Some Good News on Housing For a Change Feb 19, 2019 We’ve all grown pretty accustomed to weaker than expected housing data over the last several months, but this morning we got some positive news as homebuilder sentiment not only improved in February but also came in higher than expected. According to the NAHB, homebuilder sentiment improved from 58 up to 62 and was three points ahead of consensus expectations. For some perspective, the last time homebuilder sentiment saw a m/m increase of four points was in December 2017. The table below breaks down this month’s report by present and future sales (both increased), traffic (increased), as well as regional sentiment (mixed). Future Sales sentiment saw the largest increase this month, followed by Traffic and Present Sales. On a regional basis, both the Midwest and South saw strong gains, while the West and Northeast saw declines. While this month’s improvement is welcome, looking at the steep drops we saw over the course of 2018, the general downtrend in sentiment remains intact. In order to indicate a meaningful change in sentiment on the part of homebuilders, it’s going to take a couple of more months of similar reports.
January-February Gains A Strong Sign At Friday’s close February 15 the S&P 500 was up 10.7% YTD. The top 30 YTD gains at the February high are ranked by gain in Table 1 above. S&P 500 tacked on gains in 25 of those 30 years for an average gain of 11.3%. Overlay our January indicator Trifecta and two losses disappear. In the second table below the 27 years that the S&P 500 gained ground in both January and February since WWII appear. There is only one full year loss on the S&P cash index in 2011 and it’s puny, and there are only 2 losses in the following March-December period in 1987 and 2011 – both were in Trifecta years. No matter how you slice it, gains earlier in the year are generally a solid indication for gains the rest of the year.
Small-Caps Continue to Charge Higher As of the close today, DJIA is up 3.8% so far in February. S&P 500 is up 3% and NASDAQ has gained 2.9%. Small-caps, measured by the Russell 2000 are up 5.5% so far. This performance is well above historical average levels at this point in February over the last 21 years. Major indexes are also exceeding pre-election-year February average performance by a comfortable margin. As we pointed out in yesterday’s post, this type of market strength has typically been a reliable indicator for further gains.
Pre-Election Year March: Small-Caps Perfect 10 for 10 Turbulent March markets tend to drive prices up early in the month and batter stocks at month end. Julius Caesar failed to heed the famous warning to “beware the Ides of March” but investors have been served well when they have. Stock prices have a propensity to decline, sometimes rather precipitously, during the latter days of the month. In March 2001, DJIA plunged 1469 points (-11.8%) from March 9 to the 22. Normally a decent performing market month, March performs even better in pre-election years (see Vital Statistics table below). In pre-election years March ranks: 4th best for DJIA, S&P 500, NASDAQ and Russell 1000 (January, April and December are better). Pre-election year March rank #3 for Russell 2000. Pre-election year March has been up 13 out of the last 14 for DJIA. In fact, since inception in 1979, the Russell 2000 has a perfect, 10-for-10 winning record.
More Good News As this week’s Weekly Market Commentary suggested, over the near term equities appear quite stretched, but overall we continue to think the bull market has plenty of life left. Today, we’ll take a look at market breadth—one of our favorite technical indicators—to explore whether it may be pointing to better times ahead for equities. Market breadth measures how many stocks are participating in the movement of broader indexes. One of the easiest ways to measure this is via advance/decline (A/D) lines on various exchanges. An A/D line is a ratio of how many stocks go up versus down each day. The thinking is, if gains are caused by increases in many stocks, then there are plenty of buyers and the upward trend should likely continue, all else equal. On the other hand, if an upward move in a broad market gauge is driven by relatively few stocks, this can be a warning sign of cracks in the bull’s armor. Today’s LPL Chart of the Day shows that the NYSE Common Stock Only A/D line has broken out to a new all-time high. “This is another clue to market participants that things are actually quite healthy under the surface. When advance/decline lines are breaking out to new highs, history tells us that stocks usually aren’t too far behind,” explained LPL Senior Market Strategist Ryan Detrick.
