Performance on Mondays & Fridays Key to Bull Market Survival So far this year, Wednesday is the best performing day of the week for S&P 500, advancing 11 out of 15 times. We do not apply a great deal of weight to this accomplishment as research in the Stock Trader’s Almanac (STA) has repeatedly demonstrated that the beginning and ends of days, weeks, months and years tend to hold greater significance and Wednesday is nearly always the third trading day of the week, unless Monday was a holiday. On page 143 of STA 2017 the 23 bears years – 1953, ’56, ’57, ’60, ’62, ’66, ’69, ’70, ’73, ’74, ’77, ’78, ’81, ’84, ’87, ’90, ’94, 2000, 2001, 2002, 2008, 2011 and 2015 are separated from 42 bull market years. [Editor’s note: Ned Davis definitions of bull and bear market are used in the Almanac. A cyclical bull market requires a 30% rise in the DJIA after 50 calendar days or a 13% rise after 155 calendar days. Reversals of 30% in the Value Line Geometric Index since 1965 also qualify. A cyclical bear market requires a 30% drop in the DJIA after 50 calendar days or a 13% decline after 145 calendar days. Reversals in the Value Line Geometric Index also qualify. Bull and bear markets are measured at peak and trough dates, so both the time and price criteria must be met as of the peak and trough dates. Using this criterion, the majority of 2015 was a bear market.] While Tuesday and Thursday did not vary much between bull and bear years, Mondays and Fridays were sharply affected. There was a swing of 10.1 percentage points in Monday’s and 9.5 in Friday’s performance. When traders and investors are reluctant to hold positions over the weekend and fail to buy on the first trading day of the week, they are showing a lack of confidence. Since mid-March, Fridays (or the last trading day of week) have been poor, and Mondays (or first trading day of the week) have been weak. Improving market performance on Fridays and Mondays would confirm this bull still has legs while the opposite would suggest a rising probability of trouble ahead.
S&P 500 Kicks off Late-April Rally Early The best six months for owning stocks can begin in October or early November and usually lasts until April or early May for DJIA and S&P 500. However, seasonal strength for technology stocks, measured by NASDAQ, tends to last until June (“Best Eight Months”, see page 60 Stock Trader’s Almanac 2017). Due to its substantial weighting in technology, the S&P 500 also demonstrates a tendency to rally from late April until early June. This trade has been profitable 62.9% of the time over the longer-term however; its recent track record has been rough, declining seven times in the last eleven years. Going long the September futures contract on or about April 27 and holding until on or about June 7 has worked 23 times in 35 years. The key to this trade is overall market trend and proper trade management as numerous sizable losses and gains have occurred over trade’s history. Recent weakness has set this trade up for a potential win this year. In the S&P 500 chart below, you can see that monthly support (green dashed line indicated by upper blue arrow) has held and today’s gains have turned the Stochastic indicator positive and moved both MACDs very close to turning positive.
Historical Stock Market Reactions to Geopolitical and Economic Crisis Events Posted by lplresearch The U.S. military strike against a Syrian military base earlier this month, heightened concerns about the North Korean nuclear threat, and recent terrorist attacks in France and elsewhere have caused many to ask what these risks might mean for the stock market. It is always uncomfortable to talk about economic or market impact during a humanitarian crisis or military operation when lives are being lost, but we try to help investors by providing some historical context. After the news of the strike in Syria broke, Dow Jones Industrial Average futures immediately fell 100 points overnight during the morning of April 7. But as more domestic traders digested the news and became involved in futures markets, those losses were erased. The S&P 500 Index has been flat since then despite this and other geopolitical concerns. Should markets be more concerned? Here is where historical context can help. First, our disclaimer: Every event is different, and no one knows with any degree of certainty which crises will escalate and which ones will be contained. That said, when looking back at previous military conflicts in recent decades, we can see that the stock market has generally shrugged them off; recouping losses, if any, within days or weeks. Thanks to our friends at Ned Davis Research, we have a fairly long list of crises—some economic, some related to market imbalances, some military conflicts, some terrorist attacks, and others—and the stock market performance after those events. The most obvious takeaway is that the initial reactions are typically negative (median first day drop of 2.3%, average decline of 4.6%), but after the first month (roughly 22 trading days), the Dow has tended to be between 3% and 5% higher (and typically continued to rise beyond the first month). Perhaps the most important takeaway is that the business cycle has a substantial influence on the market’s reaction to these crisis events. The sizable stock market declines associated with the Arab oil embargo (1973), Nixon’s resignation (1974), the Hunt silver crash (1980), Iraq’s invasion of Kuwait (1990), 9/11 (2001), and Lehman Brothers’ collapse (2008), were all in or around economic recessions. The crises and corresponding big declines that took place amid healthy U.S. economies—the crash of 1987 and the Asia crisis in 1997—are more the exception than the norm. Finally, even during the more significant market-moving events, investors were very likely to experience gains three, six, and 12 months later. Patience was rewarded. Bottom line, this look at history tells us that the stock market tends to be resilient to crises, and the market’s reaction is greatly impacted by where the economy is in the business cycle. The conflicts that have triggered the biggest declines tend to be associated with economic weakness, which is why we in the LPL Research Department spend so much time analyzing the business cycle (please see our Recession Watch Dashboard). We will continue to assess potential economic and market impact from geopolitical events or any other crisis that may emerge, and we acknowledge the risks; however, from a stock market perspective, the fundamentals of the business cycle will carry the day.
