The Bull Thread

Forget Dow 20,000 and get ready for 38,820


After repeated attempts at breaking through 20,000, DJIA finally cleared this hurdle today. Technically, DJIA 20,000 does not mean that much. It’s a psychological artificial threshold people like to focus on. It is a nice round, headline filling number. It means the sum of the DJIA 30 stock prices divided by the divisor exceeds 20,000. The plethora of new all-time highs is more significant to me, it shows underlying market and economic strength and strength generally begets strength. But these big round number levels can be challenging to leave behind in short order.

Historically round numbers like 100, 1000, 10000 have been a challenge for DJIA. DJIA first traded above 100 in 1916, but did not leave it in the dust until 1942 (26 years). DJIA 1000 was reached in 1972 and hung around until 1982. DJIA 10,000 was reached in 1999 and was still in play in 2010. And according to some bears, 10,000 is still in play. Other round numbers like 2000, 3000, 4000, 5000 and 6000 enjoyed greater success. Will 20,000 be in the first group or second? It’s too early to say. Valuations are getting stretched and some profit taking is likely around 20,000, but if economic data and corporate earnings firm and accelerate, then 20,000 could easily be left behind.

DJIA 20,000 does bring my forecast for Dow 38,820 by the year 2025 into brighter light. Based on a major historical cycle pattern we discovered in 1976, I made this forecast in May of 2010 around Dow 10,000 after it was clear that the 2009 low was the secular bear low. The main factors for that Super Boom forecast are now beginning to fall into place. The new administration could bring an end to the political stalemate in Washington and signal a new era of political functionality like we had in the 1980s and 1990s. Plus signs of healthy inflation are perking up. Add in disengagement on the ground militarily in the Middle and Near East and a new paradigm-shifting, culturally-enabling technology and we will be off to a string of double digit market gains in the coming years. Any major stumbles by the new Trump administration could easily derail this good case scenario and instigate a mild bear market in the 2017-2018 timeframe. We will be watching the first 100 days and Q1 and Q2 of 2017 judiciously.

 

Where Did The Volatility Go?
Posted by lplresearch

The incredibly nonvolatile equity market continues. As we noted two weeks ago, the Dow was in the midst of the tightest monthly range ever. Although more equity new highs have been made since then, we’d still have to call the market action incredibly slow.

For instance, the S&P 500 hasn’t closed down more than 1% for an incredible 74 days in a row, the longest streak since 2006. It has also closed within 1.5% of the all-time high for 54 straight days, the third-longest such streak going back 45 years. Then, on Thursday and Friday of last week, the S&P 500 in a daily range of less than 0.33%, for the first time back-to-back since late December 2016. You have to go back 28 months to find the time it happened before that.

Speaking of the small intraday ranges, the S&P 500 has now gone 29 consecutive days without trading in a range of more than 1%. Considering the average daily range going back to 1970 is 1.5%, this is an incredibly slow stretch for equities. Per Ryan Detrick, Senior Market Strategist, “You have to go back to September 1995 to find the last time we saw 29 consecutive days without a 1% intraday range on the S&P 500. Although things are boring, the good news is these periods of small daily ranges rarely lead to large sell-offs once they are over.”



Although a very small sample size, the returns after the three times the S&P 500 made it 29 days without a 1% daily range were consistent with periods that did not see large sell-offs, which could be a positive sign for equities.

 

February’s First Trading Day–Lone Bright Spot in Often Troubled Month

Last week it was noted that February is the worst month of post-election years and even in other years, the market often struggles. One of the month’s bright spots is its first trading day. Over the past 21 years, S&P 500 has advanced 76.2% of the time with an average gain of 0.5%. DJIA and NASDAQ also exhibit strength. Over the same time period, DJIA has one less winning day than S&P 500 while NASDAQ has one additional day.

