The Bull Thread

January Almanac: Top Month in Pre-Election Years

January has quite a legendary reputation on Wall Street as an influx of cash from yearend bonuses and annual allocations typically propels stocks higher. January ranks #1 for NASDAQ (since 1971), but sixth on the S&P 500 and DJIA since 1950. It is the end of the best three-month span and holds a full docket of indicators and seasonalities.

DJIA and S&P rankings did slip from 2000 to 2016 as both indices suffered losses in ten of those nineteen Januarys with three in a row, 2008, 2009 and 2010. January 2009 has the dubious honor of being the worst January on record for DJIA (-8.8%) and S&P 500 (-8.6%) since 1901 and 1931 respectively. Despite late-month weakness in 2018, S&P 500 still gained 5.6% and DJIA jumped 5.8%.

In pre-election years, Januarys have been downright stellar ranking #1 for S&P 500, NASDAQ, Russell 1000 and Russell 2000 and #2 for DJIA. Average gains range from 2.9% by Russell 1000 to a whopping 6.6% for NASDAQ.

 

What Does 300,000 Jobs Tell Us?

The December jobs report showed nonfarm payrolls grew by 312,000 last month, well above the median consensus estimate for a 184,000 increase. This was a record 99th consecutive month with positive jobs growth. The good news sparked a big equity rally on hopes that the U.S. economy remained on firm footing.

What does a 300,000 monthly print tell us? First things first: Be aware that the labor market is constantly growing—so 300,000 jobs last month isn’t the same as 300,000 jobs back in the mid-1980s. In fact, the total number of employed people is about 50% higher now than it was then. Still, 300,000 jobs is an impressive increase and one that could suggest a recession is a ways off. “The most recent jobs figure could be a great sign that a recession is still a long way off, as the previous two cycles didn’t see recessions begin until 13 and 23 months after the last 300,000 print,” explained LPL Senior Market Strategist Ryan Detrick.

As our LPL Chart of the Day shows, looking at the previous five cycles, it took an average of 12 months after the last 300,000 jobs print before a recession started—with the last two cycles actually taking longer. We remain in the camp that we probably won’t have a recession in 2019, and this is another potential bullet point to support that.

 

Positive Santa Claus Rally & First Five Days Brighten Light at Tunnel’s End

Solid across the board gains today lifted S&P 500 to a year-to-date gain of 2.7% at today’s close 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 would be satisfied with a positive reading from our January Barometer (JB) at month’s end.

The best case, most bullish scenario is when all three indicators, SCR, FFD and JB, are positive (in table above). In 30 previous Trifecta occurrences since 1950, S&P 500 advanced 86.7% of the time during the subsequent eleven months and 90.0% of the time for the full year. However, a January Indicator Trifecta does not guarantee the year will be bear or correction free. Of the four losing “Last 11 Mon” years, shaded in grey in the above table, 1966, 1987 and 2011 experienced short duration bear markets (2011, S&P 500 –19.4% peak to trough). In 2018, S&P 500 retreated 19.8% from its September high close to its December low close.

Even if S&P 500 was to suddenly reverse course and finish the full month in the red, the prospects for the next eleven months and the full year remain fair. Of the last 10 years since 1950 that the SCR and FFD were both positive (and the full-month January was negative), the next eleven months advanced 80% of the time and full year advanced 70% of the time with gains of 7.4% and 2.9% respectively.

 

Bulls Bailed Out Into the Close
Jan 22, 2019

After a great three-week run, US equities kicked off the week on a disappointing note Tuesday. After just barely closing above the 50-day moving average (DMA) last week, bulls were hoping the next milestone for the rally off the Christmas Eve lows would be the downtrend line from the September highs, but the market had other plans. After falling as much as 2% and back below the 50-DMA heading into the final hour of trading, the S&P 500 rallied 0.60% in the final 60 minutes of trading to finish the day down 1.4% but above the 50-DMA. After a strong run like the one we had, at the very minimum, a pause was expected, and the fact that the S&P 500 was able to once again rally in the final hour of trading is something for the bulls to hang their hats on.

Besides the fact that the S&P 500 showed some life into the close, Tuesday’s sell-off came on extremely low volume which provides some consolation. Whereas market sell-offs are almost always accompanied by an uptick in volume, volume on Tuesday was notably below average. In fact, with SPY volume coming in at under 110 million shares, volume was 13% below average. For the sake of reference, the last time the S&P 500 was down 1%+ and volume was more than 10% below average was almost a year ago in late February 2018 and between then and now, there have been 28 other days where the S&P 500 was down over 1% where volume was higher relative to its 50-day average.

