The S&P 500 Index group is red hot, but what does that mean going forward?
As major domestic indices continue higher and make all-time highs, the S&P 500 Index Funds group ranks atop the Macro view on the ACGS page with an average group score of 4.77, which is an all-time high for the group going back to 2002. Not only has the S&P 500 Index group been showing historic levels of strength, the US Equity Core Percent Rank is currently 94.37%, further evidencing the strength of the core US equity market. While a strong core is a major positive sign for domestic equity markets, the run-up has put the S&P 500 Index Funds group into overbought territory with an overbought/oversold reading of 133.98%. The evidence for large-cap domestic equity funds is overwhelmingly positive, but the historically high score and heavily overbought OBOS% reading for the group could be an indication for investors to tread a little more cautiously before entering large new positions. The S&P 500 Index Funds group has been above the 4.50 mark before and has continued to post positive returns after, most evidently in late 2019 until the COVID-19 sell-off where the S&P 500 Index SPX returned 7.61% (11/29/2019 – 2/14/2020) and currently where the SPX has returned 5.77% since crossing above the 4.50 mark on August 3.
Despite the two previous times the S&P 500 Index Funds group crossed above 4.50 mark, leading to heavy selling in late 2018 and early 2020, there isn’t any more evidence to justify expecting such moves again. The evidence is still very positive for domestic equities on the ACGS page although some of the stronger groups like Large Cap Growth and S&P 500 Index Funds look like they are overextended from a historic perspective. The All Fixed Income group has softened recently dropping below the 4.00 mark, but still maintains an average group score of 3.92 and a positive score direction of 0.55. This is another positive sign for US equity groups as fixed income groups typically do not score strongly during periods in which the core US market is as strong as it is today, which can be looked at more in-depth here.
As the core US equity market remains red hot, it is important to evaluate the risks associated with the group. Using it as a proxy, the S&P 500 Index group possesses strong score characteristics but its recent performance has put it into extremely overbought territory where those wishing to take new long positions may want to wait for price normalization or a pullback. The recent tick south in the All Fixed Income group relative strength adds more validity to the strength of the S&P 500 Index group, but we are still seeing fixed income groups on the ACGS possess strong average scores and most bond sleeves should remain beneficial to your total asset allocation. Moving forward, be sure to stay up to date on major market trends on the Asset Class Group Scores page and make sure you and your clients are allocated accordingly.