 

January Indicator Trifecta Implying Positivity

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 28th time since 1949 that all three January Indicators have been positive. As we detailed in the “Proving Grounds” last week this is rather constructive. The following one-year seasonal pattern chart shows some bang up performance in post-election years with a positive January Indicator Trifecta.

 

More on our January Indicator Trifecta: 24% S&P 500 Gain in Post-Election Years

Yesterday we presented a 1-year seasonal pattern chart of S&P 500 for the last 28 times since 1949 where our Santa Claus Rally, First Five Days and January Barometer were all positive. Today we present charts of DJIA and NASDAQ performance in those years as well. Full-year performance is stellar on average for these January Trifecta years. DJIA and S&P 500 average about 17%, NASDAQ exceeds 23%.


This level of performance in Trifecta years is in conflict with other seasonal patterns that apply to full-year 2017. All post-election years (four-year presidential election cycle), years ending in 7 (decennial cycle) and the first years of new, elected presidential administrations have historically been weaker, depending on index, averaging somewhere between 6 to 8%. Because of the greater influence of the 4-year presidential-election cycle, we do not place much emphasis on the decennial pattern. And based upon the following table where all Trifecta years are broken down into year of the 4-year cycle, it would appear Trifecta years outrank the four-year cycle. Strong results are seen across the board regardless of which year of the 4-year cycle.

Regardless of which year of the four-year cycle past Trifectas occurred, S&P 500 performance over the next 11 months or for the full year was robust. There have been more January Trifectas in pre-election and election years, but past post-election year Trifecta years posted the greatest full-year gains. Based solely upon these January Indicator Trifecta years, February 2017 could still be flat to lower and full-year gains could reach into the mid to upper teens. For this to transpire, corporate earnings and economic data will need to continue to improve and the Trump administration will need to be largely successful implementing new policy changes with minimal disruption and confusion.

 

Mid-February Historically Stronger than Beginning or Ending

Over the most recent 21-year time period, February has exhibited a tendency to begin with gains on its first trading and then drift sideways to lower until about the seventh trading day of the month. At which point, DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 have typically rallied until the eleventh or twelfth trading day of February. From here to the end of the month, all five indices then headed lower. On average only DJIA and Russell 2000 finish the month with a gain. S&P 500, NASDAQ and Russell 1000 finish in the red.

 

Another Look At The January Barometer
Posted by lplresearch

In our latest Weekly Market Commentary, we noted:

Taking one last look at January, what happened was both rare and potentially very bullish. The S&P 500 was positive year to date each day of the month and did not close down more than 1% on any individual day. Since 1950*, that has happened only six other times; the results the next 11 months have been very strong, with the S&P 500 rising the rest of the year all six times with a median return of more than 10%. We do expect more volatility, but the data suggest that equity weakness should be considered as a potential buying opportunity.

So the question now is: does a good start to the year mean the next 11 months could be strong? As we noted on the blog two weeks ago, when the S&P 500 has been higher in January, then the next 11 months have been higher 88% of the time. This is known as the January Barometer, and it has had a very solid track record when January has been green. Today, we’ll take a slightly different look at this indicator.

As noted in the italicized paragraph above, the full month of January 2017 didn’t have a single 1% close lower, and not one day was negative on a year-to-date basis. It also finished the month positive. When those criteria have been met, the rest of the year (so the next 11 months) was higher all six times and saw an average return of more than 15%, with nearly an 11% median return. In other words, the great start to equities this year could be a sign of future strength.



Per Ryan Detrick, Senior Market Strategist, “They say it isn’t where you start, but where you finish. That’s very true, but stock market history would say if you start off with an exceptionally solid January (like we saw in 2017), that could improve the odds that you might finish strong.”

 

A Year Since The Lows, What Have We Learned?
Posted by lplresearch

Happy anniversary 2016 S&P 500 lows! A year ago on February 11, the S&P 500 closed at 1829.08, some 14% off the all-time highs and a fresh new 52-week low. It was a scary time, as we saw high-profile calls to “sell everything,” while many other firms cut their year-end targets. With the S&P 500 down more than 10% year to date after 28 trading days, it was the worst start to a year ever—so calls like that might sound senseless today, but at the time it didn’t seem so outrageous.

