Strong Starts Hog Gains for the Year Big gains the first four months of 2019 have some Wall Street pundits and analysts concerned. While strong starts for the market for the first four months of the year don’t leave much for the rest of the year, it is by no means a negative implication or bearish indication. S&P 500 leads the pack with its 17.5% gain coming in at #3 since 1950. NASDAQ’s 22.0% gain is the 5th best first four month since 1971. DJIA’s 14.0% rise is number 9. In the tables below we have displayed the top 20 first four month gains for the three major U.S. market indices with the subsequent changes for May, Rest of the Year, “Worst Six Months” May-October, 2nd half July-December and full year performance. While most of the full year gains are clearly logged in these big first-four-month gains, there still upside to be had in the latter part of the year. As you might expect May is weakest for DJIA and S&P and the Worst Six Months are hit hardest mostly after the strongest starts. The major blemish is course in 1987, with other critical givebacks in 1971and 2011. Other significant issues arose in 1975, 1983, 1986 and1998. Basically, if you take 1987 out of the equation the rest of the year after strong starts aint so bad. Average gains are about equal to historical average annual gains. Rest of the year gains sans 1987: DJIA 7.3%, S&P 500 8.7%, NASDAQ 12.6%.
May Option Expiration Week: Recent Weakness Trading around May option expiration is mostly a mixed bag. DJIA has been down nineteen of the last thirty-seven May expiration days with an average loss of 0.12%. The full-week has a bearish bias for DJIA and S&P 500 with records of 20 declines and 17 advances over the past 37 years. More recently, DJIA has suffered declines in eight of the past ten expiration weeks.
Pullbacks Happen As we noted yesterday, the recent bout of volatility has caught many investors off guard. However, we’ve been saying since late March that some type of normal correction could happen, and we’ve taken a more cautious stance. This was one of the best starts to a year ever for equities, which historically has led to modest returns the next six months, with an above average chance of a large correction. The S&P 500 Index fell nearly 5% before bouncing back yesterday. Here’s the catch: 5% pullbacks are actually perfectly normal parts of investing. “After a 25% bounce since the lows of December and a near 5% decline, it might feel scary and uncomfortable to investors, but it is important to remember that pullbacks are part of investing,” explained LPL Senior Market Strategist Ryan Detrick. “Trees don’t grow forever, and neither do bull runs. A break is usually needed before the eventual resumption of higher returns.” As our LPL Chart of the Day shows, there has been an average of more than three separate 5% declines for the S&P 500 per year going back to 1990. Given there hasn’t been a 5% pullback yet this year, we think the odds are quite strong that we see multiple 5% drops the rest of this year as the economic cycle ages and volatility picks up.
Memorial Day Trading: Early Exit Dampens Market In the Stock Trader’s Almanac we show how the market trades around Memorial Day. In the table below we went back to 1971, the year the Uniform Monday Holiday Act took effect, moving Memorial Day and most other federal holidays to Monday. In what used to be the “May/June Disaster area” the S&P was down 15 of 20 Mays from 1965 to 1984. Then May was the best month from 1985 to 1997. In recent years, the Friday before Memorial has become getaway day on The Street and volume is often diminished and trading uninspired. Average performance on each of the three trading days prior to the long weekend is rather lackluster for S&P 500 and NASDAQ. NASDAQ does have a higher frequency of gains during the three days, but average performance is still tepid.
