I am the editor of the Stock Trader's Almanac & Almanac Investor Newsletter. I use historical patterns and market seasonality in conjunction with fundamental and technical analysis to reduce risk and increase returns.+ FOLLOW THIS TUMBLR
It has been a long 15 years since NASDAQ last
closed at an all-time high. At its present level NASDAQ needs approximately another
1.4% to reach its nominal all-time closing high from March 10, 2000 of 5048.62.
However, when adjusted for inflation (chart below) NASDAQ needs to climb nearly
40% as its inflation adjusted high is nearly 7000. Nearly fifteen years of
inflation has eroded the dollar’s purchasing power by approximately 27%. In 2015
dollars, NASDAQ’s dot-com era bubble looks even more ridiculous. High flying
growth stock valuations may seem stretched today, but they are still a far, far
cry from what they were a decade and a half ago.
There are two basic types of market indicators: trending indicators and oscillating indicators. Trending indicators signal a move in the same direction such as On Balance Volume, where an increase in volume predicts an increase in price. Oscillating indicators or contrary indicators move inversely to an index, market or security. Sentiment indicators have been used as contrary indicators for years, but their efficacy has always been dubious.
Historically, when market sentiment has been extremely bullish it has preceded a top and a correction or bear market. Conversely, when sentiment is extremely bearish it has preceded a bottom and a rally or new bull market. The CBOE Equity Only Put/Call ratio is a contrary sentiment indicator we have used and tracked for years and is included in the Pulse of the Market below.
However, frankly, it has not been much use of late. The last time it spiked above 1.00, indicating more put buying than call buying (hence excessive fear in the market) was the week ending November 21, 2008. While this was nearly the low point of the market, the ultimate low came more than three months later in March 2009.
Investors Intelligence Advisors Sentiment has been a valuable contrary indicator over the years. So when this week’s numbers came out showing an uptick in the Bullish Advisors % to nearly 60%, the highest since last July, it was cause for concern. However, as illustrated in the charts below of the S&P 500 plotted against the Bullish and Bearish Advisors % it becomes quite clear that the usefulness of this indicator, at least in the near, has been lacking for years. The periods are broken into three to allow for the changes in price range for the S&P.
While a large percentage of bearish advisors in conjunction with a sharp spike have been more likely to accompany a bottom, large percentages of bulls even with sharp spikes have not marked a major top. Bullish sentiment can run quite high and for quite some time before a top is formed and a significant decline begins.
Ten years ago or more we had to wait for mail to be
delivered and analysis to be reported to find out who was bullish and who was
bearish. Now we know instantly on Twitter. So it’s no wonder everyone is often
in agreement and the oscillating contrary sentiment indicators are merely
following the trend of the market. Perhaps now that QE is done and rate hikes
are imminent in the US these indicators may become relevant again.
I ventured downtown to 14 Wall Street across from the New York Stock Exchange to the offices and studio of TheStreet.com. I sat down with
host Gregg Greenberg to discuss current sector trades in oil, gas and utilities;
seasonal market patterns for March and the impact of the Presidential Election
on the market this year.
Get answers on oil and other markets live from Marty “The PitBull” Schwartz Feb 28 MrTopStep Unplugged Webinar. The Pit Bull doesn’t speakin public often. Join the Feb 28 10:00 CT webinar NOW!!! https://mrtopstep.omnovia.com/register/67011424283632
As one of the Supertraders of all time, we co-dedicated the 1994 Stock Trader’s Almanac to Marty. Schwartz is a rare breed. He trades independently from an office at home and has no employees and I know from MrTopStep he trades some rather large positions and wins big. From what I understand of his trading, he is usually hyper-focused on one particular trade at a time like crude oil or S&Ps.
Tune in this Saturday morning to find out live what he’s up to. He will be answering all questions. Marty’s reputation as one of the best traders around and ever precedes him. Just Google him and you’ll see. I sure plan to be there!
Turbulent March markets tend to drive prices up early in the month and batter stocks at month end. Julius Caesar failed to heed the famous warning to “beware the Ides of March” but investors have been served well when they have. Stock prices have a propensity to decline, sometimes rather precipitously, during the latter days of the month. In March 2001, DJIA plunged 1469 points (-11.8%) from March 9 to the 22.
March packs a rather busy docket. It is the end of the first quarter, which brings with it Triple Witching and an abundance of portfolio maneuvers from The Street. March Triple-Witching Weeks have been quite bullish in recent years. But the week after is the exact opposite, DJIA down 17 of the last 27 years—and frequently down sharply for an average drop of 0.44%. Notable gains during the week after for DJIA of 4.9% in 2000, 3.1% in 2007, 6.8% in 2009, and 3.1% in 2011 are the rare exceptions to this historically poor performing timeframe.
Normally a decent performing market month, March performs even better in pre-election years (see Vital Statistics table below). In pre-election years March ranks: 4th best for DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 (January, April and December are better). Pre-election year March has been up 13 in a row for DJIA and 9 in a row for Russell 1000 & 2000. In fact, since inception in 1979, the Russell indices have a perfect, 9-for-9 winning record.
Hope to see many of you at The New York Traders Expo this weekend. Another workshop has been added for me. I covered this in a recent post, so we should be able to have a lively discussion at the workshop next Monday eve.
I will also be interviewing live to tape on location for MoneyShow.com video. Some of my fellow contributors will be my victims. Also, i have a kiosk right be the Wiley Bookstore booth when i will be available for witty repartee, Q/A, book signing and anything you may need. Looking forward to seeing you!