We noted at the time that the amount of fear we were seeing after a 14% correction was more in line with previous 50% market crashes, so there was a chance things were overdone. Also, bad starts to a year historically weren’t a reason to sell. Things are never that black and white, and we too were concerned events could quickly spiral out of control. However, looking at past history and sentiment helped us to expect the bull market to continue and equities to finish the year up mid-single digits (although the S&P 500 managed to exceed our target and gain 9.5% for 2016, we are happy with our call to stand pat a year ago).

Now the big question is: How do you know things have officially turned around? Was there a clear signal a year ago that the worst was indeed over? We noted one signal at the time as potentially very positive, and it stood out over all the others from 2016. Per Ryan Detrick, Senior Market Strategist, “The S&P 500 closed higher at least 1.5% for three consecutive days off the February 2016 lows, but this also took place coming off a 52-week low. This incredibly rare combo had only happened three other times since 1950,* and the S&P 500 was up 23.9% a year later on average and higher all three times. Sure enough, the S&P 500 has been up 20.1% since the signal last February.”

Not to be outdone, during the previous eight times when the S&P 500 was up 1.5% for three consecutive days (so not necessarily off a 52-week low, but anytime), the index was higher a year later all eight times, with an average return a year later of 20.1%.



This is just one signal, and a sample of only three is very tough to put our full faith into it. However, when other factors like sentiment, fundamentals, and valuations all supported the bullish case (like they did a year ago), a rare signal like this could be what we are looking for to support the bullish case and suggest the worst is indeed over.

We will leave with some of the impressive returns over the past year; what a 12 months it has been!

 

New All-time Highs Confirm Bull Market Alive and Well

Once again the bull market has entered an extended period of strength that for some appears to defy logic and reason. S&P 500 has not experienced a daily loss in excess of 1% since October 11, 2016. Nor has it had a 5% correction since last June. Both are protracted time spans, but historically both have been exceeded before and by sizable amounts. The current bull market also managed to go nearly four years without a 10% correction. The brutal bear market that preceded it was unusual within historical context so it is not out of the question that the following recovery and associated bull market would be accompanied with some atypical behavior.

Using a 20% decline as the definition of a bear market, there have been 11 bull markets including the current one and 10 bear markets since 1949. The previous ten bull markets lasted an average of 1770 calendar days and produced gains of 161.4%. Within these 11 bull markets there were 23 corrections ranging from 10% to 19.9% for an average of just slightly more than two corrections per bull market. The current bull market, at 2898 days old and 244.1% gain is above average in duration, magnitude and number of corrections. However, there have been longer bull markets with even more corrections.

In the following table, each bull market has been broken down and includes the corrections that occurred within it. The bull markets beginning and end dates and closing prices are included and are used to calculate the “Days Between Corrections.” In each row labeled “Bull End,” that bull market’s duration and gain is calculated.

The quickest correction was 18 calendar days in 1955 while the longest was 531 from September 1976 to March 1978. The longest the S&P 500 went without a 10% correction was 2553 calendar days from October 1990 until October 1997. The second longest streak without a correction occurred in the last bull market that ended in 2007 when the S&P 500 went 1673 days. The fewest number of days between corrections was 35 in 1974.

The S&P 500’s current streak of 368 days is less than the average amount of time between corrections and is not of major concern. The previous streak lasted 1326 calendar days and ended with the S&P 500 sliding 14.2% over 266 days. Past bullish periods were often devoid of corrections. Low volatility and extended age do not kill bull markets, crumbling economic data and/or geopolitical/exogenous events do.