New Low For Bullish Sentiment Thu, May 23, 2019 Trade headlines have continued to have a negative impact on stock prices, and in turn sentiment levels, over the past week. The AAII investor sentiment survey saw bullish sentiment decline sharply once again this week falling to 24.71% compared to 29.82% last week. To think that just two weeks ago bullish sentiment was at 43.12%, which was the highest reading of the year. Falling 18.41% from this recent high, the current decline is the largest two-week drop in bullish sentiment since 6/6/13 when it fell 19.5% over the two previous weeks. But this is not necessarily all bad news from a contrarian perspective. As shown in the chart below, this week's reading of 24.71% is well below the historical average of 38.21%. In fact, it is over 1 standard deviation below it, something that can be considered a bit extreme and raising expectations for some type of mean reversion. When bullish sentiment reaches an extreme low by historical standards, forward equity market performance has typically been stronger than average. The last time survey respondents showed this little optimism was in late December of last year; right around the time of the market bottom. Surprisingly, while there was this development in bullish sentiment, bearish sentiment actually fell to 36.08% versus 39.3% last week. So while still elevated from where it has been for much of this year as the market has rallied, bearish sentiment is not reaching new highs. It is also still above its historical average but not to an extreme degree. Neutral sentiment took from the losses in the bullish and bearish camps as it rose to 39.22%. While this sounds high, there was actually a slightly higher reading at the beginning of the month and this brings the neutral reading off of its recent lows and more in line with what has been observed for most of this year.
S&P 500 Down Four Straight Day After Memorial Day Our office will be closed for observance of Memorial Day on Monday, May 27. U.S stock and bond markets will also be closed. As you spend some quality time off with family and friends please take time to commemorate those who have paid the ultimate price while serving in the U.S. military. For decades the Stock Trader’s Almanac has been tracking and monitoring the market’s performance around holidays. The trading day after Memorial Day has a mixed record going back to 1971. Both S&P 500 and NASDAQ have declined more often than risen on the day, but average performance is still positive. Since 1986, the frequency of gains has improved, and average performance has also risen however, over the last four years S&P 500 has declined. The second trading day after Memorial Day has since more advances than declines, but average performance is negative for NASDAQ. The third day after appears to have the best long- and short-term record combined with solid average performance.
Strong Starts Weak Mays Boon for June Our previous analysis of big gains the first four months indicated weakness was in store for the merry month of May. Now that the market has indeed suffered this May the outlook for June is a boon at least historically speaking. The table below shows the top 20 first four month gains for the for the S&P 500 with the subsequent changes for May, June, Rest of the Year, “Worst Six Months” May-October, 2nd half July-December and full year performance. While most of the full year gains are clearly logged in these big first-four-month gains, there still upside to be had in the latter part of the year. May is weakest and May 2019 has delivered market declines so far, down -4.9% for the S&P 500 as of today’s close. However, after big starts, 7 of the 9 subsequent May declines were followed by big gains in June (highlighted in green). So, while we do not anticipate much upside over the next 5 months or so, June is set up for a boon.
Typical June Trading: Any Early Gains Tend to Fade Over the last twenty-one years, the month of June has been a rather lackluster month for the market. DJIA, S&P 500 and Russell 1000 have all recorded average losses in the month. NASDAQ and Russell 2000 have faired better with modest average gains. Looking at the chart above, shaded areas highlight areas of strength during the month. Historically the month has opened respectably, advancing on the first and second trading days. From there the market then drifted sideways and lower into negative territory just ahead of mid-month. Here the market rallied to create a nice mid-month bulge that quickly evaporated and turned into losses. The brisk, post, mid-month drop is typically followed by a month end rally lead by technology and small-cap. This June could turn out better than average as a result of a strong start to the year and weakness in May.
