Not a Triple Top Yet – Support Has Held There has been a lot of chatter recently about an imminent “triple top’ for the market across the January 2018, September 2018 and recent April 30, 2019 highs. It’s not a triple top until it breaks support levels. Traders do need to be watching for support levels to be broken - which we have recently held. Holding support was bullish technical action. But remember this is the Worst Six Months and we expect more volatility, more testing of support and more sideways action – backing and filling – over the weaker summer months. We talked about these support levels on the blog a month ago as well. Here’s an update to the chart from that May 7 blog post. I added some additional support levels. S&P 500 level of 2580 at February/April 2018lows is critical support – a 12.4% correction. Breaking that level would bring the December 2018 lows into play, which would be bear market territory of -20% – and likely the low and a great buying opportunity. Good thing we are already in Worst Six Months Defense Mode since we shifted to market neutral after our official Best Six Months MACD Seasonal Sell signal for DJIA and S&P 500 on May 1.
Construction Openings Surge Tue, Jun 11, 2019 Yesterday, the BLS released its April Job Openings and Labor Turnover Survey (JOLTS). The JOLTS report allows for a deeper look at the labor market beyond the plethora of statistics included with the monthly Employment Situation Report (which is best known for its Non-Farm Payrolls number). Overall, the JOLTS report showed robust openings levels, cycle highs for quit rates, strong gross hiring, and very slow layoff rates -- a generally positive set of indicators for the US labor market. The most interesting data point in the survey came from job openings at the industry level. Opening levels in the construction industry surged 11% MoM and 40% in two months to a record level. Typically, openings levels are a leading indicator for employment numbers in the construction industry, as shown in the first chart below. The uptick in openings could represent a pending surge in construction hiring (and therefore, activity). On the other hand, construction openings haven't consistently led residential construction activity (as measured by housing starts -- 2nd chart below), proving a lagging indicator during the last cycle and a coincident one for most of this one. The same is true for construction spending numbers, which captures residential spending correlated to starts and the nonresidential sector. The surge in construction openings actually looks a bit like the mid-2000s, with modest declines in spending off peak levels taking place as openings continue to surge. While the recent explosion in openings is interesting, it's hard to be sure whether it's a positive or negative sign for the construction industry.
June’s Boon – 5% DJIA Gain Already Nearly two weeks ago we examined the history of June market performance after a down May following a strong January to April. That analysis suggested that this June could produce above average market gains. Thus far, the market has not disappointed. As of today’s close, DJIA is up 5.03% already this June. NASDAQ is second best, up 4.96%. S&P 500 and Russell 1000 are 4.89% higher. Russell 2000 is the laggard of the group, higher by a still respectable 3.96%. The true test for the market will arrive in the second half of the month as the end of the quarter nears. Historically, the second half of June has not been great for the market.
Small Business Sentiment Surprises to the Upside Tue, Jun 11, 2019 Small business sentiment saw a big upside surprise for the month of May. While economists were expecting the headline NFIB Small Business Sentiment Index to fall to 102.0 from last month's reading of 103.5, the actual reading went the other way, rising to 105. That makes it four straight monthly gains after five straight months of losses from last August's record high of 108.8. As we do each month, we wanted to highlight which issues are currently the biggest problems for small businesses. Leading the way once again this month, Quality of Labor is the biggest problem for businesses, impacting a quarter of all those surveyed. Behind Labor Quality, Taxes and Government Red Tape take up the number two and three spots, but both are well off their historical highs and Red Tape is now only cited by 12% of small businesses as their most important problem. That's tied for the lowest reading since 2010! Along with Labor Quality, which was cited by 25% of all small business owners, another 8% cited the Cost of Labor as their most important problem. In other words, on a combined basis, labor issues are the biggest problems for one-third of all small business owners! In the history of the survey, there has only been one other month where the combined reading was as high as it is now (August 2018) and only a handful of other periods where it was above 30 (1998 - 2000 and since the second half of 2018). We just published a report looking at an interesting trend from this month's NFIB Small Business Sentiment survey and what it means for the market going forward.
