will we be heading lower once again? I wish I had a definitive answer, but I don't. Therefore, I’m playing the probabilities, watching technical developments and getting prepared for either outcome. Let's look at some charts that might help answer some questions.
On the middle pane in the following chart, I've placed a dashed orange line at the price level indicating the January 2018 high. I've also put a dashed red line indicating the September 2018 high. As of this writing, prices are above both the January and September 2018 highs, but only minimally. Technically speaking, if we remain above roughly 2950 (red dashed line), this favors the bulls. A move back down to around 2950 (red dashed line) would be a normal throwback. What price movement actually occurs is of great importance.
On the most recent push higher in July 2019, we start seeing some divergences between price (middle pane) and indicators (top and bottom panes). NYSE net new highs are not expanding with price (bottom pane). Similarly, the S&P 500 high-low percent (top pane) is also diverging and trending lower as price traveled to new all-time highs. While I'm keeping an eye on these indicators, overall market breadth has been quite good and hasn't been of major concern yet. Blue dashed arrows show the direction of the indicators and price.
While prices have been trending higher recently in the S&P 500 (bottom pane, chart below), we have also seen higher lows in the VIX (top pane). This is indicated by the blue dashed lines. This suggests to me that there's still some level of elevated fear in the market, based on the option trading in the S&P 500. We may see volatility increase at some point over the remainder of the year. If we look back to September 2018, we also saw the VIX showing a higher low while the S&P 500 was showing a higher high. I'm not saying we must have a repeat of last year. I'm simply stating that the elevated levels in volatility have caught my eye.
S&P 500 Performance by Year (2011 through Present)
In the following chart I've plotted the S&P 500 performance by year from 2011 through 2019. The black box marks our current position compared to prior years. As you can see, since 2011, the index is outperforming all prior years at this point in the calendar year. Can we sustain such a strong price advance? Anything is possible. The market can push the limits and has done so many times. However, being prepared for a pause and lower price levels is also prudent.
S&P 500, Dow Jones Industrial Average, Nasdaq and Russell 2000 Performance
As I've previously stated, the timeframe on which you're basing performance matters. In the following images, I've plotted performance over a few different periods for illustrative purposes. YTD returns are quite impressive. However, if we base performance from prior peaks in 2018 and a more recent peak in 2019, returns have been quite limited. Also, the Russell 2000, which is an index for small cap stocks, is still negative over all the timeframes I've plotted (except for YTD). The other indices have gone on to make new highs while the Russell 2000 is still lagging and underperforming.
Performance Since January 26, 2018
Performance Since September 21, 2018
Performance Since May 1, 2019
Source for all graphs: Stockcharts.com
Over the past 19 months, we've seen a lot of movement, but long-term progress has been quite subdued. During this period, we’ve had some violent moves both to the upside and downside. While I remain guardedly bullish, based on the current price level, prudent risk management is always my main priority. Numerous metrics have me watching movements closely. The market can push the limits more than any of us can imagine. Don't think the market can't go higher. It can. And don't think the market can’t turn and go much lower from here. It certainly can. Preparing for any and all outcomes is crucial. As Benjamin Franklin sagely put it: "By failing to prepare, you're preparing to fail." So, prepare your plan for the remainder of the year. Then follow it. For help designing a plan, click here.
The indexes mentioned in this communication are unmanaged and not available for direct investment. Past performance is no guarantee of future results. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information contained in this commentary has been obtained from sources that are reliable. This presentation is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.