Welcome to our active management update on the market

The markets have made a lot of progress since the fourth-quarter meltdown of last year. So far this year the stock market has rebounded as it has during three similar corrections in the past (2011, 1990, 1980).

The following graph of the S&P 500 is a textbook image of demand and supply known as support and resistance. Until mid-December last year, the market had fairly well-defined support at approximately 2,600 on the S&P 500. Support is identified by the price levels at which investors come into the market as buyers. In December, that support was briefly violated to the downside and quickly restored in early January. A prominent resistance level developed throughout last year as well—at approximately 2,800, where selling investors repeatedly came into the market. In the past couple of weeks, we have tested the resistance level at which sellers again entered the market. Stocks then experienced a modest pullback to the level of the 10-week and 40-week moving averages (blue and red lines, respectively).

This is quite normal and constructive price action. As this uptrend has unfolded, the MACD (the moving average convergence/divergence indicator, the middle section of the graph) has developed a relatively smooth and steep uptrend that has taken it above its zero line. Both of these characteristics of the MACD indicator are signs of strength suggesting that the stock market likely has further gains ahead of it. This suggests that any move above the resistance level by the S&P 500 will likely result in a move to the levels of the high last September.

The following graph illustrates how several asset classes have performed over the past six months. This graph highlights why Flexible Plan Investments uses stocks, bonds, and alternatives (represented by gold) when crafting strategically diversified portfolios. When stocks were declining during the fourth quarter, both bonds and gold rose as investors moved capital from stocks. Since late December, stocks have moved up nearly as fast as they declined, while bonds and gold have moved sideways.

Notice in the graph that high-yield bonds have followed in the wake of stocks, which is common. What is interesting is that high-yield bonds have already moved back to their previous highs. This is a sign that investors are comfortable with the risks associated with investing in stocks and lower-quality bonds.

Last year closed with stocks near their lows for the year. Conversely, 2019 started with stocks near the low for the year—so far. Strategies that moved from opportunistic positioning to defensive positioning during the fourth quarter are now moving, or have moved, back to opportunistic positioning. This sets the stage for a productive year for well-designed, strategically diversified portfolios.

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