Long-Term Picture Makes a Turn for the Positive

For those of you who have been following our educational articles and market updates for years, you know that, when it comes to the stock market, I couldn’t care less about what I’m seeing on the news, whether we’re living in the midst of a pandemic, or if the most divisive Presidential election in United States history is just three weeks away.

Instead, I choose to focus on:

1. Price and trend in the market
2. Volume on up vs. down days, and
3. Momentum (up or down).

Then, we invest in the strongest investments, within the strongest industry groups, within the strongest sectors, within the strongest asset classes… or what I like to call in an analogy, “Staying invested in the playoff teams and avoiding the rest.”

As crazy as this year has been, and as insane as this news might seem, this past week, one of my “slower” indicators flipped positive, indicating that the long-term health of the stock market is improving.  I’ll explain this indicator below…

The upper pane (in the chart below) is simply the S&P500.  The next pane down is the percentage of stocks within the S&P500 that are currently above their 200-day moving average (or trendline).  This number now sits at 71.63%, above the 60% level that I consider “healthy.”  One indicator isn’t good enough on its own, so the next pane down is the percentage of stocks on the Mid Cap index that are above their respective 200-day moving averages.  As you can see, this number now sits at 61.98%, also above the 60% level, meaning that 2-out-of-3 indicators are now positive.

The bottom pane (above) is the percentage of stocks on the Small Cap index that currently sit above their 200-day moving averages.  Still below 60%, but improving dramatically this last few weeks.

Why do these numbers matter?  They’re important because, when the stock market is going up, we want to see what we in the nerdy investment business call “broad participation.”  In other words, we don’t want to see the stock market going up and charging into battle on the backs of only a few “four-star generals” while the rest of the “troops” hang back at base camp!

Case in point, as you can see in the image below, the top-5 companies on the S&P500 recently grew to a point where they now make up roughly 24% of the entire index!

If that wasn’t interesting enough, take a look at the performance of these top-5 stocks between December and August of this year, as compared to “the rest” of the stocks on the index.

Of course, it’s easy to look back now, at 2020 in hindsight and say, “We should’ve just invested all our money in the biggest 5 stocks on the S&P500!” But investing all our money in only five stocks would be pretty risky for most investors, and then holding them through the inception of the first U.S. pandemic in more than 100 years, followed by the fastest stock market crash in history would’ve surely been a difficult task.

Point being, when the market is going up, we want to see lots of stocks going up with it.  Going back to the “Generals and Troops” analogy, whenever the big generals are running into battle, we want the troops right behind them, charging ahead… and this is the picture that’s emerging in October thus far.

I’m sure some are probably thinking, “But I can’t invest my money right now… there’s an election coming up in just three weeks!”

As mentioned in last week’s Coach’s Corner Educational Article, the stock market has accurately predicted the winner of the U.S. Presidential election 87% of the time.  To elaborate again, whenever the S&P500 has been higher in the three months leading up to election day, the incumbent candidate has won the election in 20-out-of-23 cases.

Over the course of the next three weeks and leading up until Election Day, I’m going to update this “Election Tracker” below each and every week, unless something changes intra-week that warrants an immediate update due to a change in tide.

Using the same data in last week’s article, if the stock market is above the red line below on Election Day, then based on historical statistics, there is an 87% chance that the GOP would win re-election.  However, if the stock market is below the red line on Election Day, there is a high probability that the Democrats will bring home the victory.

In addition to the “Election Tracker” above, I’ll also be sharing some REAL data on the election, stock market, and forward-looking performance after past elections.

My goal will be to help keep our readers focused on real data and what’s actually happening, as opposed to all the “noise” you’re inundated with each day – the same stuff that keeps you distracted from being (or becoming) a successful investor.

Till next time…

Adam