Semis Em-Bull-dened Mon, Oct 7, 2019 For much of the last several years, semiconductors have been a leading group of the broader market to both the upside and downside. Therefore, it shouldn't come as too much of a surprise that the S&P 500 has rallied off its earlier lows after the semis opened the day right around the unchanged level and have rallied from there. The chart of the Philadelphia Semiconductor Index (SOX) over the last year also bodes well for the overall equity market. Since its late May lows, the SOX has carved out a solid uptrend line with a series of higher lows, and while you have to squint closely, it has also made two higher highs relative to its high in April. Also, just today the group is looking like it is close to breaking its short-term downtrend that has been in place since the most recent marginal new high in early September. If that short-term downtrend breaks, the rally in the broader market will likely continue to have legs.
Cure Octoberphobia with Best Six Months MACD Buy Signal Octoberphobia, n. the fear of major stock market declines in the month of October Suffering from Octoberphobia? We have the cure. Our Tactical Seasonal Switching Strategy and our Best Six Months Seasonal MACD Buy Signal. We are NOT issuing the Buy Signal at this time. We are only preparing you for when it does arrive. October is the last month of our “Worst Six Months” of the year May-October. Our technical MACD Buy Signal can come any time on or after October 1. Our Best Six Months Switching Strategy – as many know as only “Sell In May” – continues to beat the market with evidence-based results. As featured in the Stock Trader’s Almanac the Best Six Months November to April has gained 7.5% for the DJIA since 1950 while the worst months gain a paltry 0.6%. Using our MACD technical triggers exponentially improves those returns to 9.1% v. -0.8%. Our MACD signals unleash the power of compounding, nearly tripling the results of a hypothetical initial one-time $10,000 investment in the Best Six Months in 1950 from $1.07 million to $2.98 million and the minor gain of $1,461 turns into a loss of -$5,862. The usual Octoberphobia decline is likely to set up a perfect Best Six Months Buy Signal for new highs at yearend 2019 and beyond.
Can The Economy Predict The Next President? October 08, 2019 “The economy, stupid” — Phrase campaign strategist James Carville used to help Bill Clinton get elected in 1992. As Carville noted ahead of the 1992 election, the recession in 1990 and 1991 was top of mind for many voters as they headed to the polls to vote for either incumbent President George H.W. Bush or opponent Bill Clinton. And now we see investors becoming more skittish around the U.S. economic outlook just before we flip the calendar to 2020, a presidential election year. Is there any logic behind the idea that a well-performing economy tends to make voters feel better about voting for the current administration? “Incredibly, the last 11 times there wasn’t a recession within two years of a re-election, the sitting president won,” according to LPL Senior Market Strategist Ryan Detrick. “Compare that to the seven times there was a recession, and the incumbent president didn’t get re-elected five of those times.” As shown in the LPL Chart of the Day, the U.S. economy predicted the winner of 16 of the previous 18 elections in which a sitting president was up for re-election. In fact, you have to go all the way back to Calvin Coolidge in 1924 to find the last time the economy was wrong regarding the re-election of a president. We’re in the 10th year—so far—of this economic expansion, and the U.S. economy has had an impressive track record of predicting the next president. There’s still another 13 months to go before the next election, but this is something to remember.
