Fork In The Road? (Market Thoughts)

Weekly Market Image

There is much to like about last week. Stocks had their best week in nearly 3 months. The S&P 500 index gained +2.3% to 2,099, which is the highest weekly close since last July. The S&P is closing in on a 3rd-straight monthly gain, which would be the longest winning streak since June 2014.

“Sell in May and go away” remains absent. Perhaps investors got their selling out of the way early in January/February. Including dividends, the S&P is up +3.7% year-to-date, a pace that just trails that of a typical calendar year return for the index.

What I liked: It appears investors face another fork-in-the-road decision. Here is yet another opportunity for the S&P to conquer 2,100, just like multiple points last year and as recently as late-April. The 2,100 price level is reflected by the blue line in the chart below (click to enlarge):

SPX Weekly 05-27-16

As you see, recent history suggests another decline could be in store here, though we believe the market appears technically stronger than it did throughout much of 2015 in terms of both relative strength and breadth. More stocks are achieving new price-highs than new price-lows, which had been the other way around until February. Also, 72% of S&P stock prices are above their long-term, 200-day averages, which bottomed in February and has rebounded since. Both measures reflect how strongly the overall U.S. market is moving in unison, rather than the broad market being driven by a few, isolated areas.

Further, notice how historically rare it is for the market to plateau for this long over the past 2+ decades (click to enlarge):

SPX Weekly -- 1994 thru 05-27-16

What I disliked: Not much. Keep an eye on long-term interest rates, which remain unfazed by stock gains. The 10-year U.S. Treasury rate has held below 2.0% since late-January, meaning investors have yet to sell bonds in mass. We have yet to see a spike in bond yields, something that often occurs during big market rallies as investors sell bonds to purchase stocks.

Again, this does not qualify as a legit rally until the S&P makes a sustained rise above 2,100 to new record highs. This could be part of the reason bonds have not sold off, which could mean a fast spike in interest rates if U.S. stocks do break higher.

Where have all the bulls gone? Negative investor sentiment has been a positive for stocks in 2016 (as I discussed last week). This was the case again last week with the S&P posting the 3rd-best weekly return of 2016. There is more good news if you continue to take this contrarian view. Bullish market sentiment fell even further in the newest AAII survey, hitting an 11-year low:

Positive sentiment: 18%
Neutral sentiment: 53%
Negative sentiment: 29%

(This survey asks investors whether they expect the market to rise, fall or hold firm over the next 6 months.)

The 29% bearish reading is better than the prior week but negative continues to outweigh positive for a 4th-straight week. The 17.8% rate of bullish-ness is the lowest since April 2005, while the 52.9% “neutral” response rate is the highest since April 1990. No surprise on the 50% indecision considering how choppy the market has been year-to-date.

For more context, 29% negative sentiment matches the long-term average going back to the inception of this survey in 1987. Positive sentiment is less than half the 39% long-term average. The remaining, undecided 53% is well above the 31% long-term average. If the script continues to play out where negative opinion breeds market gains, we would expect to see stocks move higher again this upcoming week.

Housing: New home sales exploded in April, expanding +17% during the month and hitting the highest volume since 2007. The pace of 619,000 new homes sold blew away estimates and is +24% higher than one year ago (as circled below). It is also the biggest monthly gain since 1992. Take a look at the decade-long trend in new home sales (click to enlarge):

New Home Sales April 2016 - 05-24-16

Similar to the housing data I presented last week, it is important to note that new home sales remain ~50% below the housing peak in 2005. For those concerned about another housing bubble, note that new home sales started to decline in late-2005, three years before the proverbial market shi** hit the fan. Take a look (click to enlarge):

New Home Sales - 2003 thru May 2010

Today, in addition to the rise in the number of new homes sold the median home price is surging again, up nearly +10% from $292,000 to $321,000 over the past year.

I believe it is much more likely that housing prices slowly level off rather than rage higher and eventually crash. So just be smart when it comes to owning a home. Do your best to gauge your timeline for owning, such that you know how sensitive you are to a potential dip in housing prices. Take on mortgage debt you can comfortably afford. If your budget is tight, prioritize home projects that add real value over those that only provide aesthetic pleasure. Unless you have specific expertise in housing, avoid being too heavily invested in real estate. Stay balanced between different, appreciating assets.

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About Percension

Percension Wealth Advisors, LLC is a Seattle-based Registered Investment Advisor, providing 401k rollover and IRA money management solutions.


Brian E. Betz, CFP®
Percension Wealth Advisors, LLC
Seattle Registered Investment Advisor

401k Rollovers | IRA Money Management | Financial Planning

Office: (206) 455-2765

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