Bulls Slowly Return Thu, Jun 13, 2019 With equities pulling back in May, investor sentiment has held a bearish bias over the past few weeks. Last week's rally has reversed this build-up of bearish sentiment to a small degree as the percentage of investors reporting as bulls in this week's AAII survey grew to 26.84% from 22.53% last week. While this is an improvement, investors have been hesitant to rush back as bullish sentiment remains low relative to history. This week's reading is still over one standard deviation below the historical average of 38.19%. This is a bit of a contrast to the Investors Intelligencesurvey of newsletter writers, which saw bulls come surging back with the largest increase in the number of respondents reporting as bullish since the first weeks of 2019. Bearish sentiment, on the other hand, saw a sharper move, falling to 34.2% versus 42.58% last week. That is the largest decline in bearish sentiment since February 7th of this year when it had fallen just under 9% from 31.76% to 22.78%. Similar to bulls, while this is an improvement, bearish sentiment remains elevated above its historical average. Additionally, the bull-bear spread has favored bears for five weeks in a row now. The last time the spread had a streak like this (also five weeks long) was in May of 2016. More than anything, investors appear to be hesitant on the current market as neutral sentiment is the predominant sentiment this week. Neutral sentiment is up ~4% this week to 38.96%. While higher than average and elevated, as it has been most of this year, this is not at any sort of extreme reading.
What Do Stocks Do After The First Rate Cut? It is widely expected that the Federal Reserve Bank (Fed) will cut rates at the upcoming July meeting, with the potential for as many as three total rate cuts this year. This would be the first rate cut since the Fed started hiking rates in December 2015. Concerns over trade and the global economy have sparked much of this worry. With the S&P 500 Index up nearly 15% for the year, what could this potential first rate cut mean for stocks? After all, the Fed cut rates in January 2001 and September 2007 right ahead of recessions and massive stock market corrections. Could another bear market and recession be headed our way if the Fed cuts rates soon? “The previous two times the Fed cut rates for the first time in 2001 and 2007, we saw stocks eventually get cut in half,” explained LPL Senior Market Strategist Ryan Detrick. “But the reality is if you go back further in time, you can also see explosive rallies after that first cut.” As our LPL Chart of the Day, “Not All Rate Cuts Are Created Equal”, shows, since 1984 there have been seven rate cuts that took place after at least one rate hike. The two most recent cuts were followed by poor performance over the next 12 months, but the other five cuts saw solid gains. In fact, the median return for the S&P 500 one year out has been a very impressive 13.9%, which suggests a potential rate cut over the coming months might not be as worrisome as many make it out to be.
Can Stocks Really Gain 20% This Year? U.S. stocks could have a big year if LPL Research’s forecasts prove correct. All year, we’ve maintained our fair value target on the S&P 500 Index of 3,000, implying that we expect this bull market and economic expansion to continue. If the S&P 500 closes the year at 3,000, the index will have gained 19.7% in 2019. On the surface, that seems like a high hurdle for U.S. stocks. However, the S&P 500 has already gained about 16% this year, so a rally to 3,000 isn’t far out of reach. The S&P 500 also hasn’t posted a 20% gain for the year since 2013, an unusually long stretch compared to history. “It is interesting that the S&P 500 hasn’t gained more than 20% in any one year for five consecutive years,” noted LPL Senior Market Strategist Ryan Detrick. “Only once since 1950 did it go more than five years in a row without gaining 20%, thus if this pattern continues we very well might get to 20% in 2019.” As our LPL Chart of the Day “Can The S&P 500 Index Really Gain 20% This Year?” shows, it is quite rare for the S&P 500 to go this long without a 20% annual gain. Could the streak end in 2019? Be sure to read our Midyear Outlook 2019, which is set for release next week, for more on why this could be the case.
Tied for Record Streak in Claims Thu, Jun 20, 2019 The Department of Labor's weekly report on initial jobless claims were expected to fall from 220K from 222K last week on a seasonally adjusted basis. The release surprised with stronger results showing only 216K initial jobless claims. That is the lowest print since claims came in at 212K on May 23rd. With this stronger print, a couple of impressive streaks continue. For starters, claims have remained at or below 300K for a record 224 weeks. Additionally, this week marks the 89th week at or below 250K. That ties the previous record of 89 weeks ending January 10th, 1970! Save a massive spike higher, claims will likely beat that record next week. The less volatile four-week moving average saw a small increase of 1K this week to 218.75K. As we mentioned last week, the four-week moving average has been very stable in the past month. Since the May 30th release, the four-week moving average has only moved in a tight 3.5K range with this week's print actually being at the high end of this range. As is typical for the current week of the year, claims saw a sizeable downtick this week on a non-seasonally adjusted basis. The NSA number fell from 220K last week down to 205K. As is usually the case, that is well below the average for the current week of the year since 2000 of 320K. As we have mentioned in the past, this year has seen a significant number of weeks with YoY increases in the NSA data unlike what can be observed over the past several years. After last week saw another YoY increase, this week caught a break, albeit, the YoY decline was only 1K. So this week's NSA claims number was just barely the strongest of the current cycle for the current week of the year.
