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
Brexit concerns dissipated quickly and Q2 earnings were better than expected, sending DJIA up 8.3%, S&P 500 up 8.7% and NASDAQ up 11.0% from the post Brexit low to the July 22 close. This put DJIA up 3.6%, S&P up 3.6% and NASDAQ up 5.3% for the month of July so far, qualifying this as a Hot July Market. At its present trajectory, the market could finish July with a Top 10 performance when compared to all Julys since 1950.
Gains of this magnitude for July, however, have frequently been followed by a late-summer or autumn selloff and better buying opportunities than now. The table below of big July gains and subsequent declines since 1950 gives you a good look at the kind of buying opportunities that have occurred in the past following full-month July gains in excess of 3.5%.
There is a new Three Peaks and a Domed House Top Pattern (3PDH) developing. Last month I noted another potential 3PDH pattern developing, but with the market recently breaking out it this new analysis lines up quite well with the current Three Peaks lasting just 8 months from Peak 1 (point 3) in February/March 2015 to Peak 3 (point 7) in October/November 2015, falling right in the 8-10 time span of Lindsay’s Basic Model.
The Domed House top time frame in the Basic Model is 7 months and change from the end of the Separating Decline at point 14 to the top at point 23. From the Separating Decline low in February 2016 that would put the top some around or after September. But I have seen this phase of the pattern transpire in much shorter and longer time frames.
Whenever that top occurs, the pattern resolves at point 28, somewhere back around points 10 and 14 at a minimum. It can go substantially lower before a new high, which could culminate in a bear market. If the top occurs soon, I would expect another correction and not the 20%+ type of bear market, which from current levels is well below the February low. If the this 3PDH top does not occur until September or later, perhaps around the election, then this 3PDH is more likely to resolve in a bear.
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Looking at the average daily trading volume of SPDR S&P 500 (SPY) on Yahoo! Finance (the new layout and format is going to take time to get accustomed too), it is just under 100 million shares per day over the past three months. SPY volume recently spiked as high as 333 million shares on June 24, 2016, Brexit sell-off, to a recent low of just a little over 54 million this past Tuesday. If volatility remains subdued, average daily volume is likely to continue to trend lower as the calendar heads toward August.
We refer to the summer months as the doldrums due to the anemic volume and uninspired trading on Wall Street. The individual trader, if they are looking to sell a stock, is generally met with disinterest from The Street. It becomes difficult to sell a stock at a good price. That is also why many summer rallies tend to be short lived and are quickly followed by a pullback or correction.
Below we have plotted the one-year seasonal volume patterns since 1965 for the NYSE and 1978 for NASDAQ against the annual average daily volume moving average for 2016 so far. The typical summer lull is highlighted in yellow. Note the spike in volume that occurred in late June as a result of the Brexit vote sell-off. Prior to then volume had been slowly, but steadily declining since late April. As of last Friday, volume has already sunk to pre-Brexit spike levels.
An atypical surge in volume this summer, especially accompanied by outsized 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.
Even though today’s DJIA gain was a modest 25.96 points, it was enough to extend DJIA’s daily winning streak to eight consecutive days. The last such DJIA daily winning streak was in March 2013 when it advanced for 10 straight days. Prior to the current streak of eight, there have been just 47 DJIA daily winning streaks of eight or more days since 1950. The longest was 13 straight in January 1987. Of those past 47 streaks, 24 of them ended at eight days (51.06%), 12 streaks lasted until a ninth day (25.53%), 7 streaks went 10 days (14.89%), 2 streaks lasted 11 days (4.26%) and 1 each lasted 12 and 13 days (2.13%). The average loss on the day the streak ended was 0.5%.
In the above chart the 30 trading days before and the 60 trading days after all 47 previous DJIA winning streaks of eight or more days have been plotted. There are approximately 21 trading days in an average calendar month. Based upon the above chart, even after the current streak ends further gains are likely over the next 1-, 2- and 3-calendar month periods. If NASDAQ and Russell 2000 can join DJIA and S&P 500 in record territory, further gains would be more likely, absent confirmation, less likely.
Well sort of… Hearken back to July 2007 before the central banks took over markets. Current market action is somewhat reminiscent. Not identical mind you, but with some similarities. Number one there is a high level of sentimental euphoria. Back then it was free sub-prime mortgage money, now it is unwavering free central bank money. Investors Intelligence % Advisors Bullish was screaming high at over 50% (and would get higher before the fall) just as it is now. Weekly CBOE Equity Only Put/Call ratio was quite frothy at 0.53. Last week it was 0.56.
Secondly, the S&P 500 had just logged a new all-time high May 30, 2007 for the first time since the Dotcom bubble popped in 2000. We recently logged a new high for the first time since May 21, 2015 – not nearly as long, but still well over a year. In 2007 the bull market was raging for five years without a 20% correction. Today its seven years.
2006 suffered a decent June/July correction and then another in February/March 2007 before making new highs, Then a bigger correction in July/August 2007 before the final top in October 2007. This is akin to the August/September 2015 and January/February 2016 corrections and the new all-time high we have just logged in DJIA and S&P 500. (Not NASDAQ and Russell 2000 have not logged new highs…)
Ed Clissold, U.S. Market Strategist for Ned Davis Research Group, has informed us and the world on Twitter that “today’s new high on DJIA, rally from 2/11/16 meets NDR-criteria for cyclical bull market.” So we have that going for us, which is nice. But seriously, this bull is running on fumes. Big bank earnings are way down and the only thing propping their numbers up are massive layoffs (but there is low unemployment). The fundamentals just don’t add up – PE’s are rather lofty in the 20-25X range on the blue chips.
