Global Indices Below 200-DMAs With Death Crosses To Boot Mar 23, 2018 It’s been a week to forget for global equity indices. In the charts below we chart local currency prices for indices in the US (S&P 500), Europe (Stoxx 600), Italy (FTSE MIB), Spain (IBEX 35), the UK (FTSE 100), Germany (DAX), Japan (Nikkei 225), and Australia (ASX 200). All are now below their 50-DMAs and the US is the only index hanging on to its 200-DMA. Adding to that technical damage are a number of death crosses. This bearish technical indicator is triggered when the 50-DMA passes below the 200-DMA when both are downward sloping. The Stoxx 600, FTSE 100, and DAX. As if death crosses and moves below long-term averages weren’t enough, the Stoxx 600, IBEX 35, FTSE 100, and DAX are all at 52-week lows on a closing basis. The Nikkei closed the week with its second-largest decline since the 2016 US Presidential election, and US equities have dropped on 4 of 5 trading days in 3 of the past 4 weeks. The weakness of the price action across global equities is consistent and broad-based.
Down February/Down March: Historically a Rather Bearish Outcome Over the past 69 years the combination of a down February and a down March has occurred 11 times for S&P 500 and 10 times for DJIA prior to this year’s occurrence. Historically, the market’s performance after back-to-back losses in February and March was well below average and rather bearish in nature. Recent occurrences in 2008 and 2001 were both bear market years. After a bounce in April, Q2 was down more than 70% of the time. The April through yearend period (Apr-Dec) was mixed and full-year performance was negative on average.
Whether superstitious or not, Friday 13th in April historically bearish Since 1930, the S&P 500 has traded a grand total of 148 Friday 13th across all twelve months. The overall track record is 80 up days and 68 down (or unchanged) days with a bearish average loss of 0.04%. The worst Friday 13th loss was 6.12% in October 1989. This day is often referred to as “Black Friday.” Digging deeper into the data reveals that this upcoming April Friday 13th has been down (or unchanged) six times, up three times with an average gain of 0.02%. Median performance is a loss of 0.15%. Depending on which metric chosen, November is either the worst or in a virtual tie for worst month for Friday 13th. October has a similar average loss, but with two additional up days. June is the best month for Friday 13th, up 11 times in 13 with an average gain of 0.55%.
The Curse Of The Presidential Cycle Posted by lplresearch As we noted back in January, midterm election years tend to be relatively volatile periods—with stocks historically seeing the largest intra-year pullbacks. But why is that? Of course, there are many likely reasons, but one potential reason is that in the past the political party that has won the presidency has lost seats in the House and Senate during the midterm election, generating some uncertainty during these years. Looking at the full four-year presidential cycle also shows that the second and third quarters of the president’s second year in office (so right now) can indeed have bulls frustrated. “Going all the way back to the Dow’s inception in 1896 displays that this quarter and next quarter are quite weak historically. But the good news is we’ve seen big rallies after this weakness. However, this is something to be aware of as we move forward in this midterm year,” said Ryan Detrick, Senior Market Strategist. Although we expected more volatility this year, we are seeing some signs of better times ahead for equites. Be sure to be on the lookout for our latest Weekly Market Commentarydue out Monday, where we look at some positive technical developments on equities.
Start of “Worst Six Months” for DJIA and S&P 500 May officially marks the beginning of the “Worst Six Months” for the DJIA and S&P. To wit: “Sell in May and go away.” Our “Best Six Months Switching Strategy,” created in 1986, proves that there is merit to this old trader’s tale. A hypothetical $10,000 investment in the DJIA compounded to $975,223 for November-April in 67 years compared to $116 loss for May-October. The same hypothetical $10,000 investment in the S&P 500 compounded to $705,504 for November-April in 67 years compared to a gain of just $8,615 for May-October. May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 “flash crash”. It used to be part of what we called the “May/June disaster area.” From 1965 to 1984 the S&P 500 was down during May fifteen out of twenty times. Then from 1985 through 1997 May was the best month, gaining ground every single year (13 straight gains) on the S&P, up 3.3% on average with the DJIA falling once and two NASDAQ losses. In the years since 1997, May’s performance has been erratic; DJIA up ten times in the past twenty years (three of the years had gains in excess of 4%). NASDAQ suffered five May losses in a row from 1998-2001, down – 11.9% in 2000, followed by eleven sizable gains in excess of 2.5% and four losses, the worst of which was 8.3% in 2010. Since 1950, midterm-year Mays rank poorly, #9 DJIA and NASDAQ, #10 S&P 500 and Russell 2000, #8 for Russell 1000. Losses range from 0.1% by Russell 1000 to 1.9% for Russell 2000.
