Is This Time Different?

The most popular stock index in the world hit an all-time high last Tuesday, but very few stocks are above their intermediate-term trends, let alone their long-term trends.  When you dive deeper, even fewer sectors, industry groups, and individual stocks are in uptrends, and the smaller you go in company size, the darker it gets.


In fact, only one of the S&P500 sectors joined the index at its all-time-high this past week, and that was the Consumer Discretionary sector.  This type of thin participation didn’t even happen during the 2000-02 or 2007-09 market crashes.  Then again, there hasn’t been much about this crash that has looked like anything else in history, so there’s that…


As we close in on the seasonally weakest month of the year for the stock market, 2020 has indeed been a very, very strange year.


First, we experienced the first official market crash in more than 11 years, but it just happened to be the absolute fastest decline in U.S. history, with 2nd and 3rd place being handed to The Great Depression and Black Monday.  Otherwise the “honorable mention” award (and all those thereafter) require a telescope to see in the distance.


Fastest-Market-Crash-Ever Is This Time Different?


Going thru a global pandemic, an economic shutdown, and record unemployment numbers that eclipsed the 18-month bear market between 2007-09 in a matter of weeks led most to believe that the bounce off the March lows was just that – a mere “bounce” before another leg lower.


I was in this camp, that is, until one-by-one, the short-term trend, then intermediate, and finally the long-term market trends all turned positive, making 2020 one of the fastest market recoveries during a recession in U.S. history.  The 5-month recovery is truly amazing, considering the fact that the average recovery during a recession is 30 months, not to mention what we’ve all been through this year.


Fastest-Market-Recovery-Ever Is This Time Different?


Observing the speculative, retail investors in the market (what SentimenTrader calls the “Dumb Money”) we’re seeing levels closing back up to the highs seen in February this year, just prior to the first decline.


As of Tuesday, August 25th, the spread between the Smart Money and Dumb Money is expanding, all while reaching (or exceeding) “normal” thresholds.  To add perspective, these levels rarely get above 70% or below 30%, and as you can see below, Dumb Money confidence has risen to almost 80% while Smart Money confidence is falling toward the 30% level.


Smart-vs.-Dumb-Money-Confidence Is This Time Different?


With all that being said, and completely ignoring the pandemic, the news, and any other fundamental metric (such as government debt, unemployment, etc.), the stock market tends to do well after it’s hit all-time-highs.  Looking out six months from now, the average performance of the S&P500 averages between 4-6% or so.  Go out a full year, and we’re talking 8-11% roughly.


SPX-after-New-Highs Is This Time Different?


So while short-term sentiment looks frothy, this has been a truly unprecedented year for the economy and the stock market.  Not only has this been the wildest year in my career, but reviewing all the education shared above, this has likely been the wildest year for anyone reading this letter.


Never in history have we seen a market crash like we experienced in 2020, and never have we lived through the uncertainties that our country currently faces today.


With the U.S. Presidential election just weeks away, you have to ask yourself, in such a record-breaking year, could the stock market – against all odds – continue climbing into, through, and beyond 2021 without taking another trip down the elevator?


If one thing is for sure, 2020 has proven to be a year in which truly, anything can happen.


Till next time…


Categories: Adam Koos, CFP®, CMT®, Market Commentary

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