China’s Growth Shows Signs of Stability October 09, 2019 The United States and China have faced growing economic pressure to reach a trade deal. However, the stress may be fading for one party. As shown in LPL Research’s Chart of the Day, China’s economy is exhibiting signs of stabilizing growth, according to composite leading indicators (CLI) data from the Organisation for Economic Co-operation and Development (OECD). The OECD’s assessment of the Chinese economy improved for a sixth straight month in August, while the OECD’s U.S. gauge continued to slip. To be sure, the OECD’s leading indicators gauge shows that both the United States and China are seeing “easing growth momentum” (below 100), indicating that growth still could slow for both economies in the next several months, even though China’s outlook is improving. In neither case is this a recession warning, though. The OECD CLIs are relative to long-term growth trends, and deviation from trend may represent different risks to the two economies. The OECD gauge for U.S. leading indicators has also pointed to easing growth momentum at three other points in this economic cycle, and the measure has rebounded each time. The U.S.-China trade dispute is hitting a major milestone this week, as U.S. and China officials are slated to kick off face-to-face trade discussions in Washington, D.C. October 10. There are reports that both parties may consider a partial deal to avoid future tariffs, so there’s a chance we could see some important thawing in the relationship before the Asia-Pacific Economic Cooperation meeting in November. “Trade tensions have had a meaningful impact on the global economy,” said LPL Financial Chief Investment Strategist John Lynch. “Any progress in talks this week could further relax tensions, allowing for global regions to recover from disruptions caused by trade over the past year.” Of course, resolution of trade tensions is not simply about seeking efficient growth. There are also important issues around fair business dealings, intellectual property rights, national security issues, and even the relative merits of capitalist democracies and autocratic states. It’s unlikely that we will see every issue resolved in the near term, but we’re hopeful that a few concessions can help ease trade uncertainty and boost global demand.
Claims Stay In Their Lane Thu, Oct 10, 2019 Headed into this week, initial jobless claims had been on the rise for three weeks in a row. This streak has come to an end as claims fell to 210K. Expectations were calling for this week to be unchanged from last week's revised 220K. This decline has brought claims back to the lower end of the past year's range and the lowest since September 12th. The record streaks at or below 300K and 250K also continue this week, growing to 240 and 105 consecutive weeks, respectively. Although the weekly data saw a fairly large decrease with its 10K drop, the four-week moving average actually rose for its second week in a row. The moving average, which helps to smooth out the week to week fluctuations, now sits at 213.75K. While it did rise, the degree of the increase was once again small. The moving average is up just 1K from last week, and that is actually one of the larger moves in recent weeks as the prior three weeks only saw movements of 0.25K. Given this, the moving average has remained in its tight range recently. Over the past three months, there has been only one week (August 30th when the average was 216.75K) when the average was not in the range of 212K and 215K. That sort of tight range over the past quarter is something that has not been observed in the past couple of years. In fact, the spread of just 4.75K between the past 3 months' high and low is the joint smallest range since late August 2017. Furthermore, that is the second tightest range of the current cycle with the only smaller 3-month range being the week prior to the aforementioned week in August 2017 when the range was just 4K. In other words, claims are still at healthy levels but have also not picked a direction of improvement or worsening. Claims in non-seasonally adjusted terms also rose by just 1K this week to 173K. While that is a small week-over-week change, relative to last year claims dropped by over 20K. This week's NSA data was also well below the average for the current week of the year since 2000 of 300.56K.
Remember To Buy In November! How often does someone tell you to Remember to Buy In November? Probably not as often as you’ll hear Sell in May and Go Away! But what does this all mean? What are these silly nursery rhymes all about and why should we care? Or should we even care at all? You’ll hear even some of the smartest and most experience market participants dismiss market seasonality altogether, almost as if they’re too good for it. Maybe they’re scared of things they don’t understand, like my 2 year old cousin gets when she’s confused. Or maybe seasonality is not as intellectually satisfying to them as say something like, fed policy or trump impeachments. Either way, we do care about seasonal trends at All Star Charts because they help us with both identifying market trends and risk management. Here’s what US Stock Market Seasonality means to me: First of all, we don’t actually, “Sell on May 