The Bull Thread

Typically Strong December Slightly Weaker in Election Years

December is the number one S&P 500 month and the second best month on the Dow Jones Industrials since 1950, averaging gains of 1.6% on each index. It’s also the top Russell 2000 month and third best for Russell 1000 (1979). December is NASDAQ’s second best month. Rarely does the market fall precipitously in December. When it does it is usually a turning point in the market—near a top or bottom. If the market has experienced fantastic gains leading up to December, stocks can pullback. Conversely if the market has been through the ringer of late and December is down as well, then expect a rally to ensue shortly.

In the last sixteen election years, December’s ranking slip modestly to #3 S&P 500, #5 NASDAQ, but DJIA remains #2. Small caps, measured by the Russell 2000, have had a field day in election-year Decembers. Since 1980, the Russell 2000 has lost ground just once in nine election years in December. The average small cap gain in all nine years is a solid 3.0%. The Russell 2000’s single loss was in 1980 when the Prime Rate was 21.5%.

Market trading in December is holiday inspired and fueled by a buying bias throughout the month. However, the first part of the month tends to be weaker as tax-loss selling and yearend portfolio restructuring begins. Regardless, December is laden with market seasonality and important events.

 

Election-Year Pattern Indicates Yearend Rally Following some Early- December Weakness


Over the past year we have been closely tracking DJIA, S&P 500 and NASDAQ performance in 2016 compared to past election years and 8Th Years of Presidential terms. Losses in January put the market on the losing 8th-Year track and that track suggested a February or early March rebound. The market did bottom in February and rebound to an April high before weakening once again. Following the Brexit vote, the market responded positively and clearly broke free of the potentially disastrous 8th-Year pattern.

However, in doing so we then began to anticipate market weakness sometime in September or October timeframe. DJIA and S&P 500 did decline in both of those months while NASDAQ did not falter until October. Using the Election-Year pattern once again as a source, not the sole source, the pattern does suggest DJIA and S&P 500 will rally to close out the second half of December after some modest weakness in the first half of the month.

 

Dow Theory Confirms Best Six Months Buy Signal & Bullish Call


Well it looks like the Dow Transports just issued a Dow Theory Buy signal by breaking out to a new high on today’s close. The Dow Theory Sell Signal we discussed on January 6 of this year was followed by a further decline of -7.4% on the Dow Jones Industrials.

The current post-election bullish rally looks like it’s got more legs and that further confirms our Best Six Months Seasonal MACD Buy Signal from October 24 and our recent call last week for further gains, based on our bullish scenario for Trump and his new team of policy makers to deliver stimulus, tax cuts, slow rising rates and healthy inflation.

But be nimble and use any usual mid-December weakness due to tax-loss selling or a profit taking January break, before jumping in. Most of our recent positions are up solidly, but we did miss a few that ran away and took a few losses on those that failed to break out with this rally.

 

A Bigger Picture Look At The Bull Market

On Friday, the S&P 500, Dow Jones Industrial Average, and Nasdaq all closed at new all-time highs. The Dow closed above 19,000 for the first time ever three weeks ago; now it is a strong up day or two away from potentially closing above 20,000. It is easy to get caught up in the huge move we’ve seen out of equities since the election, but it is just as important to remember what things were like heading into this move.

We noted many times over the summer how historically tight the trading range was for equities at that time. From the tightest two-year trading range in more than twenty years, to the tightest 30-day range in 50 years, to the least-volatile two-week stretch in 21 years – it all added up to expectations of a big move later this year. In fact, in late July we summed up the lack of movement like this: “Tight ranges don’t stay that way forever, just as volatile times don’t stay volatile forever. History would suggest that tight ranges like we are in now tend to resolve higher.”

It is now safe to say that has played out very nicely, but how much more could be left in the bull’s tank? As we laid out in Irrational Exuberance Part Two last week, the equity bull market is alive and well according to our methodology based on valuations, fundamentals, and technicals. Let’s take a much bigger picture look at things now. As Ryan Detrick, Senior Market Strategist, noted, “It is easy to get caught up in the near-term volatility of equity markets, but taking a bigger picture look at things sometimes helps to clear up a blurry picture. Doing this shows a nice breakout from a 13-year consolidation and greatly increases the odds of potential strength going forward into at least 2017, if not much further.”

As the chart below shows, the S&P 500 has previously moved from very long periods of sideways action, to a decade-or-longer bull market. After consolidating for 13 years from 2000 to 2013, the current bull market that dates from the breakout to new all-time highs is only three years old. If history repeats once again, this bull market could have much further to run.

