Wow, here we are wrapping up another year. The S&P 5001 was surprisingly one of the stronger markets around the globe this year, even outpacing the NASDAQ (a rare occurrence in the past couple of decades). On the other hand, traditional “diversifiers” like Bonds (both aggregate and US Treasuries) and Gold have had a rough year, all expecting to finish in the red for 2021. Ouch.
All this adds up to a year where traditional diversification didn’t work, even with the stock market rising to new highs. The bond market hurt many portfolios but didn’t get too much media attention. In fact, we have been watching bonds for awhile and will likely use them less in the future. We expect rising interest rates will likely cause bonds to continue to have a rough time in the coming years. The old-fashioned 60-40 “diversified” portfolio has struggled and, we believe, will continue to do traditional investors a disservice going forward, even when the stock side looks deceptively positive.
Speaking of which, our Mid-Term Cycle signal has been positive since December 22nd. Since that time, the market has had a very quick rebound after a shallow sell-off. That’s been really interesting to watch, given how negative things looked through the last half of November. Since our “sell” signal around November 22nd, for nearly a full month, the market has been highly volatile and we largely stayed out and avoided the chops.
As of Thursday night (December 30th, 2021), our Shadowridge Dashboard showed Positive to Negative sectors as 9 to 2. That has been steadily increasing since earlier in the month. But as we finish off the year, the market seems to be getting stuck while slowly and somewhat quietly drifting sideways. Still, there seems to be some momentum in broad buying that we could see ignite into a strong January. That would make for a Happy New Year for sure.
For this month’s chart, let’s look at something we look at every day – the NYSE New Highs-New Lows. The Green/Pink line is the daily sum of stocks going up minus the sum of stocks going down. When the line is green, it’s positive. And when the line is pink, it’s negative. We also have two moving averages (lines in purple and red). What we watch for is first, the Green/Pink line turning pink. Then we watch if the pink line falls below the red and purple moving average lines. When that happens, something might be wrong in the broad markets. For example, we saw this happen in February of 2020 before the COVID crash and again in September 2018 before the market dropped for nearly three months until Christmas day. It doesn’t look like that now, but it has our attention.
Bonds – the Aggregate Bond Index AGG is at -1.74% YTD in 2021. The 7-10yr Treasury bond index is -3.22% this year. I’ve mentioned many times in our newsletters how these asset classes that are meant to be “safer” have struggled this year. Even the T-Bill ETF is down -0.10%, and that is considered the “Risk Free” rate in most academic market teachings! The only positive spot here is High Yield bonds, which still remain strong, up around 3.77% for the year. (FastTrack Data).
Bottom line – we were able to make good use of the run-up in late December to improve our 2021 results. We’re not entirely certain what the near future holds, but we hope to continue to grab little bites of upside as it seems reasonable. As always, we’ll remain quick to protect should things turn ugly in the coming months – and years.
Happy New Year one and all!!
Don’t forget to catch our monthly webinar, where I dive deeper into what I have mentioned in this newsletter commentary. For me, nothing tells the story as much as visuals, so I really enjoy the webinar for digging into what we’re doing with investment decisions. Will, Phil, and Laura will also be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Thursday, January 13th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.