1st and Go Away”. That seems foolish. For us it’s important to understand the mathematics and history behind the Best 6 months and the Worst 6 months of the year. Just to put things in perspective, all of the gains in the Dow Jones Industrial Average since 1950 have been earned during the months of November through April. Yes that’s right. So had you bought the Dow on the first trading day in May every year and sold on Halloween, you would actually be down during that period. The last few years have turned that May through October total now slightly positive, but as you can see in this chart below, the returns have come from November through April. It’s pretty clear. The chart comes from the annual Stock Trader’s Almanac. Had you invested $10,000 in 1950 and only owned the Dow from November through April, today you’d have over made over $1 Million. Had you done the opposite and bought on May 1 and sold on Halloween, you would have made just $1,000. Think about that for a minute and then tell me you would rather ignore these trends. Historically it pays to buy the dip in October in preparation for “The Best 6 Months”. Here is another chart from the Almanac showing the seasonal pattern for all years since 1901 and then overlaid with just the Pre-Election Years. That October dip is the one we want to buy! Okay, so that’s what the numbers mean and I would argue they are pretty powerful. Markets change, asset classes change and things evolve. But the one thing that remains constant is human behavior. We behave in different ways in the Summer than we do in late December. We hang out with different people, we go to different places and we wear different clothes. To suggest those behavior patterns don’t work their way into decision making in the market is ignorant, in my opinion. The market is a reflection of human emotions. These patterns can be seen again and again throughout history. So, what do we do with this data if we’re not actually selling in May and then buying in November? Well, I think that’s a good question. And I’m going to tell you what we do. You see, we’re not making portfolio decisions ahead of a change in season. We look after the period is over to see if the market respected or ignored seasonal trends. Historically, when US Stocks ignore seasonal tendencies, that in and of itself, is the information we’re looking for. A good example was in 2016. The “Worst 6 Months” were actually not bad at all. As you can see here, stocks did really well. What did that mean? It meant that when stocks were supposed to struggle, they did rallied instead. That underlying strength preceded one of the greatest years in US Stock Market history: The opposite is also true. When stocks are supposed to do well, like during the “Best 6 Months, for example, and they don’t, then something is up. A classic example, of course, has to be November through April in 2007-2008. This was the best time of the year for Stocks and they ignored seasonal strength and fell instead. That underlying weakness preceded one of the worst bear markets in American history! So how are we looking this year during the “Worst 6 Months”? Well, with just a few more weeks to go, stocks don’t seem to be doing too poorly. A little strength into the end of October, and we could be looking at a situation similar to the end of 2016: Again, from a seasonality perspective we don’t buy because historically stocks do well in a certain period, and we definitely don’t sell because they’re supposed to act poorly. We use this data after the fact only to see if markets respected or ignored seasonal tendencies. Looking ahead, however, how do stocks tend to do mid-way through October? Well according to the Stock Traders Almanac, October has gotten much better over the past 21 years. This is a month that is known for crashes and stock underperformance. But look more recently. It’s actually the exact opposite now. October is a time to buy, not sell: Here is a chart from my friend Ryan Detrick showing the S&P500 performance since 1950, only pre-election years, the past 10 years and the past 20 years. October historically is a good time to be buying stocks, not selling them: Every late-April / early-May period is littered with press about “Sell in May and Go Away”. The hilarious part is that those same journalists purposely choose not to Remember to Buy In November! We take a weight-of-the-evidence approach here, as many of you already know. Seasonality is just one tool, one data point in a collection of many. We want to weigh these data points responsibly and appropriately depending on the environment. As I mentioned in my Q4 Playbook to Profit, we’re looking for stocks to buy, not stocks to sell. Stocks are at/near all-time highs, Interest rates are at/near all-time lows, Unemployment is at all-time lows, this is easily the most peaceful period in human history, yet people are more angry than ever. AAII sentiment came in this week with the fewest amount of bulls since 2016! These people are more pessimistic today than they were in late December??? What’s a more bullish combination than stocks breaking out to all-time highs, and most people hoping for a crash. It’s a beautiful thing. Throw the seasonality into the mix and I think it makes for a great trade. Tell me I’m wrong.
