Long-Term Outlook Remains Favorable

Bears Control Short-Term Trend

The S&P 500 established a new uptrend following the October 2022 low by making a series of higher highs and higher lows. The anchored volume weighted average price (AVWAP) chart below shows buyers remain in control of the longer-term trend. A sustained break of the region near 4090 would have to occur to put the current rally in doubt. Other areas of relevant support come in near 4320 and between 4240 and 4090. As long as the S&P 500 remains above these levels, weakness will continue to be classified as a normal retracement in the context of an established uptrend, which means the longer-term odds are still favorable for the SPDR S&P 500 ETF (SPY). 

The Market’s Take On Longer-Term Risk

While the combination of fundamental factors varies significantly over time, an uptrend is an uptrend and a downtrend is a downtrend. To illustrate the concept, let’s examine the transition from a bull market to a bear market and then back to a bull market in the 1998-2004 and 2006-2009 periods.

The 1998-2004 monthly S&P 500 chart below has a moving average envelope, which provides insight into the strength of the market’s trend. Trends and the stock market’s risk/reward profile tend to be more favorable when price is above a rising moving average envelope, which was the case in the late 1990s. The trend began to roll over in late 2000 as economic concerns increased. Calendar year 2001 featured a clear downtrend with price remaining below a downward sloping moving average envelope. As market participants became more confident in the economy, the trend flipped back to the bullish side of the ledger in 2003.

2006-2009: Different Problems – Similar Transition

While the primary fundamental issues were significantly different in the financial crisis window (2006-2009), the transition from economic confidence to economic fear and back to economic confidence was very similar to the 1998-2004 window.

How Does The Same Chart Look Today?

The chart below is more helpful if we are willing to review it in an unbiased and objective manner. The market’s long-term profile in 2023 looks similar to the favorable setups in 2003 and 2009 (after major stock market lows). The S&P 500 moved back above the moving average envelope in March 2023 and the slope of the envelope flipped from down to up in April, which speaks to increasing longer-term economic confidence.

Secular Trends and Demographics

A July article provided evidence supporting the resumption of the S&P 500's long-term bullish trend. If we place the same moving average envelope on the chart of the S&P 500 during the secular bull market in the 1980s and 1990s, the look of the bullish turn in the 1988-1989 window below is similar to the 2022-2023 turn shown above.

The 1988-89 and 2022-23 windows also have another important similarity, a large demographic group in an economically-productive window. As outlined in a recent review of demographic trends, the median age of baby boomers was 36 between 1988 and 1994; millennials will have a median age of 36 between 2022 and 2027. 

Base Case: Countertrend Move Within Bullish Trend 

While we will continue to take it day by day with an open mind about a wide range of outcomes, the weight of the evidence says the current weakness in stocks is a healthy countertrend move within a longer-term bullish trend. The monthly chart below, which uses different moving average envelope settings, helps illustrate these concepts. The lime green arrow shows the resumption of the secular bull market in 1991; the orange and red arrow shows the early stages of the 2000-2002 bear market. 

Does the August 15, 2023 chart below look more like the resumption of the bullish trend in 1991 or more like the bearish rollover in 2000 that was associated with a 50% drawdown in the S&P 500?

History says the odds favor the S&P 500 making a higher high following the bout of weakness, which means the outlook for SPY and numerous other highly-correlated stock ETFs, including the Invesco NASDAQ 100 ETF (QQQ), continues to be constructive. 

Personal Opinions Mean Little

The expression the market doesn’t care what you think speaks to the fact that markets set asset prices. If we want to increase our odds of success, it is logical to listen to the market, rather than concern ourselves with what might be, could be, or should be.

MORE CHARTS IN VIDEO BELOW:

Charts Say Pullback Should Be Followed By Higher Highs

Volatility Is A Normal Part of All Trends

The S&P 500 gained a lot of ground after a May 30 post noted multiple-sector strength says S&P 500 could move higher. All trends have countertrend moves, which means red days/givebacks are normal and to be expected.

Distracted By Countertrend Moves

When the odds are favorable, as they are today, investors’ focus should be on the sustainability of the long-term trend. Positive longer-term trends make a series of higher highs and higher lows as shown in the 2011-2015 S&P 500 chart below.

In October 2011 (above), the S&P 500 bottomed and began to form a new and sustainable uptrend. The longer-term trend was clearly up between January 1, 2012 and May 21, 2015. Between points A and B the S&P 500 gained over 69%. Between points A and B there were 851 trading days; 473 of them were green or flat and 378 days were red. Thus, we learn very little about the sustainability of a bullish trend from red days, normal pullbacks, or corrections. That concept applies to all timeframes. The market never drops for no reason, meaning there were countless things to be concerned about between 2012 and May 2015, and yet the S&P 500 gained over 69%.

Same Concepts Apply To Secular Trends

A recent demographic analysis supports the theory that in October 2022 the S&P 500 resumed a secular bull market that began in 2013. Demographics tell us to be open to a long-term bull market that lasts until 2034 or 2035, with some significant corrections along the way. In this article we will examine the S&P 500 monthly Ichimoku Cloud charts. Ichimoku Clouds look complex, but they are very easy to understand. We will focus on pattern recognition. Patterns are relevant for investors since they reflect human behavior.

