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
From our vantage point the market is threatening to return to the downside after two days of bliss following Monday’s Presidential debate. The Down Friday/Down Monday warning this week is looming large again. Spooked by a host of market events, the often treacherous end of Q3 portfolio adjusting by fund managers and perhaps some Octoberphobia, stocks retreated today.
News from Apple, Deutsche Bank, Wells Fargo and OPEC put the market in sell today. U.S. equity indices did rally off the mid-afternoon lows (which is historically the weakest part of the day), but the major indices finished the day all down around 1%. How we close out tomorrow’s action on the last trading day of Q3 should be instructive.
The 50-day moving average has been resistance for DJIA and S&P and serving as support for NASDAQ and Russell 2000. If S&P 500 cannot reclaim its 50 DMA and instead breaks down through its monthly pivot point around 2150, the early September lows near 2120 come into play. Then there is some support near 2100 around June’s highs. If that level does not hold then further support can be found just below the 200-day moving average near 2050.
However, this will be a solid set up for a quintessential October Buy. October is the best month to buys stocks, especially small caps and tech stocks. It’s even better after a pullback/correction. This current downside action is close to putting or MACD indicators into sell mode and setting up a solid “Best Six Months” Seasonal MACD Buy signal.
September’s last trading day is also the last trading day of Q3 making it prone to last-minute portfolio restructuring that has frequently resulted in broad market declines. Over the last 21 years (1995-2015), S&P 500 has advanced just 28.6% of the time on the last trading day of Q3. Solid advances in 1999, 2001, 2008 and 2015 help lift the day’s average performance to a mild 0.1% loss. Excluding those years, the average loss in 0.75% for S&P 500. NASDAQ’s record is the same while DJIA has managed to eke out one additional gain.
October has a frightful history of market crashes such as in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and the 733-point drop on October 15, 2008. During the week ending October 10, 2008, Dow lost 1,874.19 points (18.2%), the worst weekly decline in our database going back to 1901, in point and percentage terms. It is no wonder that the term “Octoberphobia” has been used to describe the phenomenon of major market drops occurring during the month.
But October has also been a turnaround month—a “bear killer”. Twelve post-WWII bear markets have ended in October: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001, 2002 and 2011 (S&P 500 declined 19.4%). However, eight were midterm bottoms. This year is neither a midterm year nor is a bear market in progress, thus October’s performance in past election years is of greater importance.
Election-year Octobers rank dead last for Dow, S&P 500 (since 1952), Russell 1000, and Russell 2000 (since 1980). NASDAQ fairs slightly better, with October being the second worst month in election years since 1972. Eliminating gruesome 2008 from the calculation provides a moderate amount of relief, as rankings climb to mid pack. Should a meaningful decline materialize in October it is likely to be an excellent buying opportunity, especially for any depressed technology and small-cap shares.
Today’s selloff marked the eighth Down Friday/Down Monday of 2016. The combination of a Down Friday* followed by a Down Monday** has been a consistently ominous warning.
Since January 1, 2000 through todays close there have 179 DJIA Down Friday/Down Mondays (DF/DM) including todays. From DJIA’s closing high within the next 7 calendar days to its closing low in the following 90 calendar days, DJIA has declined 173 times with an average loss of 7.3%. Declines following the DF/DM were greater in bear market years and milder in bull market years (see page 80 of Stock Trader’s Almanac 2016). The five times when DJIA did not decline within 90 calendar days after were October 16, 2002; May 29, 2003; February 12, 2014 and October 22, 2014.
When DJIA’s close on Monday of the DF/DM is used as the starting point of the subsequent decline (a lower price), DJIA has declined an average of 5.7% over the next 90 calendar days, but there were 30 times when no further decline occurred. 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 30 times there was no lower low after Monday.
Based upon this graph, 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.
*Friday or the last trading day of the week. **Monday or the first trading day of the next week.
Since 2008, DJIA,
S&P 500, NASDAQ and Russell 2000 have not fared all that well during the
last five trading days of the third quarter, the end of September. 2010 was the
last year where the major indices produced solid, across-the-board gains.
S&P 500 has been the worst since 2008, down 7 of the last 8 years during
the last five days of Q3.