Time For A June Swoon? Well, it finally happened. The S&P 500 Index pulled back more than 5% from its all-time high, marking the first 5% pullback of 2019. As we have discussed many times over the past two months, the odds were high that some type of pullback or even correction (10% or more off the highs) was likely after the 25% surge off the December 2018 lows. May likely will be the first negative month of the year (down nearly 6% with two days to go) and likely will be the first time stocks closed in the red in May since 2012. Now, seasonality hints to more volatility ahead, as June doesn’t have the best history for stocks. “We finally had a 5% pullback, but the bad news is June can be a tricky month for stocks,” explained Senior Market Strategist Ryan Detrick. “Going back the past 20 years, only September has been worse on average, and returns have been quite poor in June after a big drop in May.” As our LPL Chart of the day shows, stocks have tended to be weak in June over various periods. Here are six thoughts to chew on as we turn the calendar: When the S&P 500 has lost 5% in May (like it could in 2019), June’s performance has been weak. May has lost 5% or more only four other times in the past 50 years, and stocks subsequently fell more than 5% in June twice. However, when the S&P 500 has been up more than 10% year to date heading into June (like it could in 2019), the S&P 500 has gained 9 of the past 12 times (going back 50 years), and has been higher 1.9% on average. Equity markets in Greece, Brazil, India, Argentina, and Australia are all very strong. If we were truly entering a global recession, we would see more broad-based global weakness. The Chicago Board Options Exchange (CBOE) daily put/call ratio surged to its highest level since late December yesterday, suggesting a good deal of fear is coming into the market – a necessary recipe for a bottom to form. Only 31% of the components in the S&P 500 are above their 50-day moving average. This is nearing washout levels, but could need to go down to 20% before the ultimate low can form. Still, we are getting closer. The American Association of Individual Investors (AAII) Investor Sentiment Survey has more than 40% bears, the highest since the start of 2019. That’s another sign fear is spiking, and pessimism could be a bullish contrarian signal.
95% Gone Mon, Jun 3, 2019 Back in the fourth quarter of 2016, in the immediate aftermath of the 2016 Election, sentiment towards manufacturing in the US surged. Right before the election in October 2016, the ISM Manufacturing index was at 51.7 and eventually rallied all the way to a peak of 60.8 in August 2018. For the last nine months, though, manufacturing sentiment has been falling off a cliff as the impact of tariffs (both actual and threatened) put a damper on sentiment. In the latest monthly ISM Manufacturing survey, the headline index dropped from 52.8 down to 52.1 to its lowest reading since October 2016. With this month's decline, now, 95% of the post-election gains have been re-traced. As just an example of how tariffs are impacting sentiment, take a look at the commentary section of this month's report. Of the nine comments included in the section, five cited tariffs as an issue. The second comment was especially notable where a respondent from the Chemical Products industry said that tariffs in imports "...will not increase the number of U.S. jobs." As far as the breadth of this month's report is concerned, the sub-components were evenly split between gains and losses relative to April's levels, but the majority were down relative to where they stood last year at this time. The only two that showed increases were Business Inventories and Customer Inventories. On the downside, Production, New Orders, Backlog Orders, Supplier Deliveries, and Prices Paid all saw double-digit declines. Prices Paid has been a real notable decliner, dropping more than 25 points from where it was last year! Looking at how breadth in the individual components of the ISM Manufacturing report have trended over time, the chart below shows the net number of components showing m/m increases on a 12-month average basis. Through May, the 12 month average for the Manufacturing sector was -0.92, which surprisingly isn't the weakest reading we have seen in the last few months. At least the pace of decline isn't still accelerating.
June’s Job Report Day Bearish Over the past nineteen years, May’s employment situation report, released on the first Friday of June, has been a mixed bag. DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 have all recorded average declines ranging from 0.05% to 0.27%. S&P 500, NASDAQ and Russell 1000 have declined ten times and the day is littered with sizable losses most notably from 2008 through 2012. Estimates for this Friday’s release covering May were looking for around 180,000 net new nonfarm jobs being added before today’s ADP payroll release showed a disappointing 27,000 against expectations of 173,000. Since the Fed has already stated its willingness to respond to weakening data with a rate cut, a softer than expected jobs report could sway them even further in that direction.