 

Stocks Bounced, Now What?

The big bounce off the December 24 lows continued last week, as the S&P 500 Index added 2.9% for the week. In fact, it has gained 2.9%, 1.9%, 2.5%, and 2.9% over the past four weeks for a total gain of 10.5%. Of course, the S&P 500 did have its worst December in 87 years and worst fourth quarter since the 2008-09 financial crisis, so stocks were historically oversold coming into 2019. Still, this bounce is quite impressive.

Just what could this extreme strength be telling us? “Here’s the catch: Stocks have been up huge the past four weeks, but history also tells us that being up more than 1.5% for four consecutive weeks actually tends to see continued outperformance going out the next three months. Don’t fight the trend is another way to put it,” explained LPL Senior Market Strategist Ryan Detrick.

As our LPL Chart of the Day shows, the S&P 500 tends to continue to outperform after similarly strong four-week stretches. Since 1950, after being up 1.5% or more for four consecutive weeks, the index’s average return going out 8 and 12 weeks has been more than double its overall average.

 

Pre-Election Years: Best Year of Four-Year Cycle

Presidential elections every four years have a profound impact on the economy and the stock market. Wars, recessions and bear markets have tended to start or occur in the first half of the term while prosperous times and bull markets, in the latter half. This pattern has contributed to solid average gains in many pre-presidential-election years. Compared to the average performance of All Years, Pre-Election Years have enjoyed approximately twice the returns.

In the following charts, Pre-Election Years, All Years and 2019 year-to-date are presented. After a bumpy start to this year, the market has shot higher off of December’s lows. As of yesterday’s close, DJIA was up 4.62%, S&P 500 5.03% and NASDAQ 5.8%. At this early stage of pre-election year 2019, this performance is comfortably above average. If economic growth can remain firm, the partial government shutdown comes to an end, the Fed isn’t overly hawkish with monetary policy and some reasonable resolution to the trade war can be reached, 2019 could live up to expectations.

 

February Almanac: Small-Caps Tend to Outperform

Even though February is right in the middle of the Best Six Months, its long-term track record, since 1950, is not all that stellar. February ranks no better than seventh and has posted paltry average gains except for the Russell 2000. Small cap stocks, benefiting from “January Effect” carry over; tend to outpace large cap stocks in February. The Russell 2000 index of small cap stocks turns in an average gain of 1.1% in February since 1979—just the seventh best month for that benchmark.

In pre-election years, February’s performance generally improves with average returns all positive. NASDAQ performs best, gaining an average 2.8% in pre-election-year Februarys since 1971. Russell 2000 is second best, averaging gains of 2.5% since 1979. DJIA, S&P 500 and Russell 1000, the large-cap indices, tend to lag with average advances of around 1.0%.

 

Jobless Claims’ Historic Significance

Jobless claims have dropped to a 49-year low. Based on historical trends, this could signal that a U.S. economic recession is further off than many expect.

Data released January 24 showed jobless claims fell to 199K in the week ending January 18, the lowest number since 1969 and far below consensus estimates of 218K. As shown in the LPL Chart of the Day, current jobless claims have been significantly lower than those in the 12-month periods preceding each recession since the early 1970s.



Jobless claims have fallen out of the spotlight as the economic cycle has matured, but they could prove important again as investors’ recessionary fears increase. While most labor-market data serve as lagging indicators of U.S. economic health, jobless claims are a leading indicator. Historically, a 75–100K increase in claims over a 26-week period has been associated with a recession.

“Last week’s jobless claims print was particularly impressive given the partial government shutdown and weakening corporate sentiment,” said LPL Research Chief Investment Strategist John Lynch. “The U.S. labor market remains strong and will help buoy consumer health and output growth this year.”

Other predictive data sets have signaled U.S. recessionary odds are low. Data last week showed the Conference Board’s Leading Economic Index (LEI), based on 10 leading economic indicators (like jobless claims, manufacturers’ new orders, and stock prices), grew 4.3% year over year in December. In contrast, the LEI has turned negative year over year before all economic recessions since 1970. Because of its solid predictive ability, the LEI is a component of our Recession Watch Dashboard.