Has S&P 500 Finally Snapped its Malaise? After spending all of March and a majority of this month in a funk, S&P 500 (and the rest of the market) responded favorably to France’s election results today. Today’s 1.08% S&P 500 gain was the first advance exceeding 1% since March 1. The surge higher was sufficient to propel S&P 500 back above its 50-day moving average. Stochastic, relative strength and MACD indicators are also all positive. April could still manage to live up to its historical reputation. Today’s gains and the improving technical outlook could mark the beginning of the typical rally seen in years when our January Trifecta was positive. If this is the case then a few more days of modest gains (black arrow in chart below) could be followed by a swift move back toward all-time highs (green arrow).
Vive La Breakout: France Breaks Through; Will Broader Europe Follow? Posted by lplresearch European equities had a huge day yesterday, as the French election eased fears over anti-euro concerns. How historic was the day? The Paris CAC 40 Index gained 4.1% for its first >4% gain since August 2015. The Euro STOXX 50 Index gained 4.0% for its best daily gain since August 2015. The S&P 500 Index gained more than 1% for the first time since March 1, 2017, and it was only its second 1% gain this year. Volatility imploded, as the CBOE Volatility Index (VIX) sank 25.9% for its largest one-day drop since August 2011. Going back to 1990, this was the fourth-largest one-day percentage drop ever. We took a technical look at European markets in early December and noted things were looking potentially bullish. After yesterday’s big gains, markets continue to advance. In fact, most European markets are now outpacing U.S. markets year to date. Per Ryan Detrick, Senior Market Strategist, “One chart that could bode well for European markets, and likely for global markets in general, is the Paris CAC 40. It didn’t just break a bearish trendline going back 17 years yesterday; it blew the doors off the trendline. This is a picture-perfect breakout and one that should bode well for future gains.” What about European equities in general? The London FTSE Index breakout earlier this year and Paris CAC 40 breakout are both major positives, but the Euro STOXX 50 still has a little work to do before it breaks out. This trendline won’t go down without a fight, but should the Euro STOXX 50 move above the trendline, it could be an even better sign for continued European strength. We are only focusing on technicals here, and that is just part of the story. For more on our thoughts on Europe, be sure to read this week’s Weekly Market Commentary: Europe Enters The Tour De France.
May Historically a Solid Month in Post-Election Years May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 “flash crash”. It used to be part of what we called the “May/June disaster area.” From 1965 to 1984 the S&P 500 was down during May fifteen out of twenty times. Then from 1985 through 1997 May was the best month, gaining ground every single year (13 straight gains) on the S&P, up 3.3% on average with the DJIA falling once and two NASDAQ losses. In the years since 1997, May’s performance has been erratic; DJIA up nine times in the past nineteen years (three of the years had gains in excess of 4%). NASDAQ suffered five May losses in a row from 1998-2001, down – 11.9% in 2000, followed by ten sizable gains in excess of 2.5% and four losses, the worst of which was 8.3% in 2010. Post-election-year Mays rank at or near the top. May is the top performing NASDAQ and Russell 2000 month in post-election years. The Russell 2000 has been up 9 straight with gains averaging a whopping 4.6%. DJIA and S&P 500 (since 1953) have been nearly as strong, with May ranking 4th and 3rdrespectively. May begins the “Worst Six Months” for the DJIA and S&P. To wit: “Sell in May and go away.” Our “Best Six Months Switching Strategy,” created in 1986, proves that there is merit to this old trader’s tale. A hypothetical $10,000 investment in the DJIA compounded to $843,577 for November-April in 66 years compared to $319 loss for May-October.