When Is Overbought Bullish? What more can we say about the amazing rebound of the stock market since December 24? For the first time since 1997, the S&P 500 Index is up more than 10% for the year through this point in February. Of course, it was the worst December for stocks since the Great Depression—making a larger bounce possible—but the rebound over the past two months has been historic. That begs the question: What does it mean when stocks are overbought on many short-term levels? “Yes, stocks are quite extended near -term,” explained LPL Senior Market Strategist Ryan Detrick, “but historically, extended markets have tended to deliver continued outperformance over the next several months.” We can see this by looking at the number of stocks in the S&P 500 that are above their 50-day moving average and the subsequent performance of the index. That number recently cleared 90%, which was one of the highest readings ever. And after 90% of stocks in the S&P 500 go above their 50-day moving average, their 1-, 3-, and 6-month returns actually have shown continued strength. In fact, as the LPL Chart of the Day shows, three months after hitting that 90% mark, the S&P 500 has been higher 12 of the previous 13 times going back to 1990. This tells us the easy part of the recent rally is over, and we do see reasons to expect some type of consolidation or well-deserved pullback at some point, but we still think the stage is potentially set for new highs later this year.
About That Dow 9-Week Win Streak The strong move in stocks continues. The S&P 500 Index has risen nearly 19% (as of February 22) from the December 24 lows, and the Dow Jones Industrial Average (Dow) has posted an incredible nine-week winning streak for the first time since a 10-week stretch back in 1995. The Dow’s strength at this time of the year is especially impressive. To put it in perspective, the Dow closed up the first eight weeks of 2019—the second best win streak to start a year, eclipsed only by the 11 consecutive weekly wins that started 1964. The Dow’s long weekly win streak could mean continued strength ahead. “Long weekly win streaks actually have led to stronger performance,” explained LPL Senior Market Strategist Ryan Detrick. “In fact, there have been 15 other nine-week win streaks since 1900, and a year later the Dow’s median return was nearly 18%. Not bad at all.” As our LPL Chart of the Day shows, the returns after a nine-week win streak for the Dow are significantly better than its overall average return. A strong Dow has historically foreshadowed economic strength as well: Only twice out of the seven win streaks since 1950 has a recession taken place within two years of the streak. This, of course, is only one data point, but it continues to build on the other data points we’ve been sharing recently that support a continuation of this bull market in 2019 along with very little chance of a recession.
DJIA’s Golden Turkey–16% Gain So Far Bowlers and fans of bowling have created many names for streaks of strikes. Two in a row is called a Double, get three in a row and it’s a Turkey. String together three Turkeys in a row or nine straight strikes and you have a Golden Turkey or a nine-bagger. DJIA did exactly this last Friday when it closed with its ninth straight weekly gain. Since 1901 DJIA has accomplished this feat just 13 times including the current streak. In the following table the current streak along with the previous 12 streaks appear with DJIA’s performance over the following 1-, 3-, 6- and 12-month periods. As you can see, the current streak is not the longest on record. DJIA racked up a 14-week streak in 1965, however the current streak is second best by return at nearly 16%. Historically, when streaks of this duration came to an end performance one month later was something of a mixed bag with DJIA higher just 50% of the time. Average and median performance was negative one month later. By 3 months later DJIA was modestly better, but truly solid results were not observed until a full 6 months after the streak ended. One year later was good, but not stellar with DJIA up 75% of the time with a 9.86% average gain. In the above chart, the 30 trading days before and 60 trading days after the 12 previous DJIA 9 week or longer winning streaks are plotted (a typical month has approximately 21 trading days). In this chart the pullback after the streak ended is much more obvious. On a positive note, DJIA was higher than it was at the end of the streak approximately 2.5 months later.