Second Half of Midterm Mays Turbulent Over the last twenty-one years, May has a mixed record. DJIA has averaged just 0.01% gain in eleven advancing and ten declining Mays. Russell 2000 has the best record, up thirteen and down eight with an average advance of 0.6% in all years. In the above chart, the full month of May’s average performance has been plotted. The month usually begins well, but quickly weakens before recovering and trading sideways until around mid-month. Just after mid-month, the major indexes then begin a six-trading-day slide before rebounding to close the month in mildly positive territory. In midterm-election years like 2018, May’s average performance has been weaker. Midterm May’s begin in generally similar fashion, but weakness begins sooner, just ahead of mid-month, and lasts longer, until the penultimate trading day of the month. The month-end rally is also smaller in magnitude and duration leaving the full-month midterm May performance in the red across the board.
Small-cap rally could falter For the second day in a row, the Russell 2000 index of small-cap stocks closed at a new all-time high. However DJIA, S&P 500 and NASDAQ still have some ground to cover before doing the same. NASDAQ is closest followed by S&P 500 and then DJIA. Small-cap strength is encouraging, but absent the support and participation of the other indices the run could be short-lived. DJIA and S&P 500 both found support at their respective 200-day moving averages (solid red lines in upper portion of above charts) earlier in the month before bouncing higher. That bounce ended when DJIA and S&P 500 ran into projected monthly resistance (red dashed line) last Friday. Both have been churning essentially sideways since then. Both will need to break through this level before making any run towards old highs. NASDAQ’s chart is somewhat healthier than DJIA and S&P 500. This does not come as much of a surprise as NASDAQ typically enjoys a “Best Eight Months” that run November through June. As earnings season winds down and the three-day Memorial Day weekend nears, catalysts for the market to continue higher in the near-term are fading increasing the possibility of more sideways to lower trading.
June Worst DJIA, S&P 500 and Russell 1000 Month of Midterm Years June has shone brighter on NASDAQ stocks over the last 47 years as a rule ranking ninth with a 0.6% average gain, up 25 of 47 years. This contributes to NASDAQ’s “Best Eight Months” which ends in June. June ranks near the bottom on the Dow Jones Industrials just above September since 1950 with an average loss of 0.3%. S&P 500 performs similarly poorly, ranking tenth, but essentially flat (–0.02% average). However, small caps tend to fare well in June. Russell 2000 has averaged 0.6% in the month since 1979. In midterm years since 1950, June ranks no better than ninth. June is the #12 DJIA, S&P 500 and Russell 1000 month in midterm years. Average losses range from 1.4% by Russell 1000 to 1.9% from S&P 500. Of the five indexes, none has a winning track record in June. All have declined more than they have risen.
July 4th Week: Not As Bullish As it Used to Be Jun 29, 2018 Next Wednesday is July 4th, and because the holiday falls right smack in the middle of the week, it is also likely to be a week where many people look to take extended weekends on either end of the holiday. That doesn’t mean it will be a quiet week in terms of economic data, though. Not only is next Friday the Non-Farm Payrolls report, but we’ll also be getting both the ISM Manufacturing (Monday) and the ISM Services (Thursday) reports, as well as FOMC Minutes (also Thursday). With fewer people at their desks and plenty of data, don’t be surprised if there is a pickup in volatility. In terms of the US equity market’s historical performance during the week of July 4th, it has historically been positive. Since 1945, the S&P 500 has seen an average gain of 0.71% during the week of July 4th with positive returns 70% of the time. In years where the market was already up YTD heading into the holiday week, returns were even a little better at 0.78% with positive returns 75% of the time. For these calculations, we have used the S&P 500’s returns from the Friday before July 4th to the Friday after. In those cases where July 4th fell on a Friday or Saturday (in which case the markets were closed on the 3rd), performance was measured in the week before. The chart below shows the S&P 500’s July 4th week returns since 1945. Looking at the chart, what really stands out is how consistently positive the S&P 500 was in the 25 years that followed WWII. From 1945 – 1969, the S&P 500 was up during the July 4th week in every year but one (1950), and in that one down year it only fell 0.11%. Since then, though, the bullish trend for the week has waned. While the S&P 500’s return is still positive, it has not been nearly as consistent to the upside with gains just 58% of the time. Third Quarter Blues Posted by lplresearch After snapping a nine-quarter win streak with a 2.0% drop in the first three months of the year, the Dow appears poised to bounce back this quarter. Here’s where things get interesting: the third quarter of a midterm year has historically been one of the worst quarters of the four-year presidential cycle. So should investors be worried? “Buckle up, as the calendar isn’t doing anyone any favors over the next few