Nasdaq 6,000: Now What? Posted by lplresearch It was 17 years in the making, but the Nasdaq Composite finally closed above the next 1,000 point milestone level of 6,000. Considering it first closed above the 5,000 level on March 9, 2000, this equates to an annualized price return of 1.0%. In comparison, the record move from 3,000 to 4,000 took less than two months—equal to an annualized return of 555.8%. Many have said tech is in a bubble currently, but a 1% annualized gain for 17 years isn’t what we’d call asset soaring and in a bubble. Is the Nasdaq really at a record though? Looking at nominal prices, it sure is. But what if we factored in inflation (real prices)? Doing this suggests the all-time record closing price is really 7,196.56 (using March Consumer Price Index data), not the 5048.62 it closed at on March 10, 2000. So in one respect, it’s still another 19.4% away from a “real” all-time high—yet another reason to suggest tech isn’t in a bubble. The Nasdaq is considered to be a technology-heavy index, but technology actually comprises less than half of the index’s total market value. A purer look at where the technology sector stands relative to historical highs is better seen in the Dow Jones U.S. Technology Index, which is still 8.0% away from its highs set in March 2000. Here’s the catch: A real breakout just took place for tech. However, per Ryan Detrick, Senior Market Strategist, “Tech might feel like a darling sector now, but on a bigger picture view it is important to remember this group lagged for years. One of our favorite charts shows the Dow Jones Technology Index relative to the S&P 500 completing a 17-year saucer bottom* formation, which suggests the tech rally could only be just beginning.” Tech remains one of our favorite sectors: Earnings are strong, technicals are improving, and valuations are still attractive. Add it all up and even though this group is off to a great 2017, there could be continued outperformance in the future.
May’s First Trading Day Historically Bullish Next Monday, the first trading day of May has a bullish history over the past 22-years and could provide a catalyst for the market to rebound to new all-time highs again. DJIA, S&P 500 and NASDAQ have all averaged 0.5% or better on the day up twice as often as down (or better). Russell 2000 is slightly weaker with an average gain of 0.41% with five of its seven declines occurring in the last eight years. In addition, for the last three weeks, Friday (or the last trading day of the week) has been an opportunity for new long positions as the last three Mondays have been positive, the last two, decisively so.
Boring Days Historically Lead to Solid Yearly Gains Today was yet another relatively boring day for the market. S&P 500 finished the day 0.11% higher, NASDAQ was 0.14% higher and DJIA slipped -0.16%. Year-to-date DJIA has had just four trading days where it gained or lost more than 1%. At this pace DJIA is on track to finish the year with around 12 trading days exceeding +/- 1%. Going back to 1950, DJIA has averaged 52.1 trading days per year that exceed +/- 1%. The dullest year was 1964 with just three days outside +/- 1%. DJIA gained 14.6% that year. DJIA’s most exciting or more appropriately, scariest year, was 2008 with 134 days with daily moves exceeding +/- 1%. In 2008, DJIA plunged 33.8%. Separating 67 years into four groups in the table below reveals that well below average volatility has been most commonly seen during solidly bullish years. Of the 15 years that DJIA recorded 26 or less +/- 1% days its average annual performance was 17.9%. Only in one year, 1953, did DJIA post a full-year loss and 12 of those 15 years had double-digit gains.