- Monday, March 02, 2015
5:30 pm - 6:00 pm What’s Next for the Stock Market?
Equities are no longer cheap. In fact, stocks are a bit rich by many metrics. Are you concerned about what the future holds? The Fed is no longer providing excessive liquidity as it has been in recent years. The US has benefitted from a rather weak dollar. Recently it has gone from undervalued to fairly-valued. How are you preparing your portfolios? Long/short equity strategies may diversify and compliment your existing stock portfolios.
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An interesting chart came across my desk (like the one above) that showed thelast two major moves up for the S&P 500 of about 100% from 1996 to 2000 and 2002 to 2007 and the subsequent declines of 49% and 57% respectively. It also has the current ~200% up move since 2009 followed by question marks.
Excellent graphic and conversation piece and it dovetails
right into our outlook and long term projection for the next cyclical bear
market to be of the garden variety (~20-30%) and to mark the end of the current
secular bear and the beginning of the Next
Super Boom. So I ran the numbers on the last two secular bears versus the
One of the implications of the question marks is to strike
fear in the hearts of investors that since the current up move is double that
of the previous two that the next down leg will be even greater than the last
two. I suspect the opposite. As illustrated in the two charts below greater
upside magnitude does not necessarily beget greater downside.
Examine the secular bear markets of the 1930s and 1940s and
the 1970s and 1980s and see for yourself. I suspect the action of the next
cyclical bear market will exhibit similar behavior as the final cyclical bears
of the prior secular bears. In the previous two secular bears the first and middle
down moves were most severe while the third and final of a more average
At the end of the previous two secular bears in 1949 and 1982, at the outset of the secular bull markets and global booms, there was a massive shift in leadership and sector rotation. After WWII at the end of the 1940s the shift went from agriculture to manufacturing – Ike’s “military-industrial complex” he spoke of in his farewell address in 1961. In 1982 it was the shift from manufacturing to integrated circuits, computers, the internet and cellphones.
Over the next few years we will likely begin the next sector
rotation from high-tech to the new leadership sectors, which may be biotech,
healthcare, energy tech, cyber security or something I cannot possible fathom
that is currently under development in someone’s garage or lab.
While I firmly believe there is still upside left in
the stock market as per my annual forecast, we do appear to be beginning a
topping process that make take many moons, yet may occur later this year or
early next year. Whenever the top comes (and we’ll be tracking that in the near
term), we expect the bulk of the downside to transpire 2016-18 when the next
secular bull is likely to begin.
Welcome Year of the Sheep (or goat or ram depending on location). Although the Chinese New Year is not a major holiday for North America, it most definitely is for our friends and business associates in China, Hong Kong and elsewhere in the Asia and Chinatowns around the world. Celebrations will last up to a month in China impacting all aspects of life there. Business activity will take a hit and due to the fact that China is our second largest trading partner, some impact will likely reach our shores. But, let’s not fret too much because history suggests the “Year of the Sheep” will also be a good year for our markets.
In the above three tables, DJIA, S&P 500 and
NASDAQ annual performance has been aligned with the Chinese zodiac calendar.
Annual returns are based upon the Gregorian calendar. Nonetheless, the Year of
the Sheep ranks well across all three indices. DJIA’s average performance is
damaged by sizable losses in 1907 and 1931, but there has not been a losing
“Sheep” year since 1931 and the six subsequent years have racked up an average
gain of 16.6%. S&P 500, since 1930, has an identical record with an average
gain of 21.8% excluding 1931. NASDAQ’s three “Sheep” years have all been
positive and average a whopping 45%.
Happy Chinese New Year! May I wish you all a fruitful and prosperous Year of the Sheep in 2015 – especially to my new friends from Hong Kong that I met on my trip there this past December where I gave an evening seminar and a full-day workshop all organized be my colleagues at Earlthorn. In some countries it’s called the Year of the Sheep, in some the Year of the Goat and others the Year of the Ram.
But in all respects it’s a rather bullish time on the calendar. As you can see in the table below of Hang Seng Index (HSI) performance around all Hong Kong holidays Chinese New Year is arguably the most bullish holiday time for HSI both before and after CNY.
Whether it’s Sheep, Goat or Ram, this year of the Chinese zodiac is the most bullish of them all – up the past 3 in row going as far back as the HSI data we have and over 50% on average. With the Shanghai-Hong Kong stock market connection in full force now and some heavy monetary stimulus happening in the Far East, 2015 Year of the Sheep, Goat or Ram has some clearly bullish potential.
Although the market finished essentially flat on the day, it did overcome historically bearish forces on the day before and after Presidents’ Day and now stands at or near new highs. The market has also returned to the green for 2015 and remained there for its longest streak of the year in what is usually the weakest month of the “Best Six Months,” February. The market’s resilience in the face of seemingly endless concerns about Greece’s fate, the standoff between the West and Russia over Ukraine and the growing threat of terrorism further underscores underlying strength.
Recent DJIA and S&P 500 strength is evident in the above charts comparing all pre-election years and Seventh years of presidential terms seasonal patterns with 2015 year-to-date overlaid for comparison. From their late-January lows, DJIA and S&P 500 have surged approximately 5% through mid-February. This brings DJIA and S&P 500 back in line with the average historical performance of past Seventh years of presidential terms and just a few percentage points away from average pre-election year performance. Both the Seventh and pre-election year patterns suggest solid gains until early July, albeit with some volatility. Thus far, buying the dips has been the best trade. This is likely to remain the case for at least the remainder of the first half of 2015.