U.S. investors have been dealing with a dearth of economic data recently, but the upcoming week is packed with economic events, like the Federal Reserve’s (Fed) rate announcement on Wednesday, January 30, and the January jobs report on Friday, February 1.

 

Sock It To ‘Em J. P.

In line with our Base and Best Case scenarios from our 2019 Annual Forecast that we made back on December 20, 2018 Fed Chairman Jerome Powell (JP) has really toned down his rhetoric as of late and today the FOMC left interest rates unchanged. The Fed’s post meeting statement and comments were just what the market ordered: interest rates were left unchanged, flexibility on its balance reduction strategy, patience and data dependence. “The case for raising rates has weakened somewhat,” Powell said.

Here’s what we wrote on December 20 in our 2019 Annual Forecast.

Base Case – Something gives. Mild bear market bottoms soon or in early 2019 as Fed tones down rhetoric and holds off raising rates, Trump and the Dems work out a few deals and we have modest pre-election year gains in the 5-10% range.

Best Case – Everything resolves quickly. Fed becomes accommodative. Trade deals are worked out expeditiously. Trump tacks towards the center and works with congress and does not get “Muellered.” Typical pre-election year gains of 10-15% for Dow and S&P 500 and 20-30% for NASDAQ

Earnings season has also begun to deliver more positive surprises this week and the market has responded bullishly in kind, making it a virtual lock that our January Indicator Trifecta will be 3-for-3. The Santa Claus Rally and our First Five Days “Early Warning System” have both already registered positive readings. For our full-month January Barometer to not be positive the S&P 500 would need to drop 6.5% tomorrow. (Almanac Investor subscribers will be emailed the official results tomorrow after the close.)

Plus, after the late Midterm Year correction, more normal Pre-Election Year gains are now likely in 2019. The Pre-Election Year or 3rd Year of the 4-Year Election Cycle is the best of the 4 by a wide margin. DJIA averages 15.8% since 1949 and NASDAQ Composite averages 28.8% since 1971.

Hat Tip: Rex Garvin & The Mighty Cravers by way of The Specials

 

Best S&P January Since 1987

Most major U.S. stock indexes rallied to new recovery and year-to-date highs today shrugging off some misses and weakness from Microsoft, DuPont and Visa. S&P 500 finished the month strong with a 7.9% gain. This is the best S&P January since 1987. This is also the third January Trifecta in a row.

Last year the S&P 500 crumbled in the fourth quarter under the weight of triple threats from a hawkish and confusing Fed, a newly divided Congress and the U.S. trade battle with China, finishing in the red. 2017’s Trifecta was followed by a full-year gain of 19.4%, including a February-December gain of 17.3%. As you can see in the table below, the long term track record of the Trifecta is rather impressive, posting full-year gains in 27 of the 30 prior years with an average gain for the S&P 500 of 17.1%.

Devised by Yale Hirsch in 1972, the January Barometer has registered ten major errors since 1950 for an 85.5% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the ten major errors Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001.The market in January 2003 was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. In 2016, DJIA slipped into an official Ned Davis bear market in January. Including the eight flat years yields a .739 batting average.

Our January Indicator Trifecta combines the Santa Claus Rally, the First Five Days Early Warning System and our full-month January Barometer. The predicative power of the three is considerably greater than any of them alone; we have been rather impressed by its forecasting prowess. This is the 31st time since 1949 that all three January Indicators have been positive and the twelfth time (previous eleven times highlighted in grey in table below) this has occurred in a pre-election year.

With the Fed turning more dovish and President Trump tacking to the center and meeting with China and market internals improving along with the gains, the market is tracking Base Case and Best Case scenarios outlined in our 2019 Annual Forecast. Next eleven month and full-year 2019 performance is expected to be more in line with typical Pre-Election returns.

 

Full Year Gains in 10 of the Last 11 Pre-Election Years with Positive January Indicator Trifecta

From recent posts and the 2019 Stock Trader’s Almanac we know that pre-election years have historically been the best year of the four-year-presidential cycle and a positive January Trifecta has also been historically bullish for the market. The impact of a positive January Trifecta in pre-election is not as powerful as other years of the cycle because pre-election years are typically quite positive however, the Trifecta does raise the ceiling. In the following chart of DJIA, S&P 500 and NASDAQ, the one-year seasonal patterns for “All Years,” “Pre-Election Years,” “Trifecta Pre-Election Years” and 2019 have been plotted. Declines in October are the result of the crash in 1987.

