The S&P 500 closed the month of November today at 2,647.56, a fresh new all-time high monthly close. The index gained 2.81% in November, and is now higher by 18.26% in price-only returns thus far in 2017. When including dividends the S&P 500 has now increased 13 consecutive calendar months, which is absolutely stunning. I repeatedly tell my clients that the price of the S&P 500 will trade beyond the limits of human imagination, and the last 13 months are a perfect example.
We're now one month away from a perfect calendar year, or a calendar year where the price of the S&P 500, including dividends, increases January through December. To the best of my knowledge, that's never happened before. What's the forecast for December? Well, there's two conflicting historical setups that I find interesting, one "bearish" and one "bullish".
First, 8 month price-only winning streaks for the S&P 500 since 1970 haven't historically made it to 9. November marks just the sixth sample of an 8 month price-only winning streak for the S&P 500, and only 1 of the prior 5 instances saw the monthly winning streak make it to 9 (April 1983).
Alternatively, recall that 2017 recorded as a Wayne Whaley "Bullish" TOY calendar year (if that's foreign to you, read this piece I did for www.seeitmarket.com here and sign up for Wayne's work here). The month of December in Whaley "Bullish" TOY years has seen the S&P 500 close higher 13 samples in a row, and 18 of 22 overall, since 1970.
I certainly believe the odds favor a higher close for the month of December, but there is growing evidence that we should expect some turbulence along the way. First, the 10-day average of the CBOE's Equity Put/Call Ratio (CPCE) will close below 0.60 today. Closes below 0.60 preceded both March and August's pullbacks.
Second, the trailing 5-day correlation between the Volatility Index (VIX) and SPDR's S&P 500 Index Fund (SPY) closed today at 0.90. This marks ascending nervousness directly alongside ascending price action, perhaps a form of hedging into higher prices (the old "protection is cheap" narrative). I interpret this as market participants' way of demonstrating skepticism re: said ascending price action. Extreme spikes in this trailing 5-day correlation have preceded turbulence at some point over the forward 1 month more often than not. When identifying all trading days where the 5-day correlation between VIX and SPY was 0.90 or greater, and SPY closed above its 200 day simple moving average, we've experienced maximum forward 20-day drawdowns of -4% or worse in each of the last 3 samples - the bulk of which occurred in the forward 5 trading sessions following the signal date.
If we look at the forest, rather than the trees, and think well beyond December, the behavior of market participants in November left some interesting clues regarding what could unfold over the forward one year. First, I have some deja vu back to November of 2016, given how November of 2017 unfolded. A "Bullish Outside Reversal Month" for the Russell 2000 and SPDR's Industrial Select Sector (XLI), absolutely exploding Financials and Regional Banks via the SPDR's Financial Select Sector (XLF) and SPDR's S&P Regional Bank Index (KRE), the Dow Jones Transports (IYT) rocketing, and an all-time high monthly close for the S&P 500. This all occurred in November of 2016, and has now occurred again in November of 2017. This is not to suggest 2018 will behave anything like 2017, but it is to suggest that the behavior of market participants is hardly any different than exactly one year ago. Broadly speaking, participants remain incredibly eager buyers of equities, any and all narratives fit. This behavior paints the monthly chart of the S&P 500 as a beautiful primary uptrend with nothing but air above (there's no known resistance at the moment). Interestingly, when the S&P 500 closes the month of November at an all-time high, its forward 6-month returns have been higher 10 samples in a row and 10 of 12 overall. As they say, "strength begets strength".
Looking at the Russell 2000 via the iShares Russell 2000 Index (IWM), November recorded as a "Bullish Outside Reversal Month" (BORM), or a calendar month with a lower low, higher high, and higher close than the prior calendar month. Since the lower low came first in November, my interpretation is that market participants demonstrated a salacious appetite to buy IWM's constituents when they went on sale, analogous to a ridiculous Black Friday stampede at your local Wal-Mart. Since inception, there's now 17 BORM's for IWM, and 13 of the prior 16 saw IWM finish higher 1 year later for median returns of 11.91%.
Lastly, November was a big month for the consumer sectors of the S&P 500 with the SPDR's Consumer Staples Select Sector (XLP) and SPDR's Consumer Discretionary Select Sector (XLY) both gaining more than 4%. Since inception, there's now 18 calendar months where both XLP and XLY gained 4% or more and SPY closed the month above its 12-month simple moving average. In the prior 17 samples, the price of SPY closed higher over the forward one year 16 times for median returns of 9.24% . Overlapping samples certainly play a role here, but the point remains - XLP and XLY sent a positive omen for SPY's prospects over the coming year.
After a year like 2017, the easiest and most comfortable path is to sell 'em all and turn your unrealized gains into realized gains. The harder and more uncomfortable path is to "be right and sit tight", or to continue to invest in the purest of forms. I think those who choose the harder and more uncomfortable path will continue to be rewarded over time. And if I'm wrong, well that's what my risk management plan is for.