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Almanac Trader

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...

jeffhirsch 5:56 PM Jun 27, 2016 at 5:56 PM

58.8% chance major losses ended today - S&P 500 daily losing streaks over 1.8%

Fallout from last week’s Brexit vote continued today with S&P 500 declining another 1.81% today after last Friday’s 3.59% drop. Looking back to 1930, S&P 500 had previously experienced back-to-back (or consecutive) declines in excess of 1.8% 102 times before now. Of these 102 previous times, 88 times the drop stopped on the second day and of those 88 past occurrences, S&P 500 was up 60 times on the third day (60/102*100 = 58.8%). Of the 102 past streaks of 1.8% or greater daily losses, the streak continued into a third or four day just 14 times (13.7%).

In the following chart the 30 trading days before and 60 trading days after the losing streak ended are plotted. All streaks since 1930, since 1950 and since 1980 are presented. It is interesting to note that 59 of 102 streaks occurred prior to 1950 and there have only been 33 since 1980. S&P 500’s recovery has accelerated greatly in recent years.

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jeffhirsch 5:25 PM Jun 24, 2016 at 5:25 PM

Lindsay’s Long Cycle May Provide Solace during Brexit Volatility

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The Brexit vote to leave the EU roiled markets worldwide today, catching most traders, investors, economists, strategists and money managers off guard. The ramifications of this British vote to leave the European Union will take years to iron out. It is likely to create trouble for the markets in the short term, but in the long run it may turn out to be beneficial.

All that has really happened so far is that the British population voted by a relatively small margin of less than 4% of the vote (about 17 million to 16 million) to leave the EU and PM David Cameron has kept his word and is resigning. It still has to go through Parliament and the EU. There is a two-year transition period and there are exit rules the U.K. must follow. It’s a first time event, so no one knows what to expect. It could even be reversed or changed. Even if the EU ends up breaking up (already talk of other exit votes today); we expect modern civilization will endure.

Thankfully for Almanac Investors and Almanac Traders we came into today in a rather defensive position. Our DJIA and S&P 500 Best Six Months Seasonal MACD Sell Signal were issued on April 5 and our NASDAQ Best 8 Months Seasonal MACD Sell Signal was issued on June 13. Over the past two months we have sold and trimmed many long positons, executed several short trades, picked up some bonds and hold a large cash position. Unfortunately our long Gold Stock Sector trade never reached our buy limit.

In times of trouble like this it is prudent to step back and look at the bigger picture. Our good friend Ed Carlson at Seattle Technical Advisors, who is the resident authority in our book on George Lindsay’s cycles and patterns, chimed in on our Three Peaks and a Domed House (3PDH) post from earlier this week. Ed tweeted that the time between the current peaks 1 and 3 were a little long and if the 3PDH is indeed in play it points to a high and/or end of Lindsay’s Long Cycle in 2018.

So what does this mean? Well, Lindsay’s work while incredibly predictive and amazingly accurate it is a little esoteric. Lindsay’s long cycle is akin to secular bull and bear markets that last about 20 years and this one lines up well with our long term Super Boom forecast. Within the long cycle the basic advances last about 2-2.25 years and the basic declines last about 13-14 months on average, some shorter, some longer.

In the chart below I have plotted out the current long cycle points for the DJIA as I interpret them. I relied heavily on Ed Carlson’s two most recent “Lindsay Reports,” but wanted to draw them out fresh for you to see. Like the 3PDH and other counts of this nature it is a work in progress and evolves with market action.

These patterns become clearer and more defined as they progress. It remains to be seen if the highs of 2015 were point H or J or if the next high will be point J or L. The February low could have been point I and the next low could be point I or K. A low 13-14 months after the May 2015 high falls right into the current period of mid-June to mid-July.

If Brexit and all the other risks it has revealed drive the market to a point that takes out the August or February lows, 3PDH is in play and I would expect a top as early as early 2017 and a final low in mid-late-2018. The high can be point H or J, so the next high after the next low does not have to be higher than the 2015 highs. Bottom line, an interim low is on the near term horizon, but it does not appear to be hear yet. So be patient and wait for the dust to settle on this Brexit decision. Stay defensive and wait for a fatter pitch.