March Higher? “March comes in like a lion, and goes out like a lamb.” What a start to 2019, with the S&P 500 Index up 11.1% after the first two months of 2019 for its best start to a year since 1991. Although we continue to expect the next 10% gain to be quite tough, the good news is that we think new highs could happen later this year and maintain our fair-value target of 3,000 on the S&P 500 Index for 2019. So what could March bring? Like the old adage suggests, the third month can sport some cold and unpleasant weather, but that usually gives way to milder and pleasant weather by April. Could we be in store for a rocky or smoother month this time around? “Yes, 2019 is off to a great start, but investors should note that over the past 10 and 20 years, March has been the second strongest month of the year on average, and April has been pretty good as well,” explained Senior Market Strategist Ryan Detrick. As our LPL Chart of the day shows, stocks historically have done quite well in the month of March, and they’ve done even better over the past 10- and 20-year periods. March 2019 hosts many big events like a Federal Reserve Bank (Fed) policy meeting, European Central Bank (ECB) policy meeting, Bank of Japan policy meeting, the (tentative) Brexit deadline, NCAA basketball brackets, and continued trade discussions between the United States and China. All of these could cause a good deal of volatility, so be sure to follow LPL Research all month as we closely monitor all of these big events.
Slow, But Steady Slow but steady growth may win the race again as the economic expansion nears the 10-year mark. While muted growth in the current economic expansion has been frustrating at times, especially after a swift and painful downturn amid the 2008 financial crisis, it has helped extend the life of this cycle and keep excesses in check. As shown in the LPL Chart of the Day, inflation-adjusted gross domestic product (GDP) has increased an average of 2.3% annually in this cycle, the slowest pace of growth among all expansions since 1970 and a key contributor to this cycle’s near-record age. Historically, cycles with annual GDP growth higher than 4% lasted about five years on average, while cycles with annual growth lower than 4% lasted about nine years on average. “While it’s important to be mindful of where we are in the economic cycle, later-cycle economies can continue to exhibit stable growth for years,” said LPL Research Chief Investment Strategist John Lynch. “We’re maintaining our positive outlook for 2019, thanks to our conviction in sound fundamentals supporting moderate economic growth.” Steady economic growth has been helped in part by a careful and gradual approach to monetary policy. The Federal Reserve’s (Fed) policy efforts have been implemented for several years, but policymakers only started increasing rates in December 2015, more than six years into the expansion. This tightening cycle has persisted for three years now, yet inflation-adjusted interest rates are barely above zero. Still, inflation has hovered around the Fed’s 2% target for several months now, and wage growth is healthy, but manageable. Leading market and economic indicators (including ones we track in our Recession Watch Dashboard) also hint to more runway in the expansion.
NASDAQ’s Weekly Streak Intact: 6 of Last 8 Streaks Continued Alright, so DJIA failed to stretch its weekly winning streak to ten last week. NASDAQ, however did post a weekly gain for its tenth week in a row. The current streak is NASDAQ’s ninth to reach ten or more weeks since 1971. During the current streak NASDAQ gained 19.93% at Friday’s close compared to an average gain of 23.93 for the previous eight streaks. Of the past eight streaks, six lasted into an eleventh week or longer. The longest weekly streak for NASDAQ was fifteen beginning in December 1971 and lasting until March 1972. Similar to DJIA’s performance following streaks of nine or more weeks, when NASDAQ streaks of ten or more weeks came to an end performance one month later was something of a mixed bag with NASDAQ higher just 50% of the time. At three months after NASDAQ’s performance was better, up 7.52% on average. Beyond this point, NASDAQ’s performance was rather lackluster with only the slightest improvement in gains at the six-month point and even less one year later. Even if NASDAQ’s 1999 streak is excluded from averages, performance is still essentially flat beyond three months after the previous streaks ended. In the above chart, the 30 trading days before and 60 trading days after the eight previous NASDAQ ten week or longer winning streaks are plotted (a typical month has approximately 21 trading days). Unlike DJIA’s chart, NASDAQ historically recovered much quicker after its streak ended with solid gains during the approximately three months after.