Are Bulls An Endangered Species? The S&P 500 Index closed at a new all-time high yesterday, the 5th new high so far in 2019. After May, the worst month for the S&P 500 since 2010, June is up 7.3% as of 06.20.19, which would be the best June since 1955. Much of the rally this month has been sparked by a more dovish Federal Reserve (Fed), combined with U.S.-China trade discussions potentially back on track. What’s quite interesting about things now though, is many signs of investor sentiment are a long way from bullish. Remember, from a contrarian (or opposing) point of view, this can suggest there is still money on the sidelines. “The S&P 500 might be at new highs, but global fund managers and individual investors are quite underweight equities right now,” explained LPL Senior Market Strategist Ryan Detrick. “If you are looking for a reason this rally can continue, that could be it.” For example, the recent Bank of America Merrill Lynch June Global Fund Manager Survey (a survey of managers who oversee more than $600 billion in assets) showed the largest jump in cash since August 2011. Additionally, equity allocation was the lowest it had been since March 2009, and the equity-to-bond allocation was the lowest since May 2009. Not to mention the allocation to bonds was the highest it had been in eight years. “Money on the sidelines might sound cliché, but it really seems to be the case this time,” said Detrick. With the S&P 500 hitting more all-time highs, having money in the market may make more sense (or cents!). Individual investors are skeptical as well, as the recent American Association of Individual Investors (AAII) Sentiment Survey showed more bears than bulls for six straight weeks, the longest stretch since November 2016. Finally, as our LPL Chart of the Day shows, AAII bulls have been under 30% for six consecutive weeks for the first time since January 2016.
Bullish Last 3 Days June Starts NASDAQ’s Midyear Rally Over the past 21 years the last three trading days of the second quarter combined have been bullish. This three-consecutive-day period has accumulated average gains ranging from 0.5% for DJIA to 1.3% by Russell 2000. The most consistent source of gains has come from Russell 2000 and NASDAQ, both advancing 76.2% of the time during the period. S&P 500 is also typically strong, up 71.4% of the time while DJIA has advanced just 57.1% of the time. Dependable gains by tech and small-caps are likely the result of traders and investors bidding up shares in anticipation of solid Q2 earnings. The 3-day span is also the start of NASDAQ’s Midyear Rally. Consistent end-of-Q2 weakness, especially in the week after June’s option expiration week, which we have been experiencing a bit the past couple days, usually contributes to the setup of NASDAQ’s Midyear Rally. Any weakness, particularly sharp, brisk declines near the end of June can make a great entry point as the first trading day of July is generally strong and the first half of July is more bullish than the second half. 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 26 of the past 34 years with an average historical gain of 2.5%. This year the rally could begin on or around June 26 and last until around July 12. 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 nine years, up eight times with a single mild 0.1% loss in 2015. Last year, NASDAQ advanced a solid 3.5% during the 12-day span.
Jobless Claims Move Higher But Still Break a Record Thu, Jun 27, 2019 The Department of Labor's weekly Initial Jobless Claims released this morning showed a 10K increase from last week's upwardly revised reading of 217K. Now at 227K, claims are at their highest level since May 3rd when they were slightly higher at 228K. This brings the indicator towards the upper end of the past year's range, but claims also still remain very low historically. This week marked a record 90 weeks that claims came in at or below 250K. The previous record stood at 89 weeks ending January 10th, 1970. Additionally, the streak of readings at or below 300K rises to its 225th consecutive week. The less volatile four-week average also moved slightly higher this week rising to 221.25K from 219K last week. Like the weekly data, the moving average currently sits at the upper end of its range from the past year and the last time it made a new low was back in April. As the moving average is off of these recent lows, it has also moved higher YoY for the ninth week in 2019. In 2018, there wasn't a single week with a YoY increase and over the course of all of 2017, there were only 5 weeks with YoY increases. Non-seasonally adjusted (NSA) jobless claims saw yet another year-over-year increase as claims rose to 224.1K versus 222.8K one year ago. Now just about halfway through 2019, there have been ten weeks with a YoY increase in the NSA data (this is the same case for the seasonally adjusted data as well). Like the moving average, for this point in the year, this is a significant increase in the frequency of these increases from prior years. For reference, over the course of all 52 weeks in the entire year, 2018 only had two weeks and 2017 only had seven weeks with a similar YoY increase. In other words, labor market data is still at a strong level—NSA data is still well below the average for the current week since 2000, SA data has held onto impressive streaks, etc.—but it also has not been improving at anywhere near the same rate as we saw in 2017 and 2018.