Bearish Sentiment Still on the Rise Thu, Jun 6, 2019 Sentiment on the part of individual investors in the weekly survey from AAII has been reflecting equity weakness throughout May and this week was once again no exception. Despite the rally over the past two sessions, declines Monday and at the end of last week have dragged bullish sentiment from 24.8% last week down to 22.53%. At this level, bullish sentiment remains at an extreme low by historical standards and is now at its lowest since December 13th of last year when it was at 20.9%. Similar parallels can be drawn with another sentiment survey conducted by Investors Intelligence. The Investors Intelligence survey saw a massive drop in bullish sentiment from 49% last week to 42.7% this week. That brings bullish sentiment in this survey to its lowest level since January 16th. Respondents who reported that they expect a correction also rose sharply by 5.1% to 38.8%. The last time respondents turned this negative was in the final weeks of December when it rose by the same amount to 39.3%. Given bullish sentiment has dropped again, formerly bullish investors have joined the bearish camp as it has now expanded to 42.58%. That is a 2.5% increase from last week and up to its highest level since January 3rd when the bearish reading was only slightly higher at 42.77%. Once again this week, bearish sentiment sits over one standard deviation above its historical average. This was the second week in a row that bearish sentiment has done this while bullish sentiment is simultaneously more than one standard deviation below its historical average; that is only the 38th time this sort of back-to-back reading has happened in the history of the survey going back to 1987. Neutral sentiment was little changed falling 0.23% to 34.89% and has basically stayed in the middle of its range from the past few years. It now sits well off of its multi-year high seen earlier this year. Given neutral sentiment has held steady, bearishness is still the predominant sentiment among investors by multiple measures. Fortunately, many of the current readings more closely resemble those around the bottom of the Q4 2018 sell-off, meaning from a contrarian perspective, a rally is possible.
NASDAQ and Russell 2000 Advance/Decline Lines Lagging Typically at this time of the year, first half of June, NASDAQ and Russell 2000 are often leading DJIA and S&P 500. Historically, the month of June has been kinder to technology and small-cap stocks than others. Sure, June has been quite robust so far, but it has been DJIA and S&P 500 leading the charge higher. Their strength is also confirmed by NYSE and S&P 500 cumulative Advance/Decline lines at new highs already. NASDAQ and Russell 2000 cumulative Advance/Decline lines are weaker have not exceeded the highs reached last year. At the least, NASDAQ’s Advance/Decline line likely needs improvement for the market to make any meaningful headway.
Year over Year Increases are Back for Claims Thu, Jun 13, 2019 Last week's initial jobless claims number was pretty unexciting, especially compared to the ADP and NFP numbers which saw massive misses. While certainly not to the same degree as last week's data, this week's claims also came in weaker rising to 222K compared to last week's upwardly revised 219K. This also missed forecasts which called for a small drop to 215K. While it was an increase and a miss relative to estimates, on a seasonally adjusted basis, claims are still at healthy levels in the middle of the range from the past several months. In other words, given this week's data, claims are neither improving nor worsening in any significant way. Claims have now spent a record 223 weeks under 300K and 74 weeks under 250K, closing in on the record streak of 89 weeks. The less volatile four-week moving average also saw a slight increase this week to 217.75K from 215.25K last week. Like the seasonally adjusted number, the four-week moving average has not seen any large movements over the past month and is in between recent highs and lows. Non-seasonally adjusted initial jobless claims rose to 219.9K. That is a sizeable increase from last week's 189.6K, but this increase was not anything unusual for the current week of the year. From this time of the year through the next several weeks, NSA data typically sees a steady increase due to seasonal patterns as schools get out for summer. While the week-over-week increase could be expected, the NSA number also rose year-over-year. The increasing frequency of these YoY increases in 2019 is something that we have made note of in the past as a possible concern and could be pointing to a potential bottoming out in claims.
June Option Expiration Can Be Volatile The second Triple Witching Week (Quadruple Witching if you prefer) of the year brings on some volatile trading with losses frequently exceeding gains. NASDAQ has the weakest record on the first trading day of the week. Triple-Witching Friday is usually better, DJIA has been up ten of the last sixteen years. Full-week performance is choppy as well, littered with greater than 1% moves in both directions. The week after Triple-Witching Day is horrendous. This week has experienced DJIA losses in 25 of the last 29 years with an average decline of 1.09%. S&P 500 and NASDAQ have fared slightly better during the week after over the same 29-year span, declining 0.73% and 0.23% respectively on average.
