Headlines
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This year is just like...:
The S&P 500 has had a great start to the year. Through 4 months, it has a high correlation to years like 2013. Going back to 1928 and looking at the years with the highest correlation, future returns struggled during the summer months.
Bottom Line:
See the Outlook & Allocations page for more details on these summaries STOCKS: Weak sell The extreme speculation registered in January and February is starting to get wrung out. Internal dynamics have mostly held up, so a return to neutral sentiment conditions would improve the forward risk/reward profile substantially. We're still a ways off from that. BONDS: Weak buy Various parts of the market have been hit in recent weeks, with mild oversold conditions. The Bond Optimism Index is now about as low as it gets during healthy bond market environments. Fixed income isn't responding well, so that needs to be monitored in case it's transitioning to a longer-term negative market environment. GOLD: Weak buy A dollar trying to rebound from a severe short position has weighed on gold and miners. The types of signals they've given in recent weeks, within the context of their recent surge, have usually resulted in higher prices over a medium- to long-term time frame. Like bonds, gold and miners aren't responding very well, and this needs to be monitored.
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Smart / Dumb Money Confidence
Smart Money Confidence: 31%
Dumb Money Confidence: 72%
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Risk Levels
Stocks Short-Term
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Stocks Medium-Term
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Bonds
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Crude Oil
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Gold
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Agriculture
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Research
BOTTOM LINE
The S&P 500 has had a great start to the year. Through 4 months, it has a high correlation to years like 2013. Going back to 1928 and looking at the years with the highest correlation, future returns struggled during the summer months.
FORECAST / TIMEFRAME
None
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Through the first 4 months of the year, stocks have barely suffered any downside volatility. This seems like 2013 or 2017, two other recent years that were marvelous for trend followers and miserable for pretty much every other strategy.
Buying momentum to start the year has rolled over just about every mean-reversion strategy in 2021, and it's tempting to pick a year that seems similar based on eyeballing a chart. We prefer to take a more objective approach using as much data as possible.
THE CLOSEST HISTORICAL ANALOGS
Using that discipline, we can go back nearly 100 years and look for every 4-month (84 trading-day) start to the year. We'll then filter the years, looking only at those that showed the highest correlation.
There were 19 years with a correlation of more than +0.75 (on a scale of -1.0 to +1.0). We can see their average price path below.
Once the years got to about this point, they tended to plateau into the summer months before picking up again in the fall. The overall trend was still up and to the right.
The 10 most recent years that made the cut are shown below.
Most of them tended to see some exhaustion about now, or if they did see a further push, gave it back in the month(s) ahead. The only real exceptions were 1995, which was pretty much an uninterrupted uptrend, and 1989. All the others saw at least some chop.
FUTURE RETURNS AFTER THE MOST SIMILAR YEARS
The table below shows the S&P's future returns as of day #84 for the years with the highest correlation so far to 2021.
Returns weren't bad, but they weren't great either, especially for the first few months.
Over the next 3 months, the S&P averaged a return of only +0.7%, below a random 3-month return. The risk/reward wasn't bad at all, and over the next 6-12 months, there was only one terrible loss.
ANOTHER CHALLENGE - LOTS OF COMPANY
An additional challenge for the short- to medium-term this year is the high level of sentiment. The table below shows the S&P 500's future returns entering May with the highest levels of Dumb Money Confidence.
The only two years that didn't see weakness, or only a minimal gain, through June were 2003 and 2009. Both of those, of course, were the first years of a bear market recovery.
Confidence has been high for months, with no ill effect on price action. As we saw in February, the "dumb money" has been smart to a degree we've never seen before, so that's a caveat.
Given the recent record of stocks struggling in the early summer with high optimism and the long record of it struggling after the most similar 4-month starts to the year, it suggests a low likelihood of a runaway upside market.
Active Studies
Time Frame | Bullish | Bearish | Short-Term | 0 | 0 | Medium-Term | 0 | 11 | Long-Term | 11 | 4 |
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Indicators at Extremes
Portfolio
Position | Description | Weight % | Added / Reduced | Date | Stocks | RSP | 0.0 | Reduced 4.9% | 2021-04-22 | Bonds | 30.0% BND, 8.8% SCHP | 37.9 | Added 15.1% | 2021-02-18 | Commodities | GCC | 2.5 | Reduced 2.1%
| 2020-09-04 | Precious Metals | GDX | 9.8 | Added 0.1% | 2021-02-18 | Special Situations | 4.3% XLE, 2.2% PSCE | 6.5 | Reduced 5.6% | 2021-04-22 | Cash | | 43.3 | | |
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Updates (Changes made today are underlined)
I've made no adjustments for months, as the situation remained essentially stuck - energy was doing what it should, sentiment in the broader market was ridiculously stretched but with no major warning signs, and sentiment toward gold and bonds appeared overdone on the pessimistic side. Those conditions have started to reverse a bit, so I further reduced my risk. There are still no major warning signs, but I'm getting increasingly uncomfortable and would prefer to sit safely in cash and wait for better risk/reward opportunities. RETURN YTD: 7.5% 2020: 8.1%, 2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%
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Phase Table
Ranks
Sentiment Around The World
Optimism Index Thumbnails
Sector ETF's - 10-Day Moving Average
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Country ETF's - 10-Day Moving Average
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Bond ETF's - 10-Day Moving Average
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Currency ETF's - 5-Day Moving Average
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Commodity ETF's - 5-Day Moving Average
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