months. In fact, out of the four-year Presidential Cycle, the next quarter has been among the worst for stocks,” explained LPL Research Senior Market Strategist Ryan Detrick. As our LPL Chart of the Day shows, only the second quarter of an election year has posted worse average returns. The Next Quarter Has Bears Growling Source: LPL Research, FactSet 06/28/18 Before you start questioning your long-term strategy, there is good news: as the chart also shows, this quarter has actually been higher nearly two out of every three times. So what’s that mean? The average is skewed by a few big drops. A closer look reveals that large declines during the recession years of 2002 (-18%), 1990 (-15%), and 1974 (-24%) are drastically tilting the results, while 1998 saw a 12% drop in the third quarter amid the Asian Financial Crisis. With expanding earnings, strong housing data, improving retail sales, and near-record highs in confidence, we see very little reason to expect a recession over the next 12-18 months—let alone next quarter. Could trade tensions play the Asian Financial Crisis’ role we saw in 1998? Though it can’t be ruled out, if you’re making comparisons to 1998, the Dow bounced back more than 17% in the fourth quarter that year. Also note in the chart the nine-month stretch following the historically weak upcoming quarter, which has posted an annualized return of nearly 18%. Although we wouldn’t be surprised to see equity volatility persist through summer, it may prove fruitful to stick to your long-term investment plan in the third quarter. We would be a buyer on weakness—focusing on small caps, value, U.S., and emerging markets.
Midterm Elections Dampen July’s Performance July historically is the best performing month of the third quarter however, the mostly negative results in August and September make the comparison easy. Two “hot” Julys in 2009 and 2010 where DJIA and S&P 500 both gained greater than 6% and a strong performance in 2013 have boosted July’s average gains since 1950 to 1.2% and 1.0% respectively. Such strength inevitability stirs talk of a “summer rally”, but beware the hype, as it has historically been the weakest rally of all seasons (page 70, Stock Trader’s Almanac 2018). Midterm-year July rankings are something of a mixed bag, ranking #5 for DJIA and S&P 500, averaging gains of 1.2% and 0.8% respectively (since 1950); while NASDAQ (since 1974) and Russell 2000 (since 1982) midterm Julys rank #11 and #12. NASDAQ has only advanced in three of the last ten midterm Julys with an average loss of 2.4%. Russell 2000 has advanced only twice in its last eight with an average decline of 4.3%.
Small-Caps Stumble – More Weakness Could Be on the Horizon In the following chart, thirty-seven years of daily data for the Russell 2000 index of smaller companies are divided by the Russell 1000 index of largest companies, and then compressed into a single year to show an idealized yearly pattern. When the graph is descending, big blue chips are outperforming smaller companies; when the graph is rising, smaller companies are moving up faster than their larger brethren. Small-caps have historically peaked versus large-caps in late-May to early June and tend to underperform until sometime in November. Russell 2000’s all-time closing high was on June 20. Compared to DJIA, S&P 500 or Russell 1000, the Russell 2000 certainly has outperformed for the majority of the year. As of today’s close Russell 2000 is up 9.8% year-to-date compared to 2.7% for DJIA, 5.5% for S&P 500 and 5.8% by Russell 1000. However, today smalls-cap lagged significantly recording a 0.5% loss while the other major indexes logged gains. Perhaps it was just resistance at old highs that triggered profit taking today; nonetheless, the window of historical small-cap underperformance has opened.
Trump Trade Tariffs & Tough Talk Stifle NASDAQ’s Mid-Year Rally As usual end-of-Q2 weakness, especially in the week after June’s option expiration week, setup of NASDAQ’s mid-year rally quite nicely. Immigration policy issues at the Mexican border added to this perennial weakness providing a solid entry opportunity for NASDAQ’s mid-year rally. Typical early July strength at the outset of Q3 has given the mid-year rally a healthy boost. But continued trade battles, more tariffs and tough Trump talk with his European counterparts has spooked the market, shaving some points off this rally. It may be time for an early exit from this trade that ends Friday. In the mid-1980s the market began to evolve into a tech-driven market and the market’s focus in early summer shifted to the outlook for second quarter earnings of technology companies. Over the last three trading days of June and the first nine trading days in July, NASDAQ typically enjoys a rally. This 12-day run has been up 25 of the past 33 years with an average historical gain of 2.4%. This year the rally could begin on or around June 27 and last until around July 13. After the bursting of the tech bubble in 2000, NASDAQ’s mid-year rally had a spotty track record from 2002 until 2009 with three appearances and five no-shows in those years. However, it has been quite solid over the last eight years, up seven times with a single mild 0.1% loss in 2015. Last year, NASDAQ advanced a respectable 2.7% during the 12-day span. As of today’s close NASDAQ is up 2.0% since the close on the 4th to last trading day of June.
