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3 quick hits after a big 3-day rally

By February 5, 2020 No Comments

January ended with the S&P 500 flat on the year and 3% off of its high. That changed quickly. The first three days of February have seen the S&P 500 rally 3.40% and on Wednesday the index registered a new all-time closing high. If these gains hold, it will mark the best weekly gain since last June. We came into the month with tempered expectations and prepared for more downside. But we suggested it was a good time to take advantage of the weakness in various market segments. With that said, here are 3 quick hits that caught our eye so far this week.

Buy near the flatline

An early theme emerging in 2020 is that you have to buy the S&P 500 when it nears the 2019 closing price of 3230.70. There have been four attempts by the index to move into the red on the year: January 3rd, 7th, 27th, and 31st. Each of these attempts has been followed by a bounce-back rally, with the strongest occurring in the last three days.

The market likes rising rates

Long-dated bonds (TLT) rallied 7.50% to start the year. We flagged falling bond yields as a potential red flag for stocks. Well, the 10-year yield has risen from 1.52% to 1.65% this week, which is a very big move in rates. Long-dated bonds have sold-off as a result. Stocks like this recent development.

Small caps and emerging markets rally

The best representation of a “risk-on” rally comes from Small-cap stocks and Emerging market stocks. The Russell 2000 (IWM) and Small-cap 600 (IJR) are back in the black after rallying 4% each this week. Their ability to stay green on the year could go a long way in boosting the stock market’s momentum. Emerging markets (EEM), are still down 2.5% YTD, but they’re showing life after a steep fall in January. If a rising tide lifts all boats then it could just be a matter of time before EEM gets back to the flat line. Conversely, if the pullback in EEM resumes, that will be a headwind for broader markets.

The S&P 500 has climbed back to new all-time highs in short order. So far this year, any moves back to the year-to-date breakeven point (3230.70) have been buying opportunities. The stock market appears to favor a rising rate environment right now. We flagged opportunities in small-caps and emerging markets coming into the week, and they’ve quickly followed-through with gains. But their ability to keep rallying will likely have broader market implications for the foreseeable future.

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