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
In the Stock Trader’s Almanac we show how the days after Memorial Day have been rather bullish. In the table below I went back to 1971, the year the Uniform Monday Holiday Act took effect, moving Memorial Day and most other federal holidays to Monday.
Improved performance since 1986 is also highlighted. In what used to be the “May/June Disaster area” the S&P was down 15 of 20 Mays from 1965 to 1984. Then May was the best month from 1985 to 1997. Some of this bullishness after Memorial Day can be attributed to the strength of the first two days of June (like this year). In recent years, the Friday before Memorial has become getaway day on The Street and volume is often diminished and trading uninspired. NASDAQ exhibits a similar pattern to S&P 500 over the same time periods.
Last Wednesday, May 17, the market was walloped with the worst day of the year thus far. Prior to that day, VIX (CBOE Volatility Index) was at historic lows trading at less than 10 for four straight days and actually closed below 10 on May 8 & 9. VIX then slowly inched higher and closed at 10.65 on May 16. Today, VIX closed at 10.68. VIX and the broader market are essentially right back where they were one week ago, but it took four trading days to (nearly) recover that single day’s loss.
VIX’s 46.4% jump on May 17 could be the first sign that the seasonal low in volatility has already been reached this year. In the following chart, VIX weekly bars appear on top with its 1-year seasonal pattern appearing on the bottom. In a typical year, VIX typically finds a bottom sometime from mid-April to mid-July before briskly rebounding higher through frequently turbulent August and September (since 1950, September is the worst month for S&P 500 and August is second worst based upon average percent change) to a peak in early October. From then until the following April, during the “Best Six Months,” VIX is generally in decline as the market is climbing higher. If VIX has reached its seasonal low for 2017, then more days like last Wednesday could be on their way.
The market has gone virtually nowhere since March 1st and now we have matching sideways action from some solid old school technical indicators. As move into the latter part of the notorious “Sell in May” period we ask ourselves, “Is this the topping process?”
We are not expecting much more than a typical 5-10% summer/fall correction. But with all the turmoil surrounding Washington and President Trump, markets could get jittery real fast should economic data come in weak or for Wall Street to deliver some disappointments.
At a bare minimum the usual trading volume slowdown and seasonal weak spot, especially August-October, is likely to give the market pause. Add in underlying underwhelming technical readings from the A/D Lines (Advance-Decline) and COT Report (Commitment of Traders) and a potential topping process begins to emerge.
The A/D Line, which is a daily cumulative sum of the number of advancing stocks minus declining stocks, has been also moving sideways since March (see Chart above). But most concerning is the downtrend since the end of April in the NASDAQ and Russell 2000 A/D Lines, especially as the NASDAQ Composite Index has been on the rise. This sort of divergence is a bearish signal.
Then there is the Commitment of Traders (COT) Report on the S&P E-Mini Futures (ES) in the chart below. The COT Report shows the net number of Small Speculators, Large Speculators and Commercial hedgers long or short. The commercials are usually on the right side of the market as they are basically the “house.” Large specs (Fund Managers, Brokerage firms and Wire Houses) also tend to be on the correct side of the trend but less so than small specs. Small specs are notoriously wrong.
Currently all three are rather flat. A similar reading last January preceded a rally whereas a similar reading early last October was followed be a little selloff. Its May, markets are flat, reading are tepid. Caution is in order.
Over the last 21
years, DJIA has advanced just 47.6% of the time during the week before Memorial
Day weekend. Of the five major indices we frequently cite, it is the weakest
averaging a 0.29% loss. S&P 500, NASDAQ and Russell 1000 are better, but
average performance over the last 21 years is still just a fractional gain. Russell
2000 has the best track record, up 71.4% of the time with an average gain of
0.42%. Since 2003, Russell 2000 has been even stronger, up 12 of 14 weeks with
an average 1.17% gain.
In just over a week it will be Memorial Day weekend. In recent years, this weekend has become the unofficial start of summer. Not long afterwards trading activity will likely begin to slowly decline (barring any external event triggers). We refer to this summertime slowdown in trading 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 2017 so far. The typical summer lull is highlighted in yellow. 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.
From a new all-time closing high on Monday to the worst day of the year so far on Wednesday, S&P 500 appears to have decided to take the low road. If today’s selloff was solely the result of political jitters triggered by a string of blunders by the new administration, then the market could easily bounce right back. Alternately, the market could be reacting to some “Sell in May” jitters, political instability, monetary policy tightening and some buying exhaustion. In this case then a 10% correction is not out of the question.