Tepid Summer Rallies Precede Above Average Slumps It’s usually about this time of the year, when trading volumes begin to slump and markets meander that we begin to hear talk of the infamous “Summer Rally” featured on page 70 of the Stock Trader’s Almanac 2018. Long story, short, the elusive “Summer Rally” is the weakest seasonal rally of them all. So we took a look at the current Summer Rally and found it to be rather weak so far, up only 5% from the Spring low on May 2, and that does not portend so well for the Summer and Fall Corrections. We lined up the Summer Rallies ranked from weakest to strongest since 1964. Over the past 54 years prior to this year DJIA has rallied and average of 9.0% from its May/June low until its Q3 high. The Fall Rally averages 11.0% and the Summer and Fall Corrections average a loss of just under 9% for a net average gain of a few percentage points over the summer and fall. However, as shown in the table below, when the Summer Rally is below the 54-year 9.0% average, the summer and fall correction tend to be bit steeper, -10.7% and -9.5%, respectively. It gets worse as the Summer Rally numbers dwindle. So, if the market does not get excited about something soon, we may be looking at a summer selloff that could be a bit deeper than usual.
August Is Worst Performing Month of Year Since 1988 Money flows from harvesting made August a great stock market month in the first half of the Twentieth Century. August was the best month from 1901 to 1951. In 1900, 37.5% of the population was farming. Now that less than 2% farm, August is amongst the worst months of the year. It is the worst DJIA and S&P 500 month since 1987 with average declines of 1.0% and 0.8% respectively. August is also the worst month for NASDAQ (–0.1%) and Russell 1000 (–0.7%) over the same time period. Contributing to this poor performance since 1987; the shortest bear market in history (45 days) caused by turmoil in Russia, the Asian currency crisis and the Long-Term Capital Management hedge fund debacle ending August 31, 1998 with the DJIA shedding 6.4% that day. DJIA dropped a record 1344.22 points for the month, off 15.1%—which is the second worst monthly percentage DJIA loss since 1950. Saddam Hussein triggered a 10.0% slide in August 1990. The best DJIA gains occurred in 1982 (11.5%) and 1984 (9.8%) as bear markets ended. Sizeable losses in 2010, 2011, 2013 and 2015 of over 4% on DJIA have widened Augusts’ average decline. A strong August in 2014 of S&P 3.8% and NASDAQ 4.8% preceded corrections of 7.4% and 8.4% respectively from mid-September to mid-October. In midterm years since 1950, Augusts’ rankings improve slightly: #8 DJIA, #9 S&P 500, #11 NASDAQ (since 1974), #7 Russell 1000 and #11 Russell 2000 (since 1982). Average losses range from 0.1% for Russell 1000 to 1.9% for Russell 2000. DJIA suffered double-digit losses in 1974, 1990 and 1998.
Flat-Lining Advance/Decline Lines Flash Warning At the open of trading today all the major indexes were all in positive territory, but by the closing bell only DJIA and S&P 500 remained in the green for the day, up 0.8% and 0.5% respectively. NASDAQ finished basically flat on the day after surrounding early-day gains in excess of 1%. Russell 2000 had the toughest day, closing down slightly less than 1.1%. This is a reversal of the trend that existed through much of June and the first half of July when NASDAQ and Russell 2000 were leading the charge higher. These divergences across the major indexes are not a bullish indicator. In the following chart another one of our favorite indicators, Advance/Decline (A/D) lines, has been plotted alongside the performance of DJIA, S&P 500, NASDAQ and Russell 2000. Late-June index weakness was accompanied by sideways to lower movement in correlating A/D lines and early July index strength was accompanied by a robust move higher by A/D lines. Now that A/D lines have flattened out the pace of index gains has also slowed possibly signaling the July rally could be running out of fuel.