Click here for full-size image in a new window…

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jeffhirsch 5:09 PM Jun 23, 2016 at 5:09 PM

Brexit shock fades–focus on fundamentals and Fed

Brexit day finally arrived. Unfortunately, we will not know the official results until much later tonight at the earliest and possibly not until the early morning hours of tomorrow, if the vote is close. Nonetheless, this fact did not stop European markets from rallying or our market from following suit. The fact that the vote is not legally binding and the reality that any Brexit would likely be a multi-year process may be setting in. Or perhaps the potential risks and the market’s initial reaction were overblown.

The point being, we are not likely going to wake up one day to learn that the United Kingdom has completely bailed on the European Union. Today’s vote may begin a process in which the U.K. begins to exit. It could be partially or fully, only time would tell exactly. Like other past political and economic events, such as the collapse of the Soviet Union, there will be traders and investors that sell first and ask questions later. Or in the case of sovereign bonds with negative yields, buy first. Regardless of the event or shock, the market has largely continued on once the shock or event passed. When today’s vote finally comes to a close, the market is likely to shift its focus back to fundamentals, technicals and of course the Fed and interest rates–at least until the next shock happens.

Last week, the Fed threw a cold bucket of water on its economic growth outlook which is a fundamental negative, but as a result also acknowledged that interest rates are likely to remain low, longer. This is a potential positive that could offset the drag of tepid growth. Today’s initial weekly jobless claims were also better than expected suggesting the U.S. labor market is at a minimum resilient. The market is bouncing back in the short-term. In the longer-term, the Presidential election is heating up and solid, sustainable growth remains elusive.

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jeffhirsch 6:26 PM Jun 22, 2016 at 6:26 PM

Ominous Chart Pattern Potential Set Up

As we await the crucial Brexit vote in the UK tomorrow I wanted to take a step back and look at the currently developing potential for a Three Peaks and a Domed House Top Pattern (3PDH). It is far from certain that this current patter will even evolve into a 3PDH pattern.

Until the market suffers a separating decline that takes out the August or February lows this pattern will not be in play. But it is something to be prepared for as the current 2016 high or a slightly higher high could materialize into the third peak of this patter. The subsequent separating decline could transpire over the coming late-summer/early-fall weak season.

Then a potential end-of-election year rally could top out toward the end of 2016 or early 2017 in a Domed House Top and bring the market back down to the February 2016 lows at a minimum.

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jeffhirsch 5:55 PM Jun 21, 2016 at 5:55 PM

Too soon to call worst over since last DJIA Down Friday-Down Monday

It has been one week and a day since we issued our MACD Seasonal Sell Signal for NASDAQ. Since then NASDAQ traded lower, higher and today it is essentially where it was on Monday June 13. In addition to NASDAQ’s Sell Signal, DJIA also triggered its fourth Down Friday/Down Monday (DF/DM) of the year on the thirteenth. Previous research and analysis has shown that from the high within seven calendar days of the DF/DM to the subsequent low over the next 90 calendar days, DJIA has declined an average 7.5% going back to 2000. 

In the following chart, the 30 trading days before and 60 trading days after a DJIA DF/DM have been plotted alongside the 5 times there was no low after the subsequent high and the 27 times there was no lower low after Monday. The 30 trading days before and the five trading days after the most recent DF/DM are also displayed. This is the same chart that appeared in the May 16 blog post where it was noted, “If DJIA recovers the losses from the DF/DM within about 4-7 trading days, then the DF/DM quite likely was an interim bottom. However, if DJIA is at about the same level or lower then additional losses are more likely.” 

As of today, DJIA is in the window of 4-7 trading days since the completion of the DF/DM. DJIA is also only slightly higher than its June 13 close of 17732.48. This alone would seem to suggest that last week’s low could have been an interim bottom. However, we also noted in that May 16 post that technical and sentiment indicators should also be checked for confirmation. 

