Finally A Decisive Breakout

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

After being held captive in trading ranges for over six months, equity markets have finally made their breakout to the upside. The S&P 500 Index, the NASDAQ Composite Index, and the S&P 400 MidCap Index broke out the first week of November. Market sector indexes started to break out as well. The S&P Financials Index, the S&P Technology Index, the S&P Industrials Index, the S&P Health Care Index, and the S&P Basic Materials Index have all pushed up through the ceiling that had been containing their price action. This is very decisive action across several diversified sectors, and can only be interpreted as bullish. 

Interestingly, defensive sector indexes such as utilities, real estate, and consumer staples started to decline just as these breakouts were occurring. This is a perfect footprint of institutional sector rotation. The message is, institutional investors are going all-in with the long-term bull market. They are shucking the defensive positions that had been built up over the past few months and want to be fully positioned for a continued push higher in domestic equities. Other defensive sectors that have pulled back have been the precious metals, including gold and silver sectors. Finally, the worst performing sector of 2019, energy, continues to remain under pressure, and far from a breakout from the long-term downtrend that has been in place since April.

Developed international equities have also broken free from their restricted trading range and moved higher.  They started their breaks in late October with the MSCI EAFE Index, with a strong follow by the MSCI Europe Index. The MSCI Japan Index got a nice head-start with an initial breakout mid-September and another breakout mid-October. Emerging markets remain contained by their very wide 13% trading range, though in the upper range. 

Bond markets have not pulled back significantly during these very broad equity market moves higher. Most bond indexes actually settled into a high-end and quite comfortable trading range back in August, after admirable advances from the start of the year. This still leaves room for a potential rotation from bond markets into equity markets down the road. High yield bonds and convertible bonds, which have led the bond markets throughout the year, continue to push higher.

So why all the hubbub about the equity market breakouts? First, consider the timing of the breakouts from a calendar perspective. November, December and January are historically the most productive consecutive months of the year. Equity markets just finished pushing through three historically treacherous months, with modest gains. The calendar’s winds are at the equity markets’ back. Second, regardless of which Party is victorious, the last seven months of an election year have seen gains on the S&P 500 Index in 15 of the last 17 presidential elections. That’s an 88% accuracy percentage. The two misses were in 2000, when the election’s outcome was delayed for 36 days so ‘hanging chads’ could be counted, and 2008, during the Great Financial Crisis. Equity markets like election years, like the one just around the corner.    

Those are both historic reasons, but the best reasons are the current reasons. In spite of what you read on the front page of our very opinionated news services, the U.S. economy is still growing and still expanding. It does not appear that we are anywhere close to an economic recession. Low interest rates, positive new home sales, low unemployment rates, and low inflation rates are all very favorable current statistics that can’t be ignored. Last, but not least, I believe in the technical charts, and the pictures are simply gorgeous.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.