Next Best 6 Months Look Good With three days left in the historically scary month of October for markets it looks like we will sidestep October’s penchant for volatility and sharp negative market surprises. On top of the banner “Worst Six Months” that are about to come to a close this continuing upside momentum bodes well for the next “Best Six Months” and 2018 until something shocks the system. But for now all is well. Last month we showed you how Great Worst Six Months are usually followed by above average Best Six Months, full-year gains, as well as strong following years. Well, this current WSM has advanced even further into “Great” territory. Last month the S&P 500 was up 5.3% for the WSM so far. As of today’s close S&P is up 7.4% for the current WSM. In the chart below we added year-to-date performance for perspective. By almost all accounts this year’s combination of a Great WSM and YTD gains will likely beget further gains. The only blemishes on this chart are 1968-69, 1981-82, and 1989-90. Vietnam and the bear market that lasted from December 1968 to May 1970 put the squeeze on stocks in 1968 and 1969. Reagan’s recession and a bear market in the wake of reigning in high interests, inflation and dysfunctional government battered markets in 1981 and 1982. The markets responded negatively in 1990 when the first President Bush reneged on his 1988 campaign promise not to raise taxes and Gulf War I consumed the psyche of the planet.
The Best Six Months of the Year Could Get Even Better Posted by lplresearch So much for “sell in May and go away.” The S&P 500 Index has gained more than 6% during the historically worst six months of the year and could finish higher each of the six months (from May to October) for the first time since 1980. Then again, 2017 has been breaking records left and right, so the strength we’ve seen during this seasonally weak period shouldn’t be too surprising. The table below shows that the S&P 500 historically does much better from November to April, with an average gain of 7.0% versus 1.5% for the other six months. The following table, which shows average S&P 500 performance for all possible six-month combinations, confirms that the next six months have indeed been the strongest, with the ”sell in May” period of May to October being the weakest, on average. *Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90. The table below outlines all the years in which the worst six-month period (May to October) was up at least 5% and what happened next: The usually strong November to April period is up 9.2% on average, above the 7.0% average return. It doesn’t stop there though, as November is up 3.4% versus the average November return of 1.5% and the return during November and December is 5.0% versus the average year of 3.2%. Historically, the remainder of the fourth quarter (November to December), and the subsequent six-month period (November to April) saw greater average returns compared with all periods. Though this is only one metric, if the S&P 500 holds up through the end of the month, we could be in for continued above-average performance during an already historically strong period.
What Will Stocks Do Under a New Fed Chair? Posted by lplresearch President Trump is reportedly set to announce his selection for the next Chair of the Board of Governors of the Federal Reserve (Fed) in the very near future, with Jerome Powell emerging as the likely nominee. Though he’s yet to make a final decision, reports suggest that a final decision will come before November 3. In our latest Bond Market Perspectives, we took a dive into the potential shift in composition of Fed members in 2018, in addition to the chair, and why it could be quite hawkish—but what does new Fed leadership really mean? Per Ryan Detrick, Senior Market Strategist, “Just as a new President brings uncertainty, a new Fed chair can do the same. In fact, going clear back to Charles Hamlin (the first Fed chair) in 1914 and his 14 successors, the Dow is down on average six months after a new chair.” Keep in mind that the sample size is quite small and the results below are skewed due to WWI, the Great Depression, and the crash of 1987. We’re not suggesting that a new Fed chair is likely to trigger a sharp selloff, but it would add to market uncertainty, and markets don’t like uncertainty. So we wouldn’t be surprised if Trump’s announcement spurs a bout of volatility, but when we look at the bigger picture, we continue to see very few signs of the excesses seen at previous major market peaks. This suggests very low odds of a recession beginning over the next 12–18 months and a likely continuation of the equity bull market in 2018.
Politics and Investing: Keep Them Separate Oct 30, 2017 A popular chart making the rounds today is this one from Gallup, which shows the daily tracking of President Trump’s approval and disapproval ratings. As shown, just ahead of grand jury indictments concerning former members of his campaign staff, the President’s approval rating is sinking like JC Penney, while his disapproval rating looks closer to Apple as it just broke out to new highs. While these charts always make for some good conversation, their utility stops right about there, especially when it comes to the market. The chart compares the performance of the S&P 500 to his approval rating throughout Trump’s Presidency. Even as Trump’s popularity plumbs new lows, the S&P 500 has been going in the exact opposite direction. Sure, the President may be unpopular, and based on his approval ratings there’s only a one in three chance that anyone reading this approves of the job he is doing. Like him or not, though, never let politics impact your investment decisions. Just as a lot of investors missed out on the bulk of this bull market because they didn’t care for President Obama and his policies, another group of different investors has now likely missed out on another good year for the US equity market just because they don’t care for President Trump.