No Slowdown in Services Sector Mar 5, 2019 If this is a slowdown, we’ll take it. While economic data clearly slowed in December and January due to a combination of equity market weakness, the government shutdown, and other factors, activity really appears to have bounced back in February. In the case of the ISM Non-Manufacturing report, February not only increased versus January’s reading of 56.7, but it also came in higher than the consensus expectation of 57.4. At 59.7, February’s report was just slightly more than one point below the cycle high of 60.8 from back in September. On a combined basis and accounting for each sector’s share of the total economy (second chart), the February ISM came in at 59.1 which was nearly two points below the cycle high of 60.7 from back in September. Following the strength of this report, the market is now once again pricing in a higher chance that the FOMC hikes rates between now and next January (8.9%) versus cutting rates (5.6%). Meanwhile, the odds that the FOMC sits on its hands between now and then are at just under 86%. Normally, we would say the odds of the FOMC doing nothing are extremely low, but now that they have the balance sheet to tinker with, a long pause on the Fed Funds rate is certainly a possibility. The table below breaks down February’s report by each of its sub-components. On a m/m basis, this month’s report saw solid breadth, although versus where things stood a year ago the pace of growth has been less robust. The real stars of this month’s report, however, were Business Activity and New Orders (two charts below table). Business Activity rose to 64.7, which is the highest reading that component has seen since August 2005! New Orders saw an even more impressive move. While it also reached its highest level since August 2005, the m/m increase of 7.5 points was the third largest on record behind only the 9.6 point jump in April 2009 and the 8 point rise in February 2002. Pretty impressive! On the downside, Prices Paid saw the largest m/m decline of any component, falling from 59.4 down to 54.4 to its lowest level since June 2017. Behind Prices Paid (lowest chart), the only other components to decline on a m/m basis were Import Orders, Employment (which doesn’t necessarily bode well for Friday’s Payrolls report), and Inventory Sentiment.
The Nasdaq’s 10 Weeks of Green U.S. stocks’ recent momentum has been historically impressive by many measures, and the Nasdaq Composite Index notched another milestone last week. The Nasdaq has risen for the past 10 weeks, its longest winning streak in 19 years. As shown in the LPL Chart of the Day, the feat could signal more gains for U.S. stocks: In seven of the last eight 10-week winning streaks, both the Nasdaq and the broader market have climbed over the following 12 months. Technology stocks have rallied 23% since bottoming on December 24, 2018. While equities began the year extremely oversold, solid corporate earnings, a Federal Reserve pause, and progress on trade have helped fuel risk-on sentiment and boost prices. “We expect stocks to power through periodic bouts of uncertainty,” said LPL Research Chief Investment Strategist John Lynch. “While the road to new market highs could get bumpy, we encourage investors to focus on the fundamentals supporting economic growth and corporate profitability in 2019.” The one outlier in Nasdaq’s history of 10-week streaks is the one ending in December 1999, three months before the peak of the “tech bubble.” From the beginning of 1999 to March 2000, the Nasdaq more than doubled to reach record highs, then fell more than 70% through the end of 2002. In contrast to that period, we don’t see material signs of excesses in financial markets, and the recent rally has been more broad-based and backed by strong earnings growth. The S&P 500 Index and Dow Jones Industrial Average have both climbed 16% over the past 10 weeks, pacing with the Nasdaq’s 20% gain.
March Options Expiration Week Historically Bullish: DJIA, S&P 500 & NASDAQ Up 9 of Last 11 Stock options, index options, index futures, and single-stock/ETF futures all expire at the same time four times each year, March, June, September and December. This event is often referred to as Quadruple Witching or as we prefer to call it in the Stock Trader’s Almanac (page 78), Triple Witching. March’s option expiration week performance is second only to December’s and has a bullish bias. DJIA and S&P 500 have recorded weekly gains in better than twice the number of weeks as declines. NASDAQ’s track record since 1983 is slightly softer with 22 advances and 14 declines, but all three indices have logged gains in options expiration week in nine of the last eleven years. However, the week after is bearish for DJIA, S&P 500 and NASDAQ. S&P 500 is weakest, down seven years straight.