July’s First Trading Day—Most Bullish Day, S&P 500 has Advanced 85.7% of the Time July’s first trading day is the best performing first trading day of all twelve months with DJIA gaining a cumulative 1,175.74 points since 1998. Over the past 21 years, DJIA’s first trading day of July has produced gains 81.0% of the time with an average gain of 0.40%. S&P 500 has advanced 85.7% of the time (average gain 0.42%). NASDAQ has been slightly weaker at 76.2% (0.26% average gain). No other day of the year exhibits this amount of across-the-board strength which makes a solid case for declaring the first trading day of July the most bullish day of the year over the past 21 years.
Happy Birthday, And Another Record Goes Down “If you’re looking for something to discuss at your barbecue while watching fireworks, be sure to mention this is now the oldest economic cycle in history at 121 months old,” explained LPL Senior Market Strategist Ryan Detrick. That’s right, this cycle just topped the previous record of 120 months from the 1990s technology boom. Although 10 years might sound old, keep in mind that developed markets tend to have longer cycles of economic growth. “Is 10 years really that old for an expansion? Maybe not, as Australia hasn’t had a recession for nearly 28 years,” according to Detrick. “Not to mention Canada, the U.K., Spain, and Sweden, which all have had at least 15 years of growth starting in the early 1990s and ending in 2008. Going even further back we see that France, Germany, the Netherlands, Norway, South Korea, Ireland, and China have all had at least 15-year-plus expansions since World War II.” Emerging countries tend to see more of a boom-and-bust type of cycle while more developed nations can have longer-lasting periods of growth. In fact, it’s plausible that the United States could have avoided a recession in 2001 if the 9/11 attacks had not happened, which would have produced a nearly 17-year expansion. So maybe 10 years isn’t so old? As our LPL Chart of the Day, This Is Now The Longest Expansion Ever, shows, this is now the longest expansion ever. Additionally, over the decades as the United States turned into a developed nation, the cycles of growth tended to last longer. Thanks to the dual benefits of fiscal and monetary policy, we continue to expect this current cycle to have potentially years of growth left.
Jumbo First Half Gains Usually Continue After a Pause The market just put on its best first half performance for the Dow since 1999, the S&P 500 since 1997 and NASDAQ since 2003 – and that’s a pretty decent omen that market will tack on additional gains. Performance below following first-half Dow and S&P 500 gains greater than 7% and NASDAQ Composite gains greater than 10% shows a solid history of gains for the second half – after a tepid market action in Q3. Modest gains of about 1% continue into July, but gains little ground during the rest of Q3, which should come as no surprise given the infamous negative history of August and September. On average the market was unable to match first half gains during the second, though the across-the-board 7+% gains over from July to December is still solid. The Dow’s second half win ratio following jumbo gains like 2019 is a rather impressive 85.3% – S&P’s win ration is 80.0%, NAS 73.9%. Full-year gains are virtual lock.
Fridays Still Leading Below is a quick update on the S&P 500's average performance by weekday so far in 2019 now that we are more than halfway through the year. As shown, Monday has been the only weekday to average a small decline, while Friday has been by far the best day of the week with an average gain of 0.37%. Tuesday has been the 2nd best day of the week with an average gain of 0.19%, followed by Wednesday at +0.09% and Thursday at +0.02%.
Lowest Claims In Three Months Fed Chair Powell's testimony on Capitol Hill yesterday made frequent mentions of the strength of the labor market, and initial jobless claims data released this morning helped to give further support of this strength. Claims were expected to come in unchanged from last week at 221K but instead fell to a seasonally adjusted level of 209K. That is the lowest print in about three months (since April 12th) when claims came in at the multi-decade low of 193K. Whereas the past few weeks were near the upper end of the past year's range, this drop now brings claims back down towards the lower end of that range. In other words, while not a new low, it is still a healthy number. As such, the record streaks at or below 250K and 300K continue at 92 weeks and 227 weeks, respectively. The four-week moving average helps to sift out some of the fluctuations of the high-frequency weekly data. This week saw the moving average fall from 222.5K down to 219.25K. Unlike the weekly number, there were actually several lower prints throughout the past couple of months, so this does not bring the indicator back towards the lower end of its range. In fact, this decrease only brings things back to where they stood about one month ago. As could be expected given seasonal patterns, on a non-seasonally adjusted basis, claims rose to 232.7K after falling to 224.5K last week. Typically, the current week of the year sees a sizeable increase in claims averaging a week-over-week rise of over 42K over the past fifteen years, but this week's change was much smaller with only an 8.2K increase. This week's NSA number was also lower than the comparable week in 2018 when NSA claims were 264.9K. Additionally, this was the lowest reading in claims for the current week of the year of the current cycle and it was substantially under the average for the past couple of decades of 371.69K.
