The S&P 500 Total Return Index (SPXTR) made it a perfect 15 for 15, recording its 15th consecutive calendar month advance by gaining 5.73% in January. Even excluding dividends, the S&P 500 (SPX) made it a perfect 10 for 10, recording its 10th consecutive calendar month advance by increasing 5.62% in January. If anyone says they imagined this in November of 2016, or April of 2017, they're lying. Conventional wisdom says prices don't move linearly forever, but the last 15 months certainly challenge conventional wisdom. I'm a bit surprised President Trump hasn't tweeted something like "15-0".
The primary trend, no matter how one chooses to define it, remains up or "bullish". Whether you're trading or investing, going against the primary trend is mostly an exercise in futility. Therefore, my bias remains to the upside. There's no known resistance on the monthly chart, the path of least resistance remains higher, and there's no telling just how high the SPX will climb into our future.
Combining Dec & Jan Strength, a Warm & Fuzzy
The S&P 500's cumulative return over December and January recorded at 6.66% with January's close now official. This marks the 19th calendar year where December and January's cumulative total return is 5% or more. In the prior 18 samples, February has then closed higher 4 in a row, 10 of the last 12, and 13 of 18 overall for average and median returns of 1.39% and 1.03%. Keep this in mind if you think SPXTR's monthly winning streak can't possibly make it to 16.
Additionally, the S&P 500's forward 3-, 6-, and 11-month returns (with 11 being the remainder of the calendar year) have been higher 16 of 18 samples for average returns of 3.74%, 6.25%, and 11.21%. The S&P 500's forward 1-year returns, which in this case would be through January 2019's close, have been higher 17 of 18 samples for average returns of 12.04%. Lastly, the path of these returns hasn't been overly volatile as a whole, but there have been a few serious punches to the gut. There are only 3 calendar years that traded down -10% or more from January's close, and the average maximum drawdown from January's close over the forward 12 months is -5.71%. That said, calendar years like 2011, 1987, and 1980 certainly produced a very painful path toward positive returns over time, with 1987 being the lone loser over the forward 1 year. Alternatively, all 18 samples closed a calendar month at some point over the forward 1 year at least 6% higher than January's close. With January's close at 2,823.81, this study would suggest that we perhaps trade down toward ~2,661 at some point over the forward 12 months, which ironically would close the calendar year gap that's currently open, while also closing a calendar month at ~2,992 on or before January 2019's close. The timing, as always, is the tricky part (i.e., whether the drawdown or drawup comes first).
Similar to Wayne Whaley's TOY work (www.witterlester.com), which left the 35th TOY "buy" signal on 1/19, when participants are eager buyers around the "turn of the year" to this degree, it has set the tone for the calendar year in a very favorable way. Unless this time is different...
January's Strength Also a Case of Deja Vu
The S&P 500's price action in the month of January recorded as another "gap & go" month, or a calendar month where the monthly low was greater than the prior month's close. When this occurs during uptrends, as defined as the S&P 500 also closing the month above its 12-month simple moving average, the S&P 500's forward returns have been stellar. I have a fond memory of "gap & go" months, since this entire move got kicked off with a "gap & go" month in March of 2016, and only got stronger with additional "gap & go" months in January and October of 2017. A "gap & go" month here in January of 2018 is as if we're back to where it all started, a case of deja vu.
In the prior 12 samples of "gap & go" months, the S&P 500's forward 1-month return has been higher 10 of 12 instances for average and median gains of 1.94% and 2.97%. This is more than double than the average & median forward 1-month returns for all calendar months that closed above the 12-month simple moving average over the same time period, which record at 0.90% and 1.22% respectively.
Regarding the performance of the S&P 500 over the forward 1 year following "gap & go" months, there are 11 samples with a full forward 1 year worth of history and 9 of 11 samples saw the S&P 500 close higher 1 year later with both decliners being less than 1% (they ultimately cover the same time period). Additionally, 9 of 11 samples saw the S&P 500 trade higher by more than 10% above the "gap & go" monthly close at some point over the forward 1 year. With January's close at 2,823.81, a 10% drawup would place the S&P 500 at ~3,105 at some point on or before January 2019's close. Should that occur, I think you'll find the conversation at your office water cooler rather "euphoric".
Now, 12 samples is certainly a crime of small numbers, especially when samples overlap the way they do in this study, and thus this work is not consistently predictive of February's close, or January 2019's close, but it is at the bare minimum a good omen as we consider the prospects of February becoming the 16th consecutive monthly advance for SPXTR and the S&P 500 potentially recording its 10th consecutive positive calendar year. Participants have behaved, and are behaving, in a manner that has historically preceded higher prices for the S&P 500 into the future. Unless this time is different...
A February Curveball Coming?
As humans, we're seemingly hardwired to believe in mean reversion. When we stand at a roulette wheel and watch 15 consecutive blacks, we can't help but believe the next spin will come up red. So as each month passes it's normal if you find yourself wondering whether the next month will finally be the one where a normalized and healthy pullback will unfold. Well, there was one setup that triggered in January that caught my attention and runs in direct contrast to the historical forward 1-month returns following the two prior setups I just shared.
January went in the books as a calendar month that gains 5% or more and closed at an all-time high. While these two ingredients haven't been an overwhelmingly negative sign since 1970, I do find it interesting that the last 5 times this has occurred the S&P 500 declined rather meaningfully over the subsequent calendar month. Four of the last five instances have seen calendar monthly declines of -3% or more. However, I'd be remiss in not pointing out that in the three instances where this criteria occurred in January, February was then positive all 3 times. I think it's more likely than not that our winning streak extends to 16 in February, in part because the fact that we're on a 15-month winning streak doesn't alter the odds of February being positive or negative.
The price action in January was more of the same, which is an encouraging sign re: the possible continuation of our "bull market". I continue to believe long-term investors will be rewarded by "being right and sitting tight", which at this point in time seems to be a far more uncomfortable path than simply selling their equity holdings and realizing their unrealized gains . As the famed Jesse Livermore said:
"After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!"
While nothing I've shared in this post is a holy grail, or something that's consistently predictive, there is no need to overthink what's transpiring at the moment, which is an unprecedented calm and rewarding primary uptrend that's leaving clues that suggest it's likely to continue. While the waters won't remain this calm forever, you don't need to fear the inevitable pullback, or correction, as it's likely only going to be a temporary decline that interrupts the primary uptrend, rather than ending it. Instead, keep your process simple, keep it straightforward, and stick to the rules of your long-term investing plan, which hopefully include "triggers", "adjustments", and a "stop-and-reverse contingency". As they teach us in kindergarten, when you follow the rules you stay out of trouble.