What Type of Pullback Could We See? The S&P 500 Index corrected nearly 20% from the September peak until December 24 before staging a furious rally of 19%. What could happen next? A well-deserved pullback would be perfectly normal, and in fact, is probably needed before another surge higher can occur. Now the $64,000 question: Would a pullback be a retest of the December lows, a 10% correction, or something more modest? As we discussed in our recent Weekly Market Commentary: Modest Pullback Or Something Bigger? we think a pullback in the range of 3–5% is the most likely scenario. “We continue to see solid fundamentals, valuations that are quite reasonable, the strong possibility of a U.S.-China trade deal over the coming months, and healthy market technicals,” explained Senior Market Strategist Ryan Detrick. In fact, six technical indicators we mentioned in the recent commentary suggest a pullback could offer buying opportunities for suitable investors: The S&P 500 is above its upward sloping 50-day moving average (MA), suggesting an improving trend, and at support in the form of its 200-day moving average. March has been the second strongest month for the stock market over the past 20 years. Stocks tend to go up in the final 10 months of a year (25 out of the last 27 years) after experiencing gains during January and February. Market breadth is favorable, with a high proportion of stocks participating in this year’s advance. Investor flows have been negative in 2019—evidence of caution, not euphoria Investor sentiment surveys suggest bulls are not in overabundance. Last, as our LPL Chart of the Day shows, it’s important to remember that the S&P 500 has been higher a year after every midterm election since World War II—that’s 18 out of the past 18 midterms—with an average return of 14.2%. President Trump views the stock market as part of his re-election path, suggesting this pattern could hold once again. With the S&P 500 up only 1.3% since the midterm election last November, there indeed could still be room for stocks to run in 2019.
Pre-Election-Year March Historically Stronger As of today’s close, this pre-election year March is below average when compared to it historical performance. Strong market performance in pre-presidential-election year frequently translates into above average performance for individual months. March is a month that typically enjoys a nice boost, but so far it has not occurred. Prior to the gains of today and yesterday, this March was well off its average levels. This March and past pre-election year average performance has been plotted in the chart above and the gap in performance is readily visible. Strong gains in January and February had major indexes right at key resistance levels at the start of the month and when they failed to break out profit taking ensued. Slowing global growth, naming in China and the EU along with ongoing trade concerns and last Friday’s tepid jobs report have all weighed on stocks. Heavy selling of DJIA’s largest component, Boeing (BA) has kept that index in check this week. Despite sign of slowing growth, the US economy is still on relatively firm ground when compared to other regions. Further market gains are likely, but progress is probably going to be choppy.
April Almanac: DJIA’s Best Month April marks the end of our “Best Six Months” for DJIA and the S&P 500. On April 1st, we will begin looking for our seasonal MACD sell signal and corresponding early signs of seasonal weakness. Even in historically strong pre-election years the “Worst Six Months” have been lackluster on average. April 1999 was the first month to gain 1000 DJIA points. However, from 2000 to 2005, “Tax” month was hit, declining in four of six years. Since 2006, April has been up thirteen years in a row with an average gain of 2.3% to reclaim its position as the best DJIA month since 1950. April is third best for S&P and fourth best for NASDAQ (since 1971). The first half of April used to outperform the second half, but since 1994 that has no longer been the case. The effect of April 15 Tax Deadline appears to be diminished with numerous bullish days present on either side of the day. Traders and investors are clearly focused on first quarter earnings and guidance during April. Exceptional Q1 earnings and positive surprises tend to be anticipated with stocks and the market moving up in advance of the announcements and consolidating or correcting afterwards. Typical pre-election year strength does bolster April’s performance since 1950. April is DJIA’s best month in pre-election years (+4.0%), second best for S&P 500 (+3.5%) and third best for NASDAQ (+3.5%). Small caps measured by the Russell 2000 also perform well with gains (+2.8%) in seven of ten pre-election year April’s since 1979.
What happens after the first three months of the year are higher for the S&P 500? April, Q2, and the rest of the year are all stronger than average. Incredibly, the final nine months have been higher 18 of the past 19 times (only 1987 was lower). 4 things to remember 9/10 times S&P 500 was up >10% in Q1 rest of yr higher 25/27 times first 2 mos of yr green rest of yr higher 18/19 times first 3 mos of yr green rest of yr higher 34/34 times SPX didn't close beneath December low in Q1 saw full yr higher (total return)