In the above chart recent DJIA strength can be seen, but it also appears to be waning already. MACD is still negative, but Stochastic and relative strength indicators appear to have turned the corner and are gradually improving. Some additional strength would be needed to confirm that the worst is over following the most recent DF/DM. This may not occur until after the results of the Brexit vote on June 23. Considering recent strength, it would not be surprising if selling occurs regardless of the vote’s outcome. Traders have been buying the rumor and could quickly sell the fact.

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jeffhirsch 5:25 PM Jun 20, 2016 at 5:25 PM

June performance missing this election year

Historically, June is the best month of the election year for S&P 500 with a 1.4% average gain. In sixteen election years since 1952 S&P 500 has advanced thirteen times and declined just three. So far this year, the market has been tracing out the more lackluster typical June pattern in which the S&P 500 averages a 0.03% loss. Even after today’s advance, S&P 500 is still down 0.65% so far this June. 

Compared to the typical June pattern (next chart) and considering this week’s historically bearish bias, the S&P 500 could be in store for further declines before the month ends. 

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jeffhirsch 5:01 PM Jun 17, 2016 at 5:01 PM

80% Chance Of Down Week Next Week Following Down Triple Witching Week

Since 1991 DJIA has been down 10 times for the whole week of June Triple Witching. Weeks after TWW have been down 22 of 25 of those years or 88% of the time. Following the 10 down TWW DJIA has been down 8 of those 10 years.

S&P is down 18 of the last 25 June TWWs and down 12 of 13 since 2003 – average loss -1.08% for the week. Also, when TWW is down S&P is down the following week 7 of 11 since 1991.

NASDAQ is a bit firmer during the week after TWW, down 13 of 25. But of the 14 down TWW on 6 following weeks were down.

Fed Disconnect and the Brexit vote next week set the week after Triple Witching up terribly.

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jeffhirsch 5:42 PM Jun 16, 2016 at 5:42 PM

Growth & inflation expectations decline–is the market next?

June’s Triple Witching option expiration week (or Quadruple if you prefer) has a history of choppy performance. The week has historically been rather volatile with frequent moves in excess of one-percent in both directions. This volatility has been evident this week. Add in a Fed meeting and the upcoming Brexit vote and it becomes clear why the market appears to be on edge.

Yesterday’s Fed announcement drew attention not for its lack of action, but because of the reduced growth forecasts that accompanied it and an apparent disconnect over inflation expectations. Reduced growth is not that large of a surprise especially considering the Fed’s recent track record of being overly optimistic. What is somewhat concerning is the Fed maybe missing the big picture when looking at inflation. It would not be the first time for this either. Longer-term expectations do not appear that stable.

In the short-term, energy and housing have been giving CPI and PCE (Fed’s preferred metric) a boost, but longer-term expectations are falling. Since peaking in April 2011, the University of Michigan’s Inflation Expectations survey has been in a steady down trend. It was at 4.6% then and the most recent reading was 2.4%. But, this is just a survey and can be dismissed. However, what cannot be ignored are the negative 10-year bond yields in Japan, Switzerland and now Germany. There has also been a meaningful drop in U.S. yields. Undoubtedly, some of this distortion is the result of central bank policy and a flight to safety, but it also seems to be a clear signal that longer-term inflation expectations are also moving lower.

There is plenty of research that concludes the lack of inflation, or worse deflation, is simply not good. One only needs to look up the Great Depression for further detail. The real issue is the nearly obvious fact that low interest rates and quantitative easing did not/does not work all that well. It may have staved off the Financial Crisis and kept economies from falling off a cliff, but it has failed to spark sustainable growth. Growth has stalled, corporate earnings are flat-lining and real wages are shrinking which is not the best recipe for continued stock market gains.

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jeffhirsch 5:08 PM Jun 15, 2016 at 5:08 PM

Market Volatility and the Election

I am thrilled to be appearing on the same platform as my good friend and fellow trend-following though leader Sam Stovall. Sam and I will be participating at the Options Industry Council’s next online summit (OIC) on Tuesday, June 21.