Homebuilder Sentiment Surges Wed, Oct 16, 2019 Homebuilder sentiment came in significantly better than expected in October rising from 68 up to 71 compared to expectations for the index to remain unchanged at 68. With October's gain, overall sentiment is currently at its best level since February 2018. Also notable is the fact that over the last ten months, the NAHB Homebuilder Sentiment index is up 15 points. That's the strongest ten-month rate of change in more than six years. With homebuilder sentiment so strong, it's hard to imagine that the economy is on the cusp of a downturn. Looking at the internals of the report, strength was broad-based at a national level as Present and Future Sales as well as Traffic all saw impressive gains. On a regional level, though, it was a bit of a mixed picture. While sentiment in the South and West increased, sentiment in the Northeast and Midwest declined. In the case of the South, though, sentiment hit its highest level since June 2005 (chart below)!
The Calendar Could Have Bulls Smiling October 16, 2019 “History doesn’t repeat itself, but it often rhymes.” — Mark Twain Stocks have continued their surprising strength in October, thanks to a potential thaw in the U.S.-China trade dispute. And remember, the S&P 500 Index has been lower in October during a pre-election year only once since 1987. Additionally, over the past 20 years, October has been the third-best month on average for the S&P 500. October has had a bad rap due to some spectacular crashes, but the truth is the month usually is pretty good for stocks. “The calendar could be about to turn into a bull’s best friend, as late October has been when stocks historically started their end-of-year rally,” explained LPL Financial Senior Market Strategist Ryan Detrick. “No two years are ever the same, and we all remember last year’s sell-off. However, a better than expected earnings season, coupled with positive steps on trade and one more Federal Reserve rate cut this year could allow bulls to smile the rest of 2019.” As shown in the LPL Chart of the Day, we are very near the historically strong end of year for equities. Whether you look at the average year or a pre-election year, stocks have tended to deliver an upward bias starting soon.
October Back on Track – Earnings Season Ramps Up After a bumpy start, the market is back on track at the mid-point of October. DJIA, S&P 500, Russell 1000 and Russell 2000 are slightly above average at this point in the month compared to the last 21-year historical average. NASDAQ is comfortably above average and continues to lead. Negative headlines have given way to more upbeat news. Trade headlines are now featuring some progress even though tariffs remain in place and third quarter earnings season is underway with a solid report from JPMorgan Chase (JPM) today. Provided economic data and corporate earnings hold up, the market is likely to continue its run toward all-time highs and October could end with above average gains.
Housing Starts Retreat, But Still Healthy Thu, Oct 17, 2019 Both Housing Starts and Building Permits pulled back in September from their extremely strong August levels. In both cases, the pullback was expected, although in the case of Housing Starts, the decline was larger than expected (1.256 mln vs 1.320 mln estimate). Looking at the charts of both series below, September's levels remain near their highs of the cycle. The table below breaks down this month's report by single and multi-family units as well as regions. While both starts and permits were down this month, all of the declines were in multi-family units (which was a driver of last month's gains). In fact, in the case of both starts and permits, single-family units were up both on a m/m and y/y basis. In a post on homebuilder sentiment yesterday, we noted that it would be hard to imagine that the economy is on the cusp of a recession with homebuilder sentiment being so high. Similarly, when we look at the 12-month average of Housing Starts and Building Permits over time, current trends are not suggestive of a broader economic downturn. As shown in the top chart below, every prior US economic recession has historically been preceded by a downturn in the 12-month average of Housing Starts. In some cases, the peak in starts came well before the recession started and in others, it was within a year. Looking closely at the chart, while the 12-month average most recently peaked back in September 2018, it hasn't yet shown signs of rolling over as it did leading up to prior recessions. In fact, if we take a closer look at both Housing Starts and Building Permits, the 12-month average has actually started to tick higher again. That's an important trend because going back to the mid-1960s, there has never been a period where we saw rising levels of starts heading into a recession.
