The S&P 500 closed the chapter on August last week, gaining 3.03% and finishing the month at 2,901.52, a rather decisive fresh new all-time high monthly close. In my last post, which you can revisit by clicking here, I made the case for some turbulence during the month of August. But there hasn't been a lick of turbulence since. The S&P 500 traded down to 2,802.49 on August 15th and then made a sharp U-turn to the north. The index has now increased 8 of the last 11 trading days, climbing 99.03 points, or 3.53%. The primary trend has re-asserted itself as up or "bullish" across nearly all measurable time frames.
The S&P 500 enters September with a ton of upside momentum having increased 8 of the last 11 trading days, 8 of the last 9 weeks, and 5 consecutive months. Additionally, last week recorded as a calendar week where the weekly open (2,884.69), high (2,916.50), low (2,884.70), and close (2,901.52), were all greater than the prior all-time high (2,876.16). We'll call this an OHLC ATH week, and I've only found 13 prior instances of this occurring since 1970. Historically, OHLC ATH weeks have been a sign of momentum persistence, with the S&P 500 closing 11 of the 13 prior samples higher 3 weeks later, on average by 1.13%. Perhaps hindsight bias will record this past week as the breakout that began with a 'breakaway gap".
While the month of September as a whole gets a bad rap, digging into the details reveals that it seems to be a case of Dr. Jekyll and Mr. Hyde. According to Wayne Whaley (click here to sign up for his weekly market commentary), over the last 30 years the month of September has actually closed higher 20 of 30 samples over the time period covering September 1st through September 18th, on average by 0.84%. This upside seasonality would pair nicely with the study shared above regarding the forward 3-week performance for the S&P 500 following OHLC ATH weeks. However, Mr. Hyde then tends to make his appearance over the time period covering September 16th through 25th, with the S&P 500 having closed lower over this time period 24 the last 30 years, on average declining by -1.39%. Mr. Hyde especially loves Septembers following the S&P 500 having closed the month of August at an all-time high too. Of the 13 prior calendar years where August closed the month at an all-time high, the S&P 500 declined for the month of September 11 of them, on average by -1.59%. Interestingly, the only two samples in the dataset that saw the S&P 500 close higher for the month of September were those that entered the month on a 5-month winning streak.
Speaking of 5-month winning streaks, if we turn our attention to the bigger picture rather than speculating about the month of September, August landed what has historically been a huge left and right uppercut combination to the bearish thesis. August saw the S&P 500 finalize a 5-month winning streak that also closed the month at an all-time high.
Since 1950 we have 15 prior instance of 5-month winning streaks that closed month number 5 at a new all-time high for the S&P 500. 14 of 15 then saw the S&P 500 close higher 4 and 6 months later, for average returns of 5.43%, 6.35%. 15 of 15 saw the S&P 500 close higher 1 year later, for average returns of 13.69%. While historically the path of least resistance is always higher for the S&P 500, it's not higher with a 100% win rate. The directional certainty following 5-month winning streaks has been rather persistent, along the lines of Newton's first law, as the object in motion has tended to stay in motion.
In terms of drawup, all samples traded up at least 8.90% at some point over the forward 1 year from month end signal dates close, which in this case would be 2,901.52. A 8.90% drawup from 2,901.52 would place the S&P 500 at ~3,159 at some point over the forward 1 year. Ironically, that's just 4 points away from the measured move price target from a bullish breakout above 2018's rectangle when defining the rectangle with closing prices (i.e., between 2,872 and 2,581).
In terms of drawdown, only 1 sample saw the S&P 500 experience a -10% correction from month end signal dates close. On average, the S&P 500 has only traded down -3.62% from month end signal dates close, which in this case would mark a decline back toward ~2,796. Also, more than 50% of the time the S&P 500's month end signal date closing price is the lowest monthly close for the S&P 500 over the forward 1 year. Can you imagine 2,901.52 recording as the lowest monthly close over the forward 12 months? I can't. But remember, the S&P 500 trades beyond the limits of human imagination.
As always, nothing I've shared in this post is predictive of what lies ahead. Randomness and time go hand in hand in the world of markets, and the S&P 500 could very easily not replicate any of the return figures detailed in these tables. We live in unprecedented times (hello, Donald), and so unprecedented price action could easily occur. That said, the pattern of behavior across market participants the past 5 months is aligned with favorable outcomes for the price of the S&P 500 over the forward 1 year, especially with what transpired the last week of August.
We closed each and every session last week above January's high at 2,872.72. There has been virtually no selling pressure at and above January's prior all-time high, past resistance in the 2,872 region hasn't been resistance this time around. The month of August wasn't like the month of January, and that can only be attributable to the collective actions and behaviors of market participants changing for the better. They didn't sell 'em like mad this time around, they bought 'em and are holding 'em. Analyzing the behavior of market participants in the present provides a glimpse into their cumulative expectations of the future, and their behavior last week suggests that their expectations center on the idea that the future is more attractive than the present - even if Mr. Hyde makes an appearance in September.
I believe the S&P 500 has earned the benefit of the doubt. While I think we'll close September in the red, I also think we'll trade well beyond the 3,000 mark at some point over the forward 1 year. I encourage long-term investors to continue to invest as if the best is yet to come, to not fear Mr. Hyde or panic into any short-term turbulence, and to continue to stick to their long-term investment plan while also being prepared in the event the worst is just around the corner. Utilizing monthly moving averages with the discipline of 1,000 men is a great way to combine participation and protection, to participate or grow account values during uptrends and not lose your shirt or get totally obliterated during downtrends, to essentially separate Dr. Jekyll from Mr. Hyde. These are the primary goals of every long-term investor as they produce the highest of annualized returns, especially when compared to more static or strategic asset allocation policies, which gives you the best chance at achieving your financial goals.
I'll stop giving the S&P 500 the benefit of the doubt when it closes a calendar month below its 12-month simple moving average. Until then, I strive to keep making hay while the sun shines.