I am the editor of the Stock Trader's Almanac & Almanac Investor Newsletter and Chief Market Strategist at Probabilities Fund Management, LLC. I use historical patterns and market seasonality in conjunction with fundamental and technical analysis...+ FOLLOW THIS TUMBLR
Gold prices tend to move up prior to the holidays, and the trend worked especially well from 2000 to 2011. Seasonally speaking, it is best for traders to go long on or about the thirteenth trading day of November and hold for about ten trading days. Over the last 17 years, this trade has worked 13 times for a success rate of 76.5%. The longer-term history of this trade is not as good, nonetheless profitable. Gold has had a respectable year, up 10.8% as of today’s close.
After briefly breaking above $1350 in early September, gold quickly retreated back under $1300. It appears to have found support just above its 200-day moving average. But, it has also been struggling to reclaim $1300 and hold above. Stochastic, relative strength and MACD indicators are mixed. Stochastic indicator is negative, relative strength was trending higher until today while MACD is still holding onto a positive signal. Seasonal strength could give gold the boost it needs to break out above $1300.
There has been a good deal of rhetoric lately as to how small caps have underperformed this year. On closer examination however small caps have actually performed right in line with historical seasonal patterns and are poised for their usual seasonal breakout which tends to begin in late-November, but does not fully get underway until mid-December.
Yesterday’s outperformance by the Russell 2000’s up 1.6% on the day compared to 1.3% for NASDAQ and 0.8% for DJIA and S&P 500 indicated to us that small caps are on the brink of breaking out into their typical yearend rally, outperforming larges caps from about mid-December to early-March.
The chart below taken from page 110 of the Stock Trader’s Almanac 2017 shows the one-year seasonal pattern of the ratio of the Russell 2000 to the Russell 1000 from July through June to highlight the perennial low point of this relationship November and the winter rally mentioned above.
We have added the performance of this ratio in 2017 so far through November 13 and updated the historical average pattern through June 30, 2017. While this year’s pattern has more amplitude, the trend is quite similar to the historical pattern. Small caps underperformed from June through late-August, then had the usual Labor Day rally, albeit greater and a bit longer, followed by a customarily weak October. It now appears that small caps are setting up well for their season of outperformance.
For more on this historical seasonal pattern see pages 106 & 110 of the Stock Trader’s Almanac 2017 or pages 108 & 110 in the 2018 edition. The 2018 edition is now available for free with a subscription to our newsletter.
Trading around Thanksgiving has a bullish tendency perhaps buoyed by the “holiday spirit.” First published in the 1987 Stock Trader’s Almanac, the Wednesday before and the Friday after Thanksgiving combined were up 34 times in 35 years. The only S&P 500 decline was in 1964.
Subsequently, this trend changed. In the 30 years since 1987, there have been 8 declines and 22 advances. The best short-term trade appears to be getting long into weakness on Monday or Tuesday of Thanksgiving week and selling into any subsequent rally by the end of Thanksgiving week, but remain nimble as events like Greece’s debt crisis in 2011 can cancel Thanksgiving on Wall Street.
Also of note is the change in the yearend rally. Prior to 1987, from the close of trading on the Friday after Thanksgiving to yearend, the S&P 500 rallied only 20 times in 35 years. As Thanksgiving bullishness lost steam in 1987, the rally afterwards occurred more frequently. Since 1987, S&P 500 has logged gains in 22 of 30 years from the close on Friday after Thanksgiving to yearend.
November is the first
month of the “Best Six/Eight Months” and it is also the first month of the
Three-Month” span, but this November has gotten off to a below average
start and small-caps (based upon the Russell 2000) are performing miserably. At
today’s close, DJIA, S&P 500, NASDAQ and Russell 1000 are fractionally
positive for November. This compares poorly with historical average gains over
the past 21 years at this point in November ranging from 0.73% for S&P 500
and Russell 1000 to a 1.07% advance by NASDAQ. Russell 2000, off 2.10% lags
well behind its historical performance of 0.77%.
Tech and large-cap
stocks broadly shrugged off weakness by small-caps that began early in October,
but the laggard performance has grown notable this month. Historically, market
rallies of meaningful magnitude and duration are supported by broad
participation. Absent this solid foundation, further upside can become
constrained. It is also concerning to see small-caps retreating when major tax
reform which is supposed to be beneficial to them is widely anticipated. Perhaps
major tax reform is not a “done-deal.”