Initial Jobless Claims Slightly Higher Thu, Oct 17, 2019 After falling to 210,000 last week, initial jobless claims were forecast to see an increase to 215K. Instead, claims rose less than expected only rising to 214K. Jobless claims also remain flat over the past year as this week's reading was only 1K lower than the same week last year. Regardless of the sideways range, jobless claims remain at very healthy levels having been at or below 300K for a record 241 weeks and at or below 250K for a record 106 weeks. With this week's increase in the seasonally adjusted data, the four-week moving average has ticked slightly higher. This was a result of a lower reading of 210K from mid-September rolling off of the average to be replaced by this week's 214K. This was the third consecutive week with an increase in the average, albeit those increases have been small at 1K or less each week. While the moving average has been moving higher over the past month, it has by no means been by a concerning degree. Turning to the non-seasonally adjusted data (NSA), claims rose to 197.8K. Through the end of the year, we are likely to see many more weeks with an uptick in the NSA number due to seasonal factors. Year-over-year on the other hand, which provides a better look at NSA data, claims rose by 7.3K. That is the largest YoY increase since July and the first time for the current week of the year that there has been a YoY increase since 2012. But, as with the other data, the level claims sit at are still very healthy. This week's reading was far below the average of 323.25K for the current week of the year since 2000.
Positive Sentiment Surge Thu, Oct 17, 2019 With the S&P 500 fighting to retake the 3000 level this week, bullish sentiment has rebounded after dropping to the lowest level since May of 2016 last week. AAII's percentage of bullish investors rose from 20.31% last week to 33.62%. This brings the sentiment level back within its normal range of the past few years although it is still below the historical average of 38.08%. This 13.31 percentage point increase was the largest since July 12th of last year when bullish sentiment rose 15.2 percentage points. This week was also the only time since then (66 weeks) that bullish sentiment has even risen by double digits in a single week. While there is plenty of precedence for weeks where bullish sentiment jumped 10 percentage points or more (163 past occurrences since the beginning of the survey in 1987), there has been only one other time that it happened without having done so for at least one year. That was in March of 2013 when bullish sentiment rose 14.36 percentage points, snapping a 116 week-long streak. Granted it's just one week, but the S&P 500 performance following that period was generally positive. The next week saw a decline of over 1%, but over the next month, 3 months, 6 months, and year the S&P 500 saw stronger than average returns. On the contrary, average S&P 500 performance following all 163 weeks with increases of 10 percentage points or more has not been as strong as it has actually led to underperformance for all time periods other than one week later. Given the sharp rise in bullish sentiment, bearish sentiment took a nosedive falling to 31.05% from 43.96% last week. While still slightly above the historical average, this drop brought it back down to Earth from its elevated levels. As with bullish sentiment, these sorts of large moves in a single week have not been a common occurrence; perhaps even more so for bearish sentiment. Since the beginning of the survey, there have been 141 weeks including the current week, or 8% of all weeks, where bearish sentiment has seen a double-digit percentage drop. This week's 12.91 percentage point decline was the largest decline since the 13.4 percentage point move in the second week of this year in the wake of the 2018 sell-off. So unlike bullish sentiment, it has not been quite as long since we last have seen a similar decline but overall there have been fewer weeks with such a decline. In terms of the S&P 500's performance following similar declines, the average performance in the following months has been much more in line with the average for all other periods. There has been slight outperformance in the week, month, and 6-month time frames, but slight underperformance 3 months and one year later as shown in the chart below. While most of the gain in bullish sentiment came from bears, a small portion also came from those formerly reporting as neutral. The reading on neutral sentiment fell 0.4 percentage points to 35.33% this week. Neutral sentiment is now off of its high from the start of October, but it also remains above its historical average of 31.54%.
Open Season For Small Caps There’s been chatter for many moons about the under performance of small cap stocks recently. True they have been under performing since the Russell 2000 index of small cap stocks hit its all-time high close over a year ago on August 31, 2018. However, the trend of under performance tracks the historical small cap seasonality quite well. With the Russell 2000 up a fraction today as the major U.S. large indices were down a bit from our historical seasonal pattern perspective this looks like the beginning of the bottom of small cap under performance and the beginning of the new “Small Effect.” As you can see in the accompanying chart the R2K has been tracking the pattern quite well since July and looks like the small fry are coming out of hibernation just in time for small cap stock hunting season. See page 110 of the Stock Trader’s Almanac 2019 and page 112 of the soon-to-be released 2020 edition for deep background.