We are not throwing in the bear towel at all; it’s just going to take a little while longer for the marker to crack. We may get a little crack over the next few days, weeks and months, but this bull could hold on through the election and into early next year. We are staying mostly in cash, bonds and short equities.
After 417 calendar days, S&P 500 made a new all-time high this Monday and DJIA followed on Tuesday. Previous research into similar periods of time without a new all-time S&P 500 had shown a high probability for a 20% or worse bear market developing. That was not the case this time. However, looking at those previous 13 all-time high dry spells we see that S&P 500 did not always continue higher over the next 1-, 3-, 6-, 9- and 12-month time periods. Most recently was the S&P 500 new all-time high on May 30, 2007. S&P 500 did trade to an ultimate high on October 9, 2007, but that was also the end of the bull market.
The following table is an expansion of a table we have posted on a few occasions. Please click the link to view full size in a new window. To the right of the old table we have included S&P 500 returns over the next 1-, 3-, 6-, 9- and 12-months. Years shaded grey are when S&P 500 avoided a 20% bear during its all-time high hiatus. Because 1994 was less than 417 calendar days, the argument could be made that it should no longer appear in the table can be made. Absent 1994, average gains do shrink modestly. This table does suggest further gains are likely, but it does not guarantee them. Considering the magnitude of the declines that preceded, the bulk of the advance (off the Final Low) has already taken place.
Contrary to past election-year July’s, this year is well above average even with more than half a month’s trading remaining. As of today’s close, DJIA is up 3.2%, S&P 500 3.1%, NASDAQ 4.0% and Russell 2000 has gained 4.4% thus far. If we include the gains from the last three days of June, the results more than double across the board; 8% for DJIA, 8.2% S&P 500, 9.6% NASDAQ and 10.4% for the Russell 2000. DJIA and S&P 500 are trading at new all-time highs while NASDAQ and Russell 2000 are not. New all-time highs by NASDAQ and Russell 2000 would provide further evidence that this rally is for real and would likely put DJIA 18000 and S&P 500 firmly in the rearview mirror.
The explosive move higher off of June’s Brexit low on June 27 is clear in the above charts. All four indices plunged below their respective 50- and 200-day moving averages when the vote tally was announced, but quickly rebounded as the reality of the Brexit process became clearer and central banks around the globe became even more dovish. The surge higher has pushed all but NASDAQ through projected monthly resistance (red dashed lines) and sent Stochastic, relative strength and MACD indicators towards overbought.
Since 1982, the Friday of options expiration week has a bearish bias for DJIA declining 18 times in 34 years. On Friday the average loss is a significant 0.30% for DJIA and 0.32% for S&P 500. NASDAQ’s record is even weaker, down 20 of 34 years with an average loss of 0.47%. The week after options expiration also leans bearish for S&P 500 and NASDAQ over the longer-term. In recent years the track record had been improving until last year’s across the board, greater than 2% loss.
Most years, especially when the market sells off during the first half or is flat, prospects for the perennial summer rally become the buzz on the street. Parameters for this “rally” were defined by the late Ralph Rotnem as the lowest close in the Dow Jones Industrials in May or June to the highest close in July, August, or September. Such a big deal is made of the “summer rally” that one might get the impression the market puts on its best performance in the summertime. Nothing could be further from the truth! Not only does the market “rally” in every season of the year, but it does so with more gusto in the winter, spring, and fall than in the summer. From its June 27, closing low of 17140.24, DJIA has rallied 7% as of today’s close which was also a new all-time DJIA closing high.
Winters in 53 years averaged a 12.7% gain as measured from the low in November or December to the first quarter closing high. Spring rose 11.4% followed by fall with 11.0%. Last and least was the average 9.0% “summer rally.” Even 2009’s impressive 19.7% “summer rally” was outmatched by spring. So beware the summer rally hype as it is usually the smallest rally of the year and can fade just as quickly as it began. S&P 500 and DJIA have managed to break out to new highs, but NASDAQ and Russell 2000 continue to lag. Without tech and small-cap support, large-cap stocks could soon run out of momentum.
On the heels of last
Friday’s blowout jobs report and favorable election results in Japan, S&P
500 rallied to close the day at 2137.16. If you have not heard already (sure
you have), this is a new all-time high. S&P 500 last closed at an all-time
high 417 calendar days ago on May 21, 2015. By closing at an all-time high
today, S&P 500 has successfully avoided
a 20% bear market commonly associated with long periods of time between new
all-time highs. Since 1929, this will be just the fourth time (shaded in
light grey below) in fourteen that a 20% bear has been averted.
However, during the
dry spell since last May, DJIA satisfied the Ned Davis
Research definition of a bear market requiring a peak to trough decline of 13% or
more after 145 calendar days. S&P 500 suffered a peak to trough drawdown of
14.2% from its previous all-time high through its low on February 11, 2016.
An S&P 500 new all-time high is noteworthy, but without confirmation from other major indices just how meaningful is this lone new all-time high? DJIA needs to climb an additional 0.46% to reach its all-time closing high of 18312.39 set on May 19, 2015. NASDAQ needs an additional 4.61% to reach its July 20, 2015 high water mark of 5218.86 while Russell 2000 has 8.89% further to go to reach its June 23, 2015 high of 1295.80.