I am the editor of the Stock Trader's Almanac & Almanac Investor Newsletter and a Research Consultant at Probabilities Fund Management, LLC. I use historical patterns and market seasonality in conjunction with fundamental and technical analysis...+ FOLLOW THIS TUMBLR
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Today’s softness in the market lines up quite well with the typical July seasonal trading pattern. Based upon July’s recent 21-year performance chart DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 have all tracked closely to the historic pattern and today, the 14th trading day of July, has been frequently been the beginning of the summer soft spot. It is also worth reminding you that the first nine trading days of August are notoriously weak.
In the updated chart above I have highlighted this midsummer inflection point with circles and arrows for clarity. While it is encouraging that all the major US averages have just hit new all-time highs and done so many times this year. This is usually the time when markets are prone to a retreat. Throw in DC probes, investigations and presidential legal battles on top of tepid fundamentals, frothy sentiment and an overbought, cantilevered market; we are ripe for a fall.
All of the scuttlebutt in DC these days has created a form of gridlock that is keeping any changes at bay and companies and markets like the status quo. But if the situation in the US federal political arena unravels as it did for Bill Clinton in the summer of 1998 with the Lewinsky Scandal and for Richard Nixon in 1973 with the Watergate hearings, the market would likely be at least mildly adversely impacted.
It remains to be seen what will come of special prosecutor Mueller’s investigation if anything at all, but one thing is sure, whatever it is it will take some time to develop. A comparison of the timelines of the Clinton and Nixon scandals versus this Trump Russia probe investigation reveals that at a bare minimum, if anything ever comes of this it will likely not influence the market negatively in a major way for some time to come.
It is even likely to take longer now. Mueller has just expanded the investigation into all of Trump’s business dealings. Team Trump has fired back, questioning the propriety of the special counsel’s work by compiling a dossier of his and his team of prosecutors’ potential conflicts to discredit the investigation.
This of course includes the close ties between Mueller and Comey who succeeded Mueller as FBI Director and was Deputy Attorney General for a stint during Mueller’s FBI Directorship. The two men worked together to prosecute the Gambino Crime family and boss John Gotti in the early 1990s and stood up together against Bush 43’s unconstitutional NSA domestic wiretapping without a warrant business in March 2004 in sitting AG John Ashcroft’s hospital room convalescing from acute pancreatitis.
It could end up more like Lewinsky/Clinton for the market which was the shortest bear market on record. But if there is a trail of collusion it could be ugly. Only time will tell. But as you can see from the charts below of the Clinton and Nixon scandal timelines it will be the better part of a year before we know. Buckle up.
While the stock market continues to hit new highs this month so does public support for legal marijuana. Back in May during my trip to The MoneyShow Las Vegas and the onsite Cannabis Investing Event they held there I posted here on Scotts Miracle-Gro (SMG), arguably the most robust cannabis play out there.
SMG got yet another miracle earlier this month when Nevada newly legalized recreational pot. That’s right you can buy legal weed in Sin City now, amazing. CNBC had a thorough piece on Nevada’s new law back on June 30 that highlights some of the benefits to tax revenue and the opioid epidemic among other items. Bottom line: legal cannabis is here to stay and its booming industry.
Scotts came through our rigorous stock screen in October 2015 as an attractive undervalued, growing, materials stock in our seasonal stock-buying sweet spot at the outset of the Best Six Months. But in reality the big move in SMG over the past few years has been stimulated by the heavy usage of Scotts Miracle-Gro products by cannabis growers.
After Vegas and the post on May 15, SMG fell further into a ~15% correction. It was during that time that we put in a bid for some SMG in one of our accounts and picked it up in early June for an average price of 83.50. Nice MACD Buy crossover back in June too.
It’s up 12% in that account over the past months and up 15% from the June intraday low. In our Almanac Investor Stock Portfolios SMG is up 40% since we picked it up in October 2015. Right now we have SMG on Hold for mostly seasonal reasons. It would be attractive again on a pull back to support around 83.50.
Disclosure Note: At the time of this writing we held a long position in SMG.
A thousand Dow points ain’t what it used to be. DJIA’s 1000-point gain since the May 17 low amounts to a mere 5%. That’s not that bad all things being equal. But since the March 1 high DJIA is up only 522 points or 2.5%. For the most part, the market has gone virtually nowhere for 5 months. This is not surprising per se considering the big move we the prior 5 months since the election.
In addition to the erratic political arena, high valuations, soft internals and precarious technicals; we are not firmly in the Worst Four Months of the year July-October. It’s usually about now, when trading begins to dry up that we begin to hear talk of the infamous “Summer Rally” featured on page 72 of the Stock Trader’s Almanac 2017. Long story, short, the elusive “Summer Rally” is the weakest seasonal rally of them all.
So we took a look at the current Summer Rally and found it to be rather weak so far, up only 5% from the Spring low on May 17, and that does not portend so well for the Summer and Fall Corrections. We lined up the Summer Rallies ranked from weakest to strongest since 1964. Over the past 53 years prior to this year DJIA has rallied and average of 9.0% from its May/June low until its Q3 high. The Fall Rally averages 11.0% and the Summer and Fall Corrections average a loss of just under 9% for a net average gain of a few percentage points over the summer and fall.