Since the beginning of July, NASDAQ has been the
star and its leadership is continuing this week with another all-time high
close today. NASDAQ was up 6.6% in July and 1.1% in August, and as of today’s
close is up 2.4% so far in September. This is noticeably better than S&P
500 which was up 3.6% in July, down 0.1% in August and is currently up 0.3% for
the month. For the month of September these results are better than past
election year averages, but there is still time remaining. These gains
could hold or could just as easily vanish before month’s end.
A month plus of sideways trading preceded an
early September dip by DJIA, S&P 500 and NASDAQ. This action lead to a slow
deterioration of Stochastic, relative strength and MACD indicators applied to
all three indices. Strength the last two days has reversed that trend and all
three technical indicators across all three indices are now positive. Tomorrow
could prove pivotal in providing further confirmation that the market has
regained traction and can sustain recent positive momentum. A solid gain on
Friday would be a sign that confidence is returning. Over the last six Fridays,
DJIA and S&P 500 have closed down. NASDAQ’s record is slightly better, but
it has been down three of the last five Fridays.
In a surprising twist, the Fed did not raise rates today. Ok, I know it really wasn’t a surprise, but it seemed like there were more than the usual number of people expecting something from today’s meeting. About all that differentiates today’s meeting from all others this year was the number of decision dissenters, three. Other than this the board acknowledged the labor market is doing ok, but inflation is not quite at the desired level. In the end, the market responded positively to today’s inaction with S&P 500 closing up 1.09%.
In the following chart the 30 trading days before and after the last 68 Fed meetings (back to March 2008) are graphed. There are three lines, “All”, “Up” and “Down.” Up means the S&P 500 finished announcement day with a gain, down it finished with a loss. Down announcement days have generally been the best buying opportunity while up announcement days were often followed by weakness.
Of the last 68 announcement days, the S&P 500 finished the day positive 41 times. Of these 41 positive days S&P 500 was down 24 times (58.5%) the next day with an average loss of .32% across all 41 positive announcement occurrences.
For 50 years the new edition of the Stock Trader’s Almanac has been released early in the fourth quarter. And for the past fifteen years we have been preparing Almanac Investor readers for the annual October ETF buying spree. This year is no exception, but before delving into October’s seasonalities, let’s do a quick review for new and seasoned followers alike.
Every year while preparing the annual Almanac, we revisit and analyze our sector seasonalities (STA 2017 pages 94, 96 and 98) in depth in order to make adjustments for any new or developing trends. There have been a few minor revisions made to our Sector Seasonalities table in recent years, but for the most part, sector seasonality has been reasonably on track since September 2009 with many sectors producing the bulk of their annual gains during their traditionally favorable periods. Years of sector research allows us to specify whether the seasonality starts or finishes in the beginning third (B), middle third (M) or last third (E) of the month based upon the number of trading days in the month.
The 2017 Almanac table follows. Keen observers and long-time readers will note the absence of several indices. Indices that no longer appear are no longer being calculated or are not readily available in the public domain. In the place of discontinued indices we have added S&P Sector indices. Both long and short trade opportunities are researched and the most statistically viable appear below.
Complete table available to Almanac Investor Subscribers
These entry and exit points will be the basis for our seasonal trades over the coming year. They are guidelines, as we generally look to enter new positions before the start of the favorable period and exit before its end. Occasionally a trade is closed out well in advance of the seasonality’s end. An outsized advance may trigger a trade at the suggested auto-sell price (a price target based upon past historical performance of the specific seasonality) or should strength fail to materialize, a stop loss could be reached.
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Today’s release of the National Association of Home Builders (NAHB) Housing Market Index was quite robust at 65, up 10% over last month’s revised 59. The HMI is a survey of market conditions for the single-family housing market. It is a read of current market conditions and conditions six months out and traffic of prospective buyers.
The HMI tends to be a good leading indicator for overall housing market health. HMI has frequently risen and fallen in advance of weakness in sales and starts data. This was clearly the case back in 2005 and 2006. HMI was upped briskly higher in 2012 just as the housing market recovery really began to gain traction and accelerate.
So what is fueling this rise in housing market conditions and the uptick in home sales, especially New Home Sales? Perhaps it’s signaling another rate hike. The rise in housing market confidence and sales could be the fear of higher interest rates getting buyers off the fence and builders excited. Rate hikes are a hot topic with the FOMC meeting this week and the likelihood of another hike at least by yearend.