 

Strength generally follows strength, even during options expiration week

Last week’s 3%+ gains by DJIA and S&P 500 coupled with a tepid start to this week has raised concern that this option expiration week could be a disappointment for the bulls. Looking at the tables below, of DJIA and S&P 500 weekly performance the week before, the week of and the week after December’s option expiration, concern may be overblown.

Since 1982, DJIA has been up 1% or more in the week before options expiration week 10 times. Of these 10, 8 options expiration weeks were also positive. S&P 500 has been up 8 times in the week before and up 5 times during options expiration week. DJIA and S&P 500 have both advanced 3% or more in the week before and the following options expiration week was up twice. In the best month for S&P 500 and second best for DJIA since 1950, strength is common and it appears that even a strong week before options expiration week does not mean imminent disaster during options expiration week.

 

60% chance of gain on Fed announcement day, 57.1% chance of decline day after

Tomorrow is the last scheduled Fed meeting of 2016. It is widely anticipated the Fed will do the same thing it did during its last meeting in 2015, raise its lending rate. Based upon the CME Group’s FedWatch Tool, the probability of a hike stands at 95.4%. But, before getting overly concerned, the new range for the rate of 0.5 to 0.75% is still very low by historical standards.

In the following chart the 30 trading days before and after the last 70 Fed meetings (back to March 2008) are graphed. There are three lines, “All”, “Up” and “Down.” Up means the S&P 500 finished announcement day with a gain, down it finished with a loss. Down announcement days have generally been the best buying opportunities while up announcement days were often followed by weakness.

Of the last 70 announcement days, the S&P 500 finished the day positive 42 times (60%). Of these 42 positive days S&P 500 was down 24 times (57.1%) the next day with an average loss of .30% across all 42 positive announcement occurrences. Of the 28 days S&P 500 was down on announcement day, the following day was down 16 times (57.1%) with an average loss of 0.38%.

 

OK, got a quick Q for y'alls here @ Stockaholics: This is kind of a loaded question but does anyone here think we will surpass the raging 90's bull market run in length?

Here was the chart from Stock Trader's Almanac back at the beginning of this year listing all of the bull markets since 1950-


Disregard at the bottom where it says Bull End* and has 2528 under length since this wasn't updated since 2/9/2016. The current bull market that started on 3/9/2009 is still active. It is now around 2800 days long.

The all-time record bull market length is 4494 days long which started in 1987 and ended in 2000. Obviously we're nowhere near that mark right now.

But, should the current bull fail to get prices dipping into technical bear territory of minimum -20% from the highs for at least the next 4 1/4 years ... we could be looking at the longest bull run ever.

Seeing as I'm the "poll" guy here at Stockaholics , perhaps I should fire up a new thread to see what people think. But nah ... not this one. We have so many other thread polls open it's kind of becoming a little overwhelming imo lol.

Anyway, might as well make use of this thread and make it into some kind of discussion thread rather than a news article thread.

What do you guys think? Anyone actually believe we'll eventually challenge the record for the longest bull run in history when all is finally said and done?

4 1/4 years is an awful long time though. And, as we know in these markets anything can certainly happen between now and then. Case in point: we narrowly missed dipping into an official bear early this year. Although, other major indices like the small caps index Russell 2000 and Dow Transports did fall well into bear territory at their correction lows.

Anyway, just opening this up for discussion for the heck of it. Gonna be a pretty quiet next couple of weeks here I think as we close out this trading year.

 

Small caps rally 81% of time in second half of December


Historically it is not uncommon for the market to exhibit some first-half of December weakness. This was not exactly the situation this year. S&P 500, NASDAQ and Russell 2000 did decline modestly last week, but DJIA climbed 0.44% higher. And as of last Friday DJIA was up 3.8% in December, S&P 500 2.7%, NASDAQ 2.1% and Russell 2000 3.2%. The concern is absent first half weakness, the second half of December could be a disappointment. Looking over the last 21 years of data, it appears the first half of December does not necessarily make a difference. From the close on December’s options expiration day until the end of the year, DJIA, S&P 500, NASDAQ and Russell 2000 are all generally bullish. DJIA, S&P 500 and NASDAQ post average gains of slightly more than 0.8% and advance more than 60% of the time. Russell 2000 is best, averaging a solid 1.82% gain, advancing 81% of the time (17 of 21).