Homebuilders on Fire, But Be Careful Mon, Oct 21, 2019 The Homebuilder group has been one of the best performing areas of the stock market so far in 2019. The ETF that tracks the group -- ITB -- is currently up 49% YTD and 67% from its 2018 lows. You may expect the group to be trading at multi-year highs with a rally like the one seen this year, but all this rally has done is erase a steep 40% decline experienced in 2018! As shown below, ITB has basically gone parabolic over the past few months, but it's only just now approaching the high it made in January 2018. Don't look now, but homebuilders are again approaching their all-time highs seen during the mid-2000s housing bubble as well. Investors knew it would be a long, long road to recovery following the housing crash that saw the S&P 1500 Homebuilder group fall nearly 90% from its July 2005 high. But we're now more than 10 years removed from the ultimate low for the group, and on Friday it traded within 10% from its all-time high. Most homebuilders that are members of the ITB ETF -- shown below in our Trend Analyzer snapshot -- are up more than 50% year-to-date. Every single stock in the ETF is also now trading in overbought territory, with about half of them at extreme levels (more than 2 standard deviations above their respective 50-DMAs). So while our long-term "trend" algo scores all of these stocks as being in uptrends, many of them get "poor" timing scores because of how overbought they are. When things get this extended, you typically see some downside mean reversion or at the very least, sideways trading. This mean reversion can occur from either a drop in share prices or sideways trading that allows the moving averages to catch back up. There are some signs that maybe the homebuilders have gotten a little ahead of themselves lately. Mortgage rates have mirrored ITB closely over the last two years. In 2018, mortgage rates rose sharply, which caused the homebuilders to have a terrible year. This year we've seen the exact opposite, with mortgage rates dropping and homebuilders rallying. Over the last two months, however, mortgage rates have stopped falling and instead have flattened out. Homebuilders have continued to surge. You can see the divergence in the chart below which shows ITB versus the inverse of mortgage rates. If this relationship is to continue, either homebuilders need to come back down to earth a bit, or mortgage rates need to take another leg down.
Global Equities: Everybody Wins! Tue, Oct 22, 2019 The image below is a snapshot of 35 different country ETFs from our Trend Analyzer tool in the interactive section of our website. For each ETF, we start off by showing its YTD performance along with where each one closed the prior trading day with respect to its 50-day moving average. From there, we also show each ETF's Trend rating (up, down, or sideways), along with a 'Timing' score that takes into account each ETF's trend and where it's trading with respect to its trading range to determine whether current levels provide a statistically attractive time to take a long position. Finally, we also show where each ETF is trading with respect to its trading range (red or green circle) and where it was trading one week earlier (end of tail). Looking at the current snapshot, the majority of country ETFs are not only above their 50-day moving averages, but they are also overbought. In fact, just nine ETFs are not overbought and only one - Turkey (TUR) - is below its 50-DMA. What's really amazing about the recent performance of the country ETFs, though, is that all 35 ETFs listed below have traded higher over the last week. So it has not only been a good week for US equities, but stocks around the world have also been in rally mode. Leading the way to the upside, Sweden (EWD), Poland (EPOL), Turkey (TUR), and Austria (EWO) are all up over 4%, while Israel (EIS), China (GXC), Vietnam (VNM), and Malaysia (EWM) have lagged with gains of less than 1%. So why are equities rallying on a global scale? There are a number of factors behind the move, ranging from some improved tone in global data, positive earnings, and the evergreen headline of optimism related to trade. One key thing to keep in mind with regards to the performance of the ETFs below, though, is that the returns are expressed in US dollar terms. Because the dollar has declined over 1% over the last week, it therefore automatically provides a boost to performance figures. The weak dollar hasn't accounted for all of the strength in the individual country ETFs over the last week, but it has accounted for a large share of the gains.