 

US Bull Market Chugs Along
Feb 21, 2017

Below is an updated look at historical bull markets for the S&P 500 going back to its inception in 1928. Remember, the standard definition of a “bull market” is a 20%+ rally that was preceded by a 20%+ decline. We’ll leave the argument over what should or shouldn’t be considered a bull market for another day. Here we’re only reporting the numbers.

As shown below, the current bull market that began on March 9th, 2009 has now lasted 2,906 days. That makes the current bull the second longest on record by 299 days. The only bull market that lasted longer was the one that ran from December 1987 through March 2000. Remarkably, the S&P didn’t experience a decline of 20% on a closing basis over that entire 4,494-day period.

Another notable stat is that the current bull has now lasted more than 1,000 days longer than the previous bull that ran from July 2002 to October 2007.

In terms of strength, the current bull still ranks third best with a gain of 248.96%. To move into second place, the gain will need to eclipse the 267% rally seen from June 1949 through August 1956.

In case you’re wondering, the shortest bull market on record lasted just 24 days — occurring all inside the month of June 1931.

 

A Closer Look At New Highs
Posted by lplresearch

The S&P 500 closed at yet another new all-time high on Friday (February 17, 2017), making it nine new highs so far in 2017. This is halfway to the 18 new highs seen in 2016, and nearly to the 10 made in 2015. The most ever took place in 1995, with an incredible 77 new highs. In fact, looking back to 1928, 5.1% of all days have closed at a new high.* No one knows how many more will take place this year, but what you do need to know is history has shown that new highs tend to happen in clusters lasting for potentially decades.

For 24 years from 1930 to 1953, the S&P 500 didn’t make a single new high, but it then made 371 new highs in the next 15 years. The ensuing 11 years saw only 34 S&P 500 new highs, with 31 of those taking place in 1972. Then from 1980 to 2000, it made 504 new highs, only to be followed up with just nine new highs in the following 12 years. This brings us to the past five calendar years, which have seen another impressive 135 new highs and show no signs of stopping.

Per Ryan Detrick, Senior Market Strategist, “New S&P 500 highs happen in clusters that last usually 15 to 20 years, only to be followed up by periods of at least a decade without many new highs. Well, after virtually no new highs for 12 years from 2001 to 2012, the current bull market since 2013 might feel old, but it is surprisingly relatively young. When compared with other bull markets since the Great Depression, the current bull could actually have plenty of legs left.”



For more on how long bull markets tend to last once they start making new highs again, be sure to read A Bigger Picture Look At The Bull Market.

 

January Indicator Trifecta Crushing All Other Patterns & Indicators–S&P 500 2776 By Yearend?

As of today’s close, DJIA is up 4.96% year-to-date, S&P 500 is up 5.65% and NASDAQ is up a strong 8.97%. The market shrugged off typical weakness before and after Presidents’ Day and appears to be even skipping typical weakness seen during a new administration’s first 100 days in office. This strength and resilience is noteworthy as it does appear in one pattern, the pattern of past years that also had a positive January Indicator Trifecta.

In the following charts 2017 is compared to all past Post-Election Years, all past January Trifecta years and past Post-Election Years that also had a positive January Trifecta. 2017 DJIA and S&P 500 performance has (or very nearly) caught up with the bullish positive January Trifecta pattern while NASDAQ is actually exceeding past averages. Taking the most bullish of these patterns, past Post-Election Years with a positive January Trifecta, and applying them to current market levels results in some rather large numbers by yearend; DJIA 23940, S&P 500 2776 and NASDAQ 6804.



Back in December we released our Annual Forecast for 2017 and laid out three scenarios; worst case, base case and best case with probabilities attached to them. Worst case was a mild bear market with a 5% chance. Base case was for continued tepid economic growth and single-digit to low double-digit gains, 65% chance. Our best case of 20% plus gains, based upon an acceleration of growth, tax reform, healthcare reform and infrastructure buildout, had a 30% chance. The longer the market keeps making new all-time highs, the better the odds are for the best case scenario to play out, but we still await signs of and confirmation of acceleration in growth, tax and healthcare reform and infrastructure buildout.

