With only a few weeks left in the year, the S&P 500 is sitting on a gain of 25.1% for the year, through December 9 that is. If the gain were to remain where it is, 2019 would end up as the third best year of the 21st Century with only 2013 and 2003 providing higher returns. The index gained 29.6% in 2013 and it gained 26.38% in 2003.
The big rally caught most forecasters off guard after the big selloff in the fourth quarter of 2018. The Wall Street Journal tabbed Citigroup and J.P. Morgan as the winners of the closest forecast for where the S&P would end the year, barring any major changes in the next three weeks, that is. Both of the investment banks predicted the index would end the year at 3,100 and at this time the index is trading just above that level.
From the beginning of October last year through the low on Christmas Eve, the S&P lost over 20%. This concerned a number of forecasters and some saw the selloff continuing into 2019. According to the Journal article, Goldman Sachs had a year-end forecast for the S&P of 3,000. Bank of America Merrill Lynch had a prediction of 2,900, but expected the selloff from the Q4 2018 to carry over into 2019 and then a V-bottom recovery. Morgan Stanley predicted a closing level of 2,750 and Societe General had one of the lowest predictions at 2,400.
Personally, I had an opposite prediction to Bank of America Merrill Lynch. I didn’t give a level in my prediction for 2019, but I thought we would see a rally in the first quarter and then we would see the market hit some resistance and roll over again. I outlined my prediction in an article for Seeking Alpha last December 28.
My concern was based on how the market environment was looking similar to what we saw in 2000 and 2007, just before the bear markets happened. There were a couple of caveats in my prediction on how to handle it as an investor. One, I was watching the monthly overbought/oversold indicators to determine when a bottom was in. Secondly, I was watching the weekly moving averages to determine if I should increase or decrease my equity allocation.
The monthly oscillators never reached oversold territory like they did in 2002 and 2008-2009. The indicators barely dropped below the 50 level before the rally resumed. Instead of a 2000-2002 or 2007-2009 scenario, it was more like 2015.
Looking at the monthly chart now, we see how the pullback last year took the S&P down to what can be called the lower rail of a trend channel now. Looking at the monthly closing lows from 2016 and last December, we get a trend line that also comes close to the 2011 low.
The upper rail loosely connects the monthly closing highs from the past 10 years and the S&P is right at that upper rail at this time.
We see that the month of December ’18 was the only month where the S&P closed below its 24-month moving average and that was the first time since the beginning of 2016 that the index had been in contact with the moving average.
Of course, this is just one aspect of the analysis that I think people should use. I believe you have to look at the technical picture as well as the fundamental and sentiment indicators.
I know I write a lot of cautious articles for Bull Market Rodeo, but I write about what I see and try not to write about what I think. When I see the Leading Indicators registering negative readings for three straight months, it gives me reason to be cautious. When I see contraction from the manufacturing sector for month after month, it gives me reason to be cautious.
That being said, I think investors need to be cautious heading into 2020. But being cautious doesn’t mean dumping all your equity holdings. It means keeping a closer eye on things and it means you need to be diversified with your holdings.
In my Hedged Alpha portfolio, I have been taking profits on some stocks when they jumped 20% to 30% in short periods. I have also been trying to recommend more stocks that I think will continue to perform well, even if the overall market does turn lower. My three most recent recommendations have been from the healthcare sector, the consumer staples sector, and one from the tech sector. We already have a number of tech sector holdings and have taken profits on part of the trade in a number of cases.
This is what I mean by being cautious. You take steps to protect your portfolio, but you also make decisions that can still help the portfolio grow—even if you think the market is going to move lower. You may end up being wrong about the overall market and you don’t want to miss out on gains as a result.
I was wrong about the S&P in 2019, but that didn’t prevent me from recommending different stocks from different sectors at different times.