Q4 Rally Is Real. Don’t Let 2018 Spook You Understandably folks are apprehensive about the perennial fourth quarter rally this year after the debacle that culminated in the Christmas Eve Crumble in 2018. But the history is clear. The fourth quarter is the best quarter of the year going back to 1949, except for NASDAQ where Q1 leads Q4 by 4.5% to 4.0%, since 1971. Historically, the “Sweet Spot” of the 4-Year Election Cycle is the three-quarter span from Q4 Midterm Year through Q2 Pre-Election Year, averaging a gain of 19.3% for DJIA and 20.0% for S&P 500 since 1949 and 29.3% for NASDAQ since 1971. Conversely the weakest two-quarter span is Q2-Q3 of the Midterm Year, averaging a loss of -1.2% for DJIA and -1.5% for S&P 500 since 1949 and -5.0% for NASDAQ since 1971. Market action was impacted by some more powerful forces in 2018 that trumped (no pun intended) seasonality. Q2-Q3 was up 9.8% for DJIA, 10.3% for S&P and 13.9% for NASDAQ. Q4 was horrible, down -11.8% for DJIA, -14.0% for S&P and -17.5% for NASDAQ.Q1-Q2 of pre-election year, especially Q1 gained all that back. Pre-Election year Q4 is still one of the best quarters of the 4-Year Cycle, ranked 5th, for average gains of 2.6% for DJIA and 3.2% for S&P since 1949 and 5.4% for NASDAQ. Additionally, from the Pre-Election Seasonal Pattern we updated in last Friday’s post, you can see how the market tends to make a high near yearend in the Pre-Election Year. So, save some new unexpected outside event, Q4 Market Magic is expected to impress once again this year.
Market Entering Fed Anticipation Window In one week the Fed will gather for its seventh scheduled meeting of 2019. The Fed has already cut rates twice this year and according to CME Group’s FedWatch Tool, there is currently a 92.5% probability that they will ease another 0.25% next week. In the chart below the 30 trading days before and after the last 93 Fed meetings (back to March 2008) are graphed. There are three lines, “All,” “Up,” and “Down.” Up means the S&P 500 finished announcement day with a gain, down it finished with a loss or unchanged. A green box has been drawn shading the S&P 500’s average performance five trading days before announcement day. On average the period is marked with sideways to flat trading regardless of what occurs on announcement day. Barring any major earnings or corporate disappointments, the market could spend the next five trading days in a narrow range.
Banks - On To The Next Test Wed, Oct 23, 2019 It has been a pretty monumental two weeks for the KBW Bank index. Since the close on 10/8, the index has rallied just under 9% as earnings reports from some of the largest US banks received a warm welcome from Wall Street. The index is now once again testing the top-end of its range, one which it has unsuccessfully tested multiple times in the last year. If you think the repeated tests of 3,000 for the S&P 500 over the last 18 months have been dramatic, the current go around with 103 for the KBW Bank Index has been the sixth such test in the last year! We would also note that prior to last year's fourth quarter downturn, the same level that has been acting as resistance for the KBW Bank index was previously providing support. In the case of each prior failed break above 103 for the KBW Bank index, sell-offs of at least 5% (and usually 10%+) followed, but one thing the index has going for it even if the sixth time isn't the charm is that just yesterday it broke above its downtrend that has been in place since early 2018. The group has passed one test at least! From here, if we do see a pullback, that former downtrend line should provide support. Turning to the KBW Index's individual components, the table below lists each of the 24 stocks in the index along with how each one has performed since the index's recent low on 10/8 and on a YTD basis (sorted by performance since 10/8). In the slightly more than two weeks since the index's short-term low, every stock in the index is up and up by at least 4%. That's a pretty broad rally! Leading the way to the upside, State Street (STT) has rallied nearly 20%, while First Republic (FRC), Northern Trust (NTRS), and Bank of America (BAC) have jumped more than 13%. In the case of STT, the rally of the last two-weeks has also moved the stock into the green on a YTD basis.