November’s First Trading Day: NASDAQ Is Best Based upon data in the now available Stock Trader’s Almanac for 2018 on page 86, the first trading day of November is the fourth weakest of all monthly first trading days since September 1997 based upon total DJIA point gained. DJIA and S&P 500 have been up 11 of the last 21 years on the first trading day of November. NASDAQ has the best record, up 14 times with an average gain of 0.32%. Tomorrow is also FOMC announcement day of which 46 of the last 77 have been positive (59.7%) for S&P 500 with an average gain of 0.44%. However, the biggest move this year on FOMC announcement day was a 0.84% gain on March 15. The other five announcement days have seen the S&P 500 close in a tiny range from –0.13% to 0.06%.
Market’s Best Three-Month Span is November to January Over the last 67 full years, DJIA has gained an average of 4.0% during the three consecutive months of November, December and January. S&P 500 has gained 4.1% and NASDAQ has averaged 5.9% (since 1971). Over the long-term, these are the Best Three Consecutive Months to be long the market. They may not all be positive every year, but they have been a consistent source of gains over the years. This was definitely the case last November, December and January and a repeat is likely as past Great Worst Months (May-October) were followed by above average performance during the “Best Six Months” (November-April).
The Halloween Indicator Posted by lplresearch The S&P 500 Index was up 15.03% year to date as of the end of October, and it also has closed higher for the eighth consecutive week —marking the first time since 2013 that this has happened. Today we will take a closer look at both of these rare occurrences and why they could be a good sign for the bulls. Historically, November and December have been two of the strongest months of the year for the S&P 500; and, since 1950*, the combined average return during these two months has been a very solid 3.2%. Here’s the catch: When the S&P 500 has been up a lot coming into these two months it has tended to do even better. Per Ryan Detrick, Senior Market Strategist, “Wouldn’t you know it, but when the S&P 500 has been up 15% or more year to date as of Halloween, the rest of the year has been higher 16 out of 17 times, and the average return has been better than the average year.” In other words, strength begets strength. It doesn’t stop there though, as the S&P 500 has been up eight straight weeks in a row currently. Once again, these long streaks of equity strength have tended to result in stronger than average future returns, with the average return 4 weeks, 8 weeks, and 12 weeks after an eight-week win streak having been stronger than the average returns over these same periods. This is the feel-good time of the year, and that usually means equities benefit. One might think that the impressive run so far this year could lead to a well-deserved pullback and the Grinch showing up, but these studies suggest that if there is a pullback, it could be a nice buying opportunity.
January Indicator Trifecta Was Right on the Mark Our Santa Claus Rally, First Five Days and January Barometer collectively form our January Indicator Trifecta. This trio was certainly on mark earlier this year when all three were positive. Years when the January Trifecta was positive have been quite bullish. S&P 500 has advanced an average of 17.8% in years where the January Trifecta was positive since 1950. As of today’s close, S&P 500 is up 15.9% year-to-date, DJIA is up 19.2% and NASDAQ has gained 26.1%. In the following charts, 2017 year-to-date performance through today’s close is graphed against All Post-Election Years, January Trifecta Positive (all years) and January Trifecta Positive – Post-Election Years. Generally in past January Trifecta positive years, it was smooth sailing from here to yearend for the market, but in those past years October was not as strong as it was this year.
All Year In the Black Nov 13, 2017 With the S&P 500 currently up 15% year-to-date, we’d basically need to see a market crash for the index to close down on the year when all is said and done on December 29th, 2017 (the last trading day of the year). If the market doesn’t crash, the S&P will likely go the entire year without trading into negative territory at any point. As shown below, there have only been ten prior years where the S&P went the entire year without trading into negative territory. The last two were relatively recent in 2012 and 2013. What’s notable in the table is the performance in the following year after the S&P goes an entire year “in the black.” Following the ten prior occurrences, the index traded up the next year eight times and down twice. On average, the next-year gain was +11.31%. Investors would surely sign up for another 10%+ gain in 2018!