However, as shown in the table below, when the Summer Rally is below the 53-year 9.0% average, the summer and fall correction tend to be bit steeper, -11.0% and -9.9%, respectively. It gets worse as the Summer Rally numbers dwindle. So, if the market does not get excited about something soon, we may be looking at a summer selloff that is a bit deeper than usual.
Since 1982, the Friday of options expiration week has a bearish bias for DJIA declining 18 times in 35 years with two unchanged years, 1991 and 1995. On Friday the average loss is a significant 0.29% for DJIA and 0.31% for S&P 500. NASDAQ’s record is even weaker, down 21 of 35 years with an average loss of 0.46%. DJIA posts the best full-week performance, up 22 of 35 with an average 0.41% gain. The week after options expiration also leans bearish for S&P 500 and NASDAQ over the longer-term with average losses. In recent years the track record had been improving until 2015’s across the board, greater than 2% loss.
Selling the September S&P 500 futures contract on or about July 17 and holding until on or about July 26 has a 60% success rate registering 21 wins against 14 losses in the last 35 years. The best win was $19,150 in 2002, and the worst loss was in 2009, posting a $12,650 bereavement. This trade had been successful in 13 of 15 years from 1990 to 2004. However since then it has nearly the opposite record, posting losses in 9 of 12 years from 2005-2016.
In these recent years, weakness did materialize however; it was not perfectly aligned with the window defined by this trade. In some years weakness arrived early and was fleeting while in other years it was later and lasted into the early part of August and beyond. In 2015 this trade returned and was nearly perfectly aligned with the seasonal trend. This year the setup is compelling as the market is struggling to breakout above resistance at recent all-time highs. Expectations for major reform by the new Republican administration are also in question. Congress is, and has been, bogged down in healthcare overhaul and little else has been done.
Looking at the chart above, you will see the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October (blue arrow). This trade targets the initial part of weakness (shaded yellow). Part of the reason is perhaps due to the fact that July starts the worst four months of the year for NASDAQ and also falls in the middle of the worst six months for DJIA and S&P 500. Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade, as active traders may have “bought the rumor” or bought ahead on anticipation of good earnings expectations and then turn around and “sell the news” once it hits the street.
DJIA closed at a new all-time high once again today. But, before we go celebrating a great deal, DJIA closed a mere 3.15 points above its previous all-time high close on June 19. In percentage terms it works out to a meager 0.015% gain in just over three weeks. S&P 500, NASDAQ, Russell 1000 and Russell 2000 did not participate in the new all-time high party today. If they did, or do soon, this would be encouraging.
Based upon July’s recent 21-year performance chart, there are potentially six more trading days for the other major indices to catch up to DJIA. However, the typical mid-July rally has begun a few days earlier than usual, there may only be until the end of this week for the major indices to confirm a possible DJIA break out. NASDAQ’s midyear rally comes to an end on the ninth trading day which is July 14 so tech could fizzle soon thereafter.
This morning Bloomberg made a big to do about bored traders checking out profiles on Tinder, cutting out early for kids’ sports games and office-planned golf retreats. As we reminded you back in May, just ahead of this usually low trading volume period for the market, welcome to the Wall Street Summer Doldrums.
Below we have u the one-year seasonal volume patterns since 1965 for the NYSE and 1978 for NASDAQ against the updated annual average daily volume moving average for 2017 so far. The typical summer lull is highlighted in yellow.
After a volume spike in mid-late June as the Comey testimony, the Tories loss of the majority in the UK Parliamentary vote and a selloff in FANG stocks perhaps fueled by selling from a Qatar sovereign fund in response to the showdown there, volume has begun to dry up for what looks like the typical Wall Street Summer Low Volume Doldrums.
A surge in volume this summer, especially accompanied by gains, would be an encouraging sign that the bull market will continue. However, should traders lose their conviction and participate in the annual summer exodus from The Street, a market pullback or correction could quickly unfold. A selloff on a volume as Congress stays in session through some or all of its usual August recess would be more concerning.
For now, play some defense and hold some cash and get out there and have some summer fun.
Since the start of the year we have been tracking various 1-Year seasonal patterns alongside 2017’s performance. As you likely know by now, 2017 is a post-election year, it is the seventh year of the decade, we have the first year of a newly elected Republican administration and 2017 also registered a positive January Trifecta reading (Santa Claus Rally, First Five Days and January Barometer were all positive). In the above two charts, the 1-Year seasonal pattern for all of these scenarios appears along 2017 performance through last Friday’s close for DJIA and S&P 500. A full-year comparison reveals a potentially broad range by yearend. “Positive January Trifecta” years display the greatest historical gains while “First Elected Republicans” actually racked up average losses by yearend.
In the next two charts, the beginning point has been shifted to July 1 and only the last six months of the year are displayed. Presented in this manner, the sizable mid-year performance discrepancies shrink noticeable. This is due to the fact that regardless of the pattern selected, DJIA and S&P 500 did not do very much during July and August. In September “First Elected Republicans” stumbled while 1987’s October crash tanked “Seventh Years of Decades”.
If all goes well, with the economy and in Washington, and DJIA & S&P 500 follow the best case “Positive January Trifecta” pattern, then gains of an additional 6% are possible. If Washington fumbles (healthcare, tax reform, budget and/or debt ceiling are a few major obstacles) then losses on the order of 5 to 6% at yearend are not out of the question.