 

A Bullish Signal From The 2017 Bespoke Report
Dec 31, 2016

Yesterday we posted a bearish chart from our 2017 Bespoke Report market outlook. Lest we end the year on an overly negative note, we thought we’d also post a more positive spin on things. We like to think our outlook paints a full picture, taking into account both the positives and negatives facing investors. In 178 pages of charts, analysis and commentary there is obviously no shortage of important data points, some of which paint a positive, while others a negative picture. Below we’re including one of the more bullish tables from the outlook report. In the table below we show market returns following long periods in a bull market where the S&P fails to make a new bull market high. As can be seen, long consolidation phases without a new high, tend to be followed by positive returns over the following 3, 6 and 12 months. Since we exited a 416 day consolidation phase in July 2016, this certainly qualifies as a positive indicator heading into 2017.

 

Dow 20,795
Jan 4, 2017

With investors, or more specifically, the media intensely focused on when the Dow Jones Industrial Average (DJIA) will finally break above 20,000, we wanted to see how analyst price targets for the 30 components of the index compare to current prices. Additionally, if each of the stocks in the index traded up to their respective consensus target, where would the index trade? Obviously, this is purely a theoretical exercise as not a lot of weight is put into specific price targets. That being said, where targets stand relative to current prices provides a gauge as to how bullish or bearish the analyst community is towards a specific stock, or in this case the DJIA.

The table below lists each of the DJIA’s 30 components along with their consensus price target from the analyst community as well as how many points would be added to the index if the target was reached. With a consensus target of $182.95, analysts are expecting 13.3% upside for UnitedHealth (UNH). While three other stocks are expected see more upside based on their target prices in percentage terms, because of its higher share price and the fact that the index is price-weighted, if UNH rallies to its target price it would add nearly 150 points to the overall index. Behind UNH, the only other stock that would contribute more than 100 points to the DJIA if its target was reached would be Apple (AAPL), with analysts expecting 13.5% of upside. The stock that analysts are the most bullish on is NIKE (NKE). With a current target of $62.04, analysts expect nearly 20% upside from the stock, but because of its relatively low share price, that would translate to just under 70 DJIA points.

Analysts are usually tilted to the bullish side, but there are eight stocks in the DJIA where the consensus target is actually lower than the current price. At a level of $158.75, IBM’s consensus target is 5% below where it closed yesterday. Likewise, for Goldman (GS), it closed yesterday 2.2% above its consensus target. Ever since November, GS has been a big contributor to the DJIA’s gain, but if you put any weight into price targets, other stocks are going to have to start taking the lead in order for the DJIA to break above 20K.

Combining all the price targets for the 30 stocks together, analyst price targets currently imply 913 points of upside for the DJIA relative to yesterday’s close to 20,795 or 4.6%. For a group that is usually associated with rose-colored glasses, analysts that cover the 30 stocks in the DJIA aren’t really all that bullish right now.

 

Trump rally resumes, 66.7% chance it lasts through end of April

Although the market’s rally since Election Day has largely been attributed to Donald Trump’s victory, it could actually be called “The-election-is-finally-over rally.” Historically the S&P 500 has rallied after Presidential Election Day passes. Since 1952, the S&P 500 has advanced 68.8% of the time from the day after the election to the end of November and through the end of December. Expanding beyond yearend until Inauguration Day, S&P 500 has advanced 75% of the time. The current rally has been solid, but there have been better. History also suggests that the S&P 500 will continue to rally through President Trump’s first 100 days in office as six of the last nine (66.7%) newly elected Presidents were greeted with S&P 500 gains.

 

January Indicator Trifecta Now Two-for-Two

Even though today turned out to be a mixed day for the market (DJIA and S&P 500 down, NASDAQ up), S&P 500 is still positive year-to-date and thus our First Five Day (FFD) early warning system is also positive. Combined with last week’s positive Santa Claus Rally (SCR), our January Trifecta is now two for two. The January Trifecta could be satisfied with a positive reading from our January Barometer (JB) at month’s end.

When all three indicators, SCR, FFD and JB, are positive this has been the most bullish scenario for the next eleven months and the full year. In 28 previous Trifecta occurrences since 1950, S&P 500 advanced 89.3% of the time during the subsequent eleven months and 92.9% of the time for the full year. However, a January Indicator Trifecta does not guarantee the year will be bear free. The three losing “Last 11 Mon” years, shaded in grey, experienced short duration bear markets.