Record Decline in Empire Manufacturing Report Mon, Jun 17, 2019 After month/month increases in three of the four prior months, the June Empire Manufacturing report fell and fell hard. While economists were expecting the headline index to drop from 17.8 down to 11.0, the actual decline was much larger sending the headline index down to negative8.6. With the June decline, the Empire Manufacturing index saw its first negative reading since the 2016 election, the weakest decline relative to expectations since June 2011, and the largest m/m decline in the history of the survey dating back to 2001. One caveat to the decline, however, may be that the temporary trade spat with Mexico may have contributed to the weakness. We'll have to wait until more data for the month comes in, though, for more clarity on that front. While current conditions plummeted, the expectations component of the report saw a much more modest decline, falling from 30.6 down to 25.7. As if the decline in the headline index wasn't large enough, the text of the report may have been even worse. The first paragraph alone was filled with descriptors like "sharp turn downward," "plummeted," "largest monthly decline on record," "receded," "fell," "slightly lower," "small declines," "price increases slowed," and "less optimistic." On top of that, the titles of the paragraphs that followed were "Growth Abruptly Reverses," "Employment Shrinks," and "Futures Indexes Decline." Happy Monday! As far as the internals of the report were concerned, every component of the Current Conditions declined except for Prices Paid, while on the Outlook side of the table (Six Months Out), all but two components (Prices Paid and Average Workweek) declined. We already mentioned that the headline General Business index saw a record m/m decline, and we highlight that in the first chart below. It wasn't only the General Business Index that saw a steep decline, though. As shown in the second chart below, the New Orders component also dropped over 20 points, which was the third largest m/m decline on record. The only times the index saw steeper declines were just after 9/11, after the Lehman bankruptcy, and in November 2010.
S&P 500 Has Declined 9 of Last 10 Fed Days As of approximately 2:00 p.m. eastern, CME Group’s FedWatch Tool was reporting an 77.5% chance the Fed will not change the Fed Funds rate on Wednesday and a 22.5% chance that they will cut rates by 0.25%. Like these probabilities suggest, there will most likely not be any change this week. Instead next month may be a more appropriate time. Between now and the July 30-31 meeting there is a G20 meeting and another whole month of data. The second quarter will also be history and the first reading of Q2 GDP will be available as well. In the chart above the 30 trading days before and after the last 90 Fed meetings (back to March 2008) are graphed. There are four lines, “All,” “Up,” “Down” and “Rate Hike Days.” Up means the S&P 500 finished announcement day with a gain, down it finished with a loss or unchanged. Rate Hike Days are the nine times a hike was announced. Note how past down announcement days have, on average, enjoyed the best gains over the next 30 trading days. Of the last 90 announcement days, the S&P 500 finished the day positive 49 times. Of these 49 positive days S&P 500 was down 28 times (57.1%) the next day. Of the 41 down announcement days, the following day was down 22 times (53.7%). All 90 announcement days have averaged 0.35% S&P 500 gains while the day after has been a net loser with S&P 500 declining 0.29% on average.
Starts Starting to Roll Tue, Jun 18, 2019 It has now been 15 months since Housing Starts last made a new high, and despite the fact that they seem to have stabilized, on a 12-month average basis, they are showing signs of rolling over. With residential housing being such a large share of the economy, we wanted to show how a rollover in Housing Starts fits in with the economic cycle. The chart below shows Housing Starts on a 12-month rolling average basis. In it, we have overlaid recessions in gray and colored the line red whenever the reading hit a one-year low. Looking at the chart, there wasn't a single recession where the 12-month average reading in Housing Starts wasn't at 12-month lows heading into the recession. There were, however, a number of 'false positives' where the 12-month average had rolled over and no recession followed before Starts started to rebound again. Those occurrences were in the mid-1960s, mid-1980s, mid-1990s (2 periods) and during the early stages of this expansion in 2011. So while the slowdown in Housing Starts is reflective of slower overall growth, it hardly guarantees a recession is around the corner. One trait that these 'false-positive' periods do have in common, though, is that during all five of them, the FOMC was easing monetary policy during or shortly after the 12-month low readings in Housing Starts. Given the volatility in multi-family units, we also ran this analysis using single-family Housing Starts, but here again, the results are similar. While single-family starts have typically already started to roll over well in advance of recessions, not all rollovers in single-family starts have been followed by recessions.