August’s First Trading Day Not So Great From the Stock Trader’s Almanac 2018 (page 86), it is known that the first trading days of each month combined gain nearly as much as all other days combined. However, the first trading day of August does not contribute to this phenomenon ranking worst among other First Trading Days in the 2018 Almanac and even after a modestly positive performance last year it is still the last in the upcoming 2019 edition of the Almanac. In the past 21 years DJIA has risen just 33.3% (up 7, down 14) of the time on the first trading day of August. Several sizable gains in those up years, have mitigated the average first day percent change, but the median performance is a more sizable loss. Over the past seven years, DJIA and S&P 500 have both declined five times.
August Preview: A Month for the Bears? The surprise summer rally continues, as the S&P 500 Index is on pace to gain for a fourth consecutive month. In fact, should July close in the green, over the past 21 months, the S&P 500 has closed higher all but three times. Here is the catch: The calendar is something we should not ignore, as August and September are two of the weakest months historically and they are coming up next. As stated in our recently released Midyear Outlook 2018: The Plot Thickens, one of the three major themes we are looking for over the rest of this year is volatility (with fiscal policy and peaks being the other two). Right on cue, here comes the one month where “when it’s down, it’s really down.” “Maybe it’s the back-to-school blues, but since 1980, there is no month with a worse average return when it is lower than August,” explained LPL Research Senior Market Strategist Ryan Detrick. Look at the recent history of August: Iraq invaded Kuwait in 1990, 1997 and 1998 both saw big drops in August over the “Asian Contagion” and the implosion of Long-Term Capital Management (LTCM), 2010 saw a big drop as worries over the global economy spread, 2011 had the U.S. debt downgrade, and 2015 was the China currency issues and a 1,000 Dow drop. Pick a reason why, but August seems to have these big events that cause trouble. As our LPL Chart of the Day shows, August has a penchant for large drops. We continue to expect stock market gains of 10%+ when all is said and done in 2018, thanks to the benefits of fiscal policy and strong corporate profits, suitable investors may consider using any potential late summer weakness as an opportunity to add to risk.
Typical August Trading: Don’t Expect Much from the Worst Month Just like many Augusts in the recent past, this year August also began tepidly. Yes, NASDAQ did manage a 0.46% gain today (thank you AAPL), but DJIA, S&P 500 and Russell 2000 all finished the day in the red. Today’s Fed announcement had little impact on the market as the Fed did exactly what was widely anticipated, nothing. Looking ahead to the rest of the month of August (chart above) then enjoys a solid, but brief, run lasting from ninth trading day until the thirteenth trading day. From that point through the end of the month the trend is sideways at best to lower at worst.
Tariffs, Tariffs, Tariffs! Aug 1, 2018 As mentioned earlier in a tweet about the ISM Manufacturing report for July, talk and concern about tariffs is just about everywhere in the manufacturing sector. In addition to the ISM Manufacturing report, we’ve also seen a major uptick in tariff conversation during the latest round of Q2 earnings conference calls. We’ve been tracking all of the conference call transcripts of companies in the S&P 500 that have reported earnings so far and with just about half of all companies reporting, the percentage of conference calls where tariffs have been brought up has more than doubled relative to Q1 (39.8% vs 16.6%). For the entire Q1 earnings season, the word “tariff” came up 290 different times in S&P 500 conference calls (in some calls, the word came up more than once), while during this earnings season, the term has already come up 609 different times. Remember, we’re only halfway through this earnings season. The table below breaks down the percentage of companies that have mentioned tariffs in their Q2 conference calls by sector. For each sector, we have also included the conference calls where the term has come up the most frequently. Three sectors have seen “tariff” mentioned in half of the conference calls (Industrials, Materials, and Consumer Staples), and all three sectors have lagged the market considerably this year. Sectors where tariffs have been least mentioned are Telecom Services, Health Care, and Real Estate. In terms of individual companies, given all the headlines Harley Davidson (HOG) created when it was targeted by the President for saying it would move production outside of the US in response to tariffs, the fact that tariffs were mentioned the most on its conference call isn’t much of a surprise. Right behind HOG, Stanley Black & Decker (SWK), and Mettler-Toledo (MTD) round out the top three. Finally, we also wanted to highlight a few excerpts from conference calls that have taken place between the close on Tuesday and the open Wednesday. Apple (AAPL) is the most notable of the six companies mentioned and gets right down to the bottom line with its statement that “Tariffs show up as a tax on the consumer…and sometimes can bring about significant risk of unintended consequences.” We couldn’t have said it better ourselves!