Seasonal (Tail)Winds OCTOBER 21, 2019 The stock market has started October on a bumpy path. Many global issues remain unresolved, but seasonal forces, sound fundamentals, and breakthroughs on the trade and geopolitical1 fronts could help sustain the S&P 500 Index at record highs. Volatility can be uncomfortable, but we remain confident enough in domestic fundamentals that we would recommend suitable investors use any potential pullbacks to consider buying or rebalancing equity positions. FOURTH QUARTER STRENGTH October has had a bad reputation in the stock market. To be fair, it’s somewhat warranted—some of the stock market’s most spectacular crashes have happened in October, including the S&P 500’s 27% slide in October 2008 at the height of the financial crisis. Thankfully, we haven’t seen any moves of that magnitude this October, but investors are still on edge after a bout of market swings to start the month. Some volatility is par for the course, however, at this point in the year. Since 1950, the S&P 500 has posted more 1% daily moves in October than any other month of the year. Fortunately, the winds of fall (and seasonality) are starting to blow through the stock market. The fourth quarter historically has been the strongest period of the year for U.S. stocks. Since 1950, the S&P 500 has risen an average of 3.9% in the fourth quarter, its best performance of all quarters. November and December also have been the S&P 500’s two best months over that same period [Figure 1]. Stocks generally benefited from increased management commentary on the upcoming year, end-of-year portfolio rebalancing, and a general optimism boost as the holidays approach. There’s a reason we call it the “Santa Claus rally.” POSITIVE SEASONAL SIGNALS While seasonality is a bullish factor to consider, it may not entirely dictate the path of the market. The fourth quarter of 2018 is a good example of stocks defying seasonal tailwinds. Last year, the S&P 500 fell as much as 19.6% on a closing basis from October to December 2018 amid the fear of a Federal Reserve (Fed) policy mistake, an escalating U.S.-China trade dispute, and a looming government shutdown over the federal budget. Elevated uncertainty was too much for investors to digest, spurring the S&P 500’s worst sell-off since 2011. However, stocks have climbed many walls of worry in this bull market, and they scaled a particularly tall wall at that point, thanks to solid domestic fundamentals and the Fed’s flexible monetary policy stance. (Monetary policy refers to decisions by the Federal Reserve and other central banks regarding interest rates and the money supply.) Since then, the S&P 500 has recovered all of its December 2018 losses and made new record highs, even though investors are still facing some of the same issues. The United States and China have yet to reach a comprehensive agreement on trade, and the Fed is still figuring out the appropriate level of monetary policy given trade uncertainty. Other geopolitical issues, such as the United Kingdom’s upcoming exit from the European Union (Brexit), are still weighing on global markets. We believe the year-to-date strength we’ve seen in U.S. stocks is a testament to how much easing monetary policy by the Fed and solid domestic fundamentals have driven long-term investor sentiment. MAKING PROGRESS Lately, however, we’ve seen progress on multiple fronts. The United States and China verbally agreed to a limited trade deal October 11. Even though this is a small step forward in the trade dispute, we think any potential thaw could continue to offer a significant market tailwind before the two sides meet again at the Asia-Pacific Economic Cooperation summit in November. The U.S. Treasury yield curve has found its way out of inversion territory (long-term yields have moved back above short-term yields) amid the increase in clarity on trade, soothing investors who saw bond market stress as a signal of recession. Monetary policy is still on investors’ sides. The Fed has committed to “acting as appropriate” to sustain the expansion in light of recent downside risks, a stance that could continue to calm investors and buoy stocks. That commitment has translated into two 25 basis point (0.25%) interest rate cuts so far this year, and we think one more could happen before the end of the year. We also expect policymakers to stick to more flexible commentary when talking about future policy, another dynamic that could support risk appetite. To be clear, there are still several headwinds blowing, including elevated global geopolitical uncertainty, ongoing trade tensions, and stalled corporate earnings growth. We’re certainly not discounting the risks, but we expect them to be temporary speedbumps for this ongoing bull market. We still see long-term opportunity in U.S. stocks, especially if the United States and China reach a trade deal, allowing U.S. companies to focus on growing profits through increased productivity and higher investment.