On average, since 1949, S&P 500 has experienced a 10% or greater pullback about once every 1.4 years. S&P 500’s last correction ended on February 11, 2016 after it slipped 14.2% in 266 calendar days. S&P 500 is not overdue for a correction, but it certainly is near historical average duration between them.
As of yesterday’s close DJIA was up 6.2% year-to-date. S&P 500 was up 7.3% and NASDAQ was up an impressive 14.2%. S&P 500 and NASDAQ are well above historical average performance compared to past post-election years. DJIA is also above average, but by a lesser degree. The magnitude of outperformance can be seen in the following charts.
Although the major indices have clearly diverged from historical post-election year tendencies up until this point, there is still a possibility that they could revert to the mean before long. All three of the above charts have three distinct patterns that reasonably tracked one another until sometime in the second quarter of the year. S&P 500’s patterns converged in mid-April, DJIA’s patterns converged in April too and move in relative unison until mid-May. NASDAQ’s historical patterns also converged in mid-April and remain intertwined until mid-June.
This would seem to indicate that the market could be at a major inflection point. At this point in the past, all post-election years, on average, tended to see the market move sideways. Newly elected Democrats historically enjoyed continued market gains while newly elected Republican presidents were not as fortunate as early gains where surrendered.
At this juncture the market could go either way. DJIA and Russell 2000 could catch up to S&P 500 and NASDAQ and trade at new all-time highs. This would confirm the upside breakout is for real and the rally still has some legs. In this situation our Seasonal MACD Sell signal would most likely be delayed further. If the market should decide to go the other way and DJIA and Russell 2000 pull S&P 500 and NASDAQ back down, then our Seasonal MACD Sell signal would arrive much sooner. It has also been 460 calendar days since S&P 500 had a 10% or greater correction which is close to the average duration between corrections since 1949 of 514 calendar days.
When I checked at The MoneyShow Las Vegas this morning one of the first things I did was stop in at the The Cannabis Investing Event to see what all the buzz was about. I have a full schedule of my own over the next few days of the show, but I like to do a little reconnaissance to see if I can unearth and attractive opportunities.
There were other interesting “pre-show” tracks on options, ETFs and stock picking. As I made the rounds and ventured into the cannabis track room I felt today was good moment to remind folks of our pick nearly two years ago of the most solid cannabis stock play out there: Scotts Miracle-Gro (SMG).
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.
Here at the event there are a host of cannabis stocks that I have not analyzed yet. While some business models sound viable, I am dubious any will pass muster, but here is the list of cannabis stocks here at MoneyShow Las Vegas that are public. All are thinly traded, early stage and have little revenue or earnings if any at all. But here you go if you want to kick the tires. I am by no means suggesting anyone buy any of these stocks. Just FYI.
Aurora Cannabis Inc.
Canabo Medical Inc. (CMM.V)
Lexaria Bioscience Corp. (LXRP)
THC Therapeutics, Inc. (THCT)
Vitality Biopharma, Inc. (VBIO)
However, SMG is real company with real liquidity, revenue, earnings and growth. When we first brought SMG to our subscribers attention in October 2015 the stock was trading around 65.48. Our original buy limit below the market was not initially reached, but eventually in December 2015 it was added to our portfolio at our higher buy limit of 66.75. SMG recently traded over 98, but has been retreating of late and is currently setting up for another buy opportunity. But we remain patient. SMG is in our Almanac Investor Newsletter Portfolio on HOLD. We may buy more maybe at the seasonal summer low. Stay cool…
Trading around May option expiration is mostly a mixed bag. Only the first day of the week has a solidly bullish bias over the past 35 years. Trading the rest of the week into Friday, and the following week has historically been choppy. DJIA has been down nineteen of the last thirty-five May expiration days with an average loss of 0.15%. The full-week has a bearish bias for DJIA and S&P 500 with records of 18 declines and 17 advances over the past 35 years. More recently, DJIA and S&P 500 have suffered declines in six of the past eight expiration weeks.
Over the last twenty-two years on the Friday before Mother’s Day and the Monday after the Dow Jones Industrials have gained ground fifteen times. Average gain on Friday has been 0.20% and a respectable 0.49% on Monday. However, in four of the last five years, the Monday following Mother’s Day has been down.