 

March’s first trading day historically bullish

When it comes to first trading day of the month performance, March has a modestly bullish history. Examining the last 21 years of data reveals DJIA and S&P 500 have the best record, advancing 66.7% of the time with average gains of 0.13% and 0.16%, respectively. NASDAQ and Russell 2000 have posted better average gains, but with fewer winning days. After a rough patch from 2007 through 2011, March’s first trading day does appear to be improving. DJIA, S&P 500, NASDAQ and Russell 2000 have all recorded gains in four of the last five years. President Trump’s first speech before Congress Tuesday night is likely to influence March 1 trading this year. The rally has been running on broad proposed policy changes. Absent at least some details, the rally could falter.

 

March: Lamb or Lion?
Posted by lplresearch

“March comes in like a lion and goes out like a lamb.”

The age-old saying refers to the weather, which can start off cold and snowy sometimes, but usually ends with warm spring days. March is known for many things, from spring training, to the NCAA tournament, to spring flowers, to consistent equity gains? That’s right, over the past 10 years, there hasn’t been a month for the S&P 500 with a higher average monthly return than March.



Here’s a chart we shared about March in our recent Weekly Economic Commentary:



Per Ryan Detrick, Senior Market Strategist, “March has been strong for the S&P 500, ranking as the fourth-best month of the year since 1950.* Adding the fact it has been the best-performing month for the past 10 years, seasonality sides with the bulls in the near term. Importantly, we don’t blindly follow seasonality, nor does it always work. Still, be aware the next two months are historically two of the strongest months for equities.”

A few other stats:

• When the first two months of the year have been higher, March has closed higher 19 of 26 times (73.1%) and has been up an average of 1.4%.
• The S&P 500 is set to close up four consecutive months once February is in the books. When the S&P 500 has been up four or more months heading into March, then March actually has become stronger, as since 1950, it has closed higher 11 of 13 times (84.6%) with an average return of 2.3%.
• Looking at post-election years, March falls right near the middle as the sixth-best month, up 0.6% on average and higher 50% of the time.

 

Sixth Best Start to March on Record
Mar 2, 2017

The S&P 500’s 1.37% gain yesterday was the sixth best start to March (1st trading day of the month) in the index’s history. Below is a quick table highlighting all 1%+ gains on the first trading day of March for the S&P 500 since 1928.

You might not remember, but stocks started off last March with a bang as well. The S&P was up 2.39% to start March 2016, and the index went on to gain another 4.11% for the remainder of the month. Prior to last year, 2010 was the last time the S&P gained more than 1% to start March, and just like 2016, the S&P gained another 4%+ for the remainder of the month. Including this year, the S&P has seen gains of 1%+ on the first trading day of March thirteen times (out of 90 years total). In the prior 12 years, the S&P averaged a decline of 0.15% for the remainder of the month. But that average decline is significantly impacted by the 25.8% decline seen for the remainder of March 1938. If you take the median instead of the average, the rest-of-month change is +1.38%. In the 77 other years where the S&P didn’t start March with a 1%+ gain, the index has seen a median rest-of-month gain of 1%.

 

March and Beyond Largely Bullish after Positive January and February

Although the market took a breather today giving back a portion of yesterday’s surge, it is not all that likely to manifest into anything more than a brief bout. In addition to our positive January Trifecta signaling further gains are quite likely, the history of S&P 500 gains in January and February offers further support for continued strength.

In 87 years going back to 1930, S&P 500 has been positive in January and February 33 times. Strength continued into March in 22 of those years and the full year was up 29 times. The record further improves when examining the data since 1950. This is the earliest year we consider to represent the beginning of the modern era. Since 1950, S&P 500 has advanced 19 out of 26 times in March following gains in January and February and was positive for the full year 25 out of 26. Average March gains in all 26 years were 1.4% while the full-year averaged 19.5%.