Dubbed Market Volatility and the Election, it will feature presentations from Sam Stovall of S&P Capital IQ as well as me, Jeff Hirsch of Stock Trader’s Almanac. In addition, instructors from OIC will lead options-strategy sessions to help you learn how to manage market volatility with options – especially in a tumultuous election year.

Register today at: http://www.optionseducation.org/content/oic/en/seminars_events/all_seminars/webinar-summit.html.

Hope to see you there and then. There will be time for some Q/A after each session.

Session 1: Election Year Outlook

Presented by Sam Stovall

The S&P 500 bull market just celebrated its seventh birthday. What does history say could happen to volatility as we proceed into the eighth year? In addition, election years always inject a bit of uncertainty into the stock market, especially when the incumbent is not up for reelection. And don’t forget Congress’ part in this perplexing process. Sam Stovall, U.S. Equity Strategist of S&P Global Market Intelligence and author of The Seven Rules of Wall Street, will share with us how markets have performed during presidential election years, and whether history will repeat, rhyme, or like, singers of the national anthem, forget the words.

Session 2: Volatility: The Only Constant

Presented by OIC

Volatility is a constant for an options portfolio – especially in an election year. Joe Burgoyne of the Options Industry Council will discuss the different types of volatilities and analyze what drives changes in option premiums. We’ll look at risks associated with volatility and will also cover theoretical value, skew, put/call parity and leave time for your questions.

Session 3: Election Cycle Charts Bumpy Course Through 2018

Presented by Jeff Hirsch

While the current four-year presidential election cycle sets up poorly for 2016 through 2018, Jeff Hirsch of Stock Trader’s Almanac will show you how to navigate the market’s dangerous currents. While this isn’t a doom-and-gloom forecast, there may not be much upside for the next few years in his opinion. In fact, Jeff expects a bear market that could see 20-30 percent drops into 2017 or 2018 – and this cyclical, garden-variety bear market could end these secular bear markets that began in early 2000. But after the next bear market ends, his 2010 Super Boom forecast is on track and we could see the Dow nearing 39,000 by 2025.

Session 4: Talking Market Volatility with the Pros

Panel discussion moderated by OIC

Is implied volatility working for or against you? Guided by a panel of pros, you’ll learn the importance of implied volatility for your option positions. You’ll hear how to track premiums when they’re expanding or contracting and, most importantly, how those premiums affect your bottom line. The panelists will talk about different options strategies and products and discuss where “implieds” are headed as we approach the November elections.

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jeffhirsch 5:22 PM Jun 14, 2016 at 5:22 PM

61.2% Chance of S&P 500 Gain on Fed Announcement Day

The Fed’s two-day meeting concludes tomorrow and it is widely expected to do nothing. May’s jobs report was significantly weaker than expected and was accompanied by downward revisions to March and April numbers. When that data was released, the U.S. dollar tumbled and the CME Group’s FedWatch Tool, that calculates the probability of rate increases at upcoming Fed meetings, also tumbled. Today, the tool indicates just a 1.9% chance of a rate hike tomorrow. So there will most likely be no increase tomorrow.

Prior to today’s FOMC meeting, there have been 67 scheduled meetings since January 2008. Of those previous 67 meetings, S&P 500 finished the announcement day down 26 times and up 41 (61.2% up). The worst S&P 500 decline of 2.94% was on September 21, 2011 and the best day was a 5.14% gain on December 16, 2008. S&P 500 average gain on all 67 days is a respectable 0.5%. Considering the recent history of FOMC meeting announcement days, there is a clear bullish bias.

In the above chart S&P 500 performance 30 trading days before and 30 trading days after the last 67 FOMC meetings has been plotted alongside the last 30 trading days performance. The baseline is all 67 meetings with all positive announcement days and all negative announcement days grouped separately for comparison. S&P 500 has followed the path of “Up” announcement days prior to the last few trading sessions which suggests further weakness could follow tomorrow’s announcement.

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