In addition to this
week being options
expiration week, this week is also the week before Thanksgiving week. This
overlap occurs in most years, but not all. November 2013 would be the most
recent example when they did not overlap. Nonetheless, the overall bullish bias
that options expiration week exhibits also exists during the week before Thanksgiving
week. Over the last 21 years, DJIA and S&P 500 have both advanced more than
70% of the time during the this week. DJIA has gained an average of 0.65% and
S&P 500 0.32%. NASDAQ and Russell 2000 are slightly weaker, up just 61.9%
of the time with average gains of 0.56% and 0.15% respectively. Steep losses
occurred in 2008 during financial crisis and 2011 also hosted sizable losses.
DJIA has been up 9 of the last 13 years on Monday of expiration week and Friday is up 12 of the last 15 years with an average gain of 0.62%. For you fact-checkers our there it is not a mistake that November Op-Ex day has the same point change and percent change in 2014 and 2015. I triple checked, its right. If you go out 2 more decimal places in the percentage calculation it’s different, but that is getting way too wonky for a Friday post.
S&P 500, NASDAQ and Russell 2000 have not been as bullish as DJIA around or on November option expiration. S&P 500 has advanced only 16 times during options expiration week while NASDAQ and Russell 2000 have climbed only 14 and 13 times respectively over the past 23 years. All four indices have posted average losses on Monday and aside from DJIA and S&P 500 have been essentially mixed on options expiration day. Friday’s solid average gains across the board are largely due to a sizable gain in 2008. Any weakness next week could be a good entry point for new longs ahead of the usually bullish Thanksgiving holiday. Note solid strength during the week after options expiration since 2002. The worst blemish on the recent history is 2011.
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.
6 of Last 8 Concurrent DJIA & S&P 500 Monthly Winning Streaks followed by Correction or Bear within a Year
DJIA and S&P 500 are currently in a 7-consecutive-month winning streak. The streak began in April and at October’s close DJIA had gained 13.13%. S&P 500 had climbed 9.0%. Streaks of 7 months or more are rather infrequent. DJIA has had 15 such streaks lasting 7 or more months since 1901, S&P 500 has accomplished the feat 17 previous times since 1930.
Concurrent DJIA and S&P 500 streaks have occurred just 9 times including the current streak. The last concurrent streak began in July 2006 and lasted until January 2007. DJIA and S&P 500 have advanced greater than 30% on average during previous concurrent streaks. Six of eight past concurrent streaks lasted 8 months or longer. The longest was a full year from April 1935 to March 1936. In the March 1958 and October 1960 streaks (shaded grey in tables below) DJIA went one month longer than S&P 500.
When past streaks ended, the down month averaged a loss of 3.02% for DJIA and 2.56% for S&P 500. Both were generally higher 3- and 6-months later, but performance at the 1-year after point was lackluster with DJIA climbing just 0.49% and S&P 500 losing 0.50%. Three bear markets (greater than a 20%) began within one year after streaks ended (end date bold); 3/10/1937 to 3/31/1938 DJIA –49.1%, 12/13/1961 to 6/26/1962 DJIA –27.1% and 10/9/2007 to 3/9/2009 DJIA –53.8%. Corrections took place twice (end date bold & italic); 11/29/1983 to 7/24/1984 DJIA –15.6% and 1/5/1960 to 10/25/1960 DJIA –17.4%.
The current streak has not ended yet, but it will. Historically, the odds would suggest a correction or bear market could begin within one year of the streaks end. If November or December turns out to be the month that ends the current streak, then mid-term year 2018 could be the host of the next correction or bear market.
In a few days, on November 9, the Trump rally will mark its 1-year anniversary. As of last Friday’s close, S&P 500 had gained 19.63% from the close of trading on the day after the 2016 Presidential election. This is the third best showing by S&P 500 since 1950 and newly-elected, first-term presidents. President Kennedy takes top honors with a 27.86% gain and President G.H.W. Bush holds the second spot at 23.14%.
President Bush’s rally made it to the 18-month marker only to fade shortly thereafter when Iraq invaded Kuwait in early August of 1990. Kennedy’s rally ended with a bear market that began in December 1961 and ultimately chopped 27.1% off the S&P 500 by the time it ended in June 1962.
Expectations for October’s non-farm payroll report, scheduled to be released tomorrow morning, are quite lofty at 325,000 net new jobs. Yesterday’s ADP Employment report estimated 235,000 new private sector jobs which was better than expected and bodes well for tomorrow’s report. Over the past 16 years, the market has responded favorably to October’s report released in November. DJIA, S&P 500, Russell 1000 and Russell 2000 have all advanced more than 60% of the time with average performance ranging from 0.31% to 0.41%.