 

Late Day Rallies
Feb 11, 2019

If we could only use one characteristic to describe equity market performance so far in 2019, late day strength may be the most applicable. Heading into Monday, the S&P 500 had been up in the final hour of trading for seven straight days, and over the prior five weeks, the last hour of trading saw positive returns 90% of the time! That kind of late day strength doesn’t occur all that often.

Ever since the S&P 500’s most recent low on December 24th, the intraday trading characteristics of the market have really shifted. The first chart below shows the S&P 500’s average hourly performance during the period from the 9/20/18 high through 12/24. The only time period of the day that saw any strength was the opening half hour. From 10 AM on, though, every other hour of the trading day averaged a decline, with the most weakness coming from 10 AM through 1 PM. The last hour of the trading day wasn’t particularly strong with an average decline of 0.06%.



In the period since Christmas Eve, the intraday characteristics of the trading day have been completely upended. During this period, the weakest part of the trading day has been the opening half hour (formerly the strongest), while the strongest part of the trading day has been the last hour with an average change of 0.22%. Behind the last hour of the trading day, the next strongest hourly interval has been the period from 11 – 12, which has averaged a gain of 0.19%. Combined, these two hours of the trading day have accounted for 86% of the S&P 500’s gains since the Christmas Eve low. Moral of the story? If you are a bull these days, don’t take an early lunch and don’t try and cut out early to beat the traffic home!

 

The Year of the Pig Could Have Bulls Smiling

“Bulls make money, bears make money, and pigs get slaughtered.” Old Wall Street saying.

The Chinese New Year (often called the Lunar New Year) kicked off Tuesday, February 5, and with it came the Year of the Pig. Although we would never suggest investing based on the zodiac signs—it is important to note that the Year of the Pig has historically been quite strong for equities.

Since the Chinese New Year typically starts between late-January and mid-February, we looked at the 12-month return of the S&P 500 Index starting in late January dating all the way back to 1928.* And wouldn’t you know it? The Year of the Pig is up nearly 15% on average. Oink oink indeed!



“The year of the pig is the twelfth of the 12 animal signs of the Chinese zodiac, and the pig is considered a symbol of wealth in Chinese culture, which is quite interesting given some strong equity returns have taken place during this year. In fact, out of the 12 zodiac signs, no year sports a better average return,” explained LPL Senior Market Strategist Ryan Detrick.



Be aware that a small sample size and the pure randomness of this makes us want to stress not to ever invest purely based on the zodiac signs. Still, here’s to the year of the pig playing out for the bulls once again!

 

Should Investors Love A Great Start to 2019?

Happy Valentine’s Day everyone! With the S&P 500 Index up 9.8% for the year as of yesterday, this is its best start up to this point since 1991. So should investors love to see this much green this early in the year, or should they be leery they might be heartbroken down the road?

An old adage on Wall Street suggests, “As goes January, so goes the year.” With stocks having posted their best January in more than 30 years, it’s time to take a closer look at the January barometer, first discussed in 1972 by Yale Hirsh of the Stock Trader’s Almanac. Simply put, if the first month of the year is green, it bodes well for the rest of the year (and vice versa).

Let’s get one thing straight—this didn’t work last year. The S&P 500 was up more than 5% in January of 2018, and it closed the year in the red. Nonetheless, the January barometer has a strong track record, and one we shouldn’t ignore.

As shown below in the LPL Chart of the Day, the numbers confirm that when the S&P 500 has been green in January, the rest of the year (final 11 months) has been up 11.7% on average, well above the overall average return of 7.6% for the final 11 months of the year. However, when that first month was red, the final 11 months were up only 1.2% on average. According to LPL Research Senior Market Strategist Ryan Detrick, “The January barometer isn’t perfect, but it does have a pretty solid track record. Now where things really get interesting is when that first month was up more than 7% (like in 2019), the return over the final 11 months actually became stronger.”



Of course, we don’t suggest investing based simply on what the first month does, but with a more accommodative Federal Reserve, fiscal policy still flowing, and likely continued better-than-expected corporate earnings growth, this is yet another sign that 2019 may see a continuation of the bull market, as we outlined previously in our Outlook 2019.

In all the instances when the S&P 500 was up more than 7% at the end of January, the rest of the year gained five out of six times, with only 1987 negative. Still, a 10.3% return over the final 11 months implies we’d see new highs before 2019 is over. Last, be open to a pullback, as a median correction of 8.1% has happened in the past after super strong starts to the year.