Secular Stagnation 1930-1949

The S&P 500’s price action between 1930 and 1949 looks nothing like a secular bull market. Secular bear markets or long-term periods of economic and market stagnation share numerous characteristics: (a) the S&P 500 typically cannot make a stand at the blue 50-month moving average, (b) price tends to oscillate above and below the 50-month, (c) the slope of the 50-month is often negative, (d) price spends a considerable amount of time below a downward sloping 50-month, and (e) the Ichimoku Cloud typically turns red.

Secular Bull Market 1950-1973

Does the chart below look discernably different from the chart above? The answer is yes. During a secular bull market, the following characteristics are common: (a) the S&P 500 typically makes a stand near an upward-sloping 50-month moving average, (b) price tends to stay above the 50-month, (c) the slope of the 50-month tends to remain positive, and (d) the Ichimoku Cloud tends to remain green.

The strongest part of the secular trend above ends in 1968; the moves between 1969 and early 1973 are a grey area (somewhat associated with the end of the secular bull and somewhat associated with the beginning of secular stagnation). During secular bull markets a growth-oriented allocation, a higher tolerance for volatility and drawdowns, coupled with a longer-term strategic focus tend to produce satisfying outcomes.

Secular Stagnation 1969-1979

The same basic characteristics that were present in the 1925-1949 period of secular stagnation were present in the highly indecisive 1969-1979 window. In periods of secular stagnation, a more defensive investment allocation, along with tactical shifts tend to be more effective.

Secular Bull Market 1982-2000

The 1979-1981 window is in the grey area (end of stagnation/beginning of secular bull). The Baby Boomer secular bull market began in 1982 and did not end until March 2000. The look of the chart below could be placed in the “secular bull market” closet in the central casting building. The 1950-1968 secular bull and the 1982-2000 secular bull look very similar and look significantly different from the 1925-1949 and 1969-1979 secular stagnation periods.

2000-2012 Secular Stagnation

The 2000-2012 period looks a lot like the other periods of secular stagnation (1925-1949, 1969-1979), and looks nothing like the secular bull markets (1950-1968, 1982-2000).

How Does 2023 Compare?

In 2023, it is helpful to review market action from the end of 2012 to see what we can learn about long-term odds for the S&P 500 and S&P 500 SPDR ETF (SPY). If you are willing to review all of the historical cases above and objectively compare the 2013-2020 chart below, it is easy to see it shares very little with the secular periods of stagnation and has all the common characteristics of a secular bull market.

2022-2023: Secular Trend Script

As shown below, the S&P 500 did exactly what you would expect during a secular trend in 2020 and again in October 2022 by making a stand near an upward-sloping 50-month moving average. 

None of the key characteristics of a secular period of stagnation apply to the two previous charts (2013-2020, 2020-2023):

Secular bear markets or long-term periods of economic and market stagnation share numerous characteristics: (a) the S&P 500 typically cannot make a stand at the blue 50-month moving average, (b) price tends to oscillate above and below the 50-month, (c) the slope of the 50-month is often negative, (d) price spends a considerable amount of time below a downward sloping 50-month, and (e) the Ichimoku Cloud typically turns red.

Demographics and A.I.

A weight of the evidence approach looks at questions from numerous relevant perspectives. Thus, after performing a comprehensive analysis of Boomer, Millennial, and Generation Z demographics, which supported the case for a secular bull market that could last until 2034, it is logical to ask:

Do the charts and concepts presented above align with or contradict the secular bull market thesis?

How Is All This Helpful?

As long as the weight of the evidence continues to support a series of higher highs and higher lows in the context of a secular bull market, investors can lean toward growth-oriented investment allocations and prudently try to ignore 100% normal and to be expected volatility and givebacks that occur even in the context of the strongest bullish trends.

Since markets and stocks tend to be highly correlated, the S&P 500 analysis presented above speaks to the long-term odds for numerous stock-based ETFs, above and beyond SPY, including the NASDAQ 100 (QQQ), S&P Technology Sector SPDR (XLK), and S&P 500 Equal-Weight (RSP). If the evidence shifts in a material manner, we must be willing to reassess the probability of good things happening relative to the probability of bad things happening.

CONCERNING HEADLINES

The headlines were negative on Wednesday, August 2, 2023, just as they were on the 378 red trading days that occurred within the context of the 69% S&P 500 move between the end of 2011 and May 2015. The headlines were also negative countless times in the 1950-1968 and 1982-1999 secular trend windows. In each of those historical instances, patient investors were rewarded with higher highs and higher account balances. Given what we know today, any pullback in stocks should be followed by higher highs.

NEW STUDIES IN THIS WEEK’S CCM VIDEO

We are working on numerous studies based on price action in June and July 2023. Weekly videos can be found on CCM’s Twitter feed, Threads feed, the Ciovacco Capital YouTube Channel, Facebook, and/or LinkedIn.