 

The Most Bullish Technical Pattern Since 1982?
Posted by lplresearch

Something happened last year that has only happened twice in the history of the S&P 500, and it could be a very bullish development, as 2016 completed what is called a bullish outside year. An outside year occurs when the high of the year is above the high from the previous year and the low from that year is beneath the low from the previous year. During the big drop the S&P 500 took at the start of 2016, it broke the low from August 2015; then in July when the S&P 500 broke out to new highs, it moved above the high from May 2015. Outside days, weeks, and months are fairly common and considered to be bullish technical developments when the pattern completes above the previous high, but a bullish outside year has only happened two other times—in 1935 and 1982.

According to Ryan Detrick, Senior Market Strategist, “We started talking about the potential for a bullish outside year back in July, when the S&P 500 broke out to new highs. Now that the year is officially over, this is only the third bullish outside year ever. The two previous outside years, in 1935 and 1982, saw gains of 27.9% and 17.2% the following year, respectively. Of course, if you want to find a flaw with this, it is that the sample size is only two, so it could be totally random. But in the end, we’d still side with this development supporting the bull market turning eight this year and finishing the year higher.”



We all know that 1982 kicked off a huge 18-year bull market, while the other bullish outside year in 1935 saw a nice gain of 27.9% in 1936, but it all came crashing down with a 38.6% drop in 1937, as the Great Depression continued.

Here’s something else to consider that could be a good sign for this bullish outside year. The S&P 500 closed at a monthly all-time high at the end of December 2016, exactly like it did in 1982. December 1935 didn’t close at new monthly high, so 2016 and 1982 are the only times in history the S&P 500 made a bullish outside year and saw the S&P 500 close at a monthly new high.



In conclusion, as we discussed in Outlook 2017: Gauging Market Milestones, earnings growth and an accelerating economy should produce mid-single-digit equity returns, even though valuations are somewhat historically stretched. The bullish outside year we saw in 2016 further reinforces the odds this bull market continues in 2017.

 

Do The First Five Days Of The Year Matter?
Posted by lplresearch

The first five days of 2017 are in the books, and the S&P was up 1.3%, the best start to a year since 2013. This is a far cry from the 6% drop last year, which was actually the worst start to the year ever.

This time of year we hear a lot about how the first five days of the year can accurately predict the full year. After all, a big start in 2013 signaled a big move that year, while a big dip to start 2008 was a warning of more trouble to come. Then again, after the worst start to a year ever last year, the S&P rebounded to close the year up 9.5%—so this sure isn’t foolproof.

Going back 20 years, when the S&P 500 was higher in the first five days, the full year was up 12.9%, whereas when those first five days were in the red, the full year was actually down nearly 1% on average.



Taking things back to 1950,* the results have been even more impressive. Per Ryan Detrick, Senior Market Strategist, “Although the first five days of the year as an indicator for the full year might sound rather random, there appears to be some truth to it. When those first five days were higher, then the full year was up nearly 14% on average versus when those days were lower, the return was only 1.0%. The real eye-opening stat is when those first five days were up more than 1% (like this year), then the full year finished higher more than 88% of the time.”



There have been 26 times when the S&P 500 was up at least 1% in the first five days of the year and only three times did the full year close lower. Two of those times were 1973 and 2002, both years that saw recessions, while 2011 was the other year and the S&P 500 was only fractionally lower on the year then. As we discussed in Outlook 2017: Gauging Market Milestones, the odds of a recession in 2017 are rather low, which helps support the chances that the S&P 500 finishes higher this year; this study only further supports that outlook.

*Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

 

Multiple Seasonal Patterns Converge at 6-8% Full Year Gains

This Friday, Donald Trump will be inaugurated as the 45th President of the United States and a new administration will be in place. The market’s rally since Election Day has been one of this best in records going back to 1952 at various points along the way and remains near the top today even after some mild losses. The pace of gains has slowed as an increasing number of traders and investors ponder whether or not the rally can continue. Based upon the following seasonal pattern charts, the rally has a reasonably good chance of lasting, but gains are likely to be limited to around 6-8% at yearend for DJIA and S&P 500 and around 10% for NASDAQ.



In the above charts, four different seasonal patterns are plotted alongside 2017 year-to-date as of today’s close. The baseline is “All Years” and includes every year of data. DJIA data begins in 1901, S&P 500 in 1930 and NASDAQ is since 1971. 2017 is a post-election year and a comparison to “All Post-Election Years” is included. This year will also be the first year of a new administration which is represented by “1st Year of New Administration.” Lastly, “7th Years of Decades” is included. 7th Years of Decades have a rather nasty history and are the second worst performing year for DJIA going back to 1881 (page 129 of Stock Trader’s Almanac 2017). Zero years have the worst record however; we don’t place much emphasis on the decennial cycle currently as the four-year presidential cycle exhibits more influence.