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
Just past the halfway point in January, the market has essentially gone nowhere in the New Year. We got off to a solid start with positive readings from our Santa Claus Rally and First Five Days indicators, but aside from NASDAQ, other major indices, DJIA, S&P 500 and Russell 2000 are flat or slightly down. Looking at the following charts, it’s apparent that the market has slipped into a holding pattern that extends back to about mid-December. DJIA cannot seem to break through 20,000; S&P 500 is struggling with 2280 and Russell 2000 has gone from knocking on 1400 to near its 50-day moving average today. NASDAQ was encouraging up to a few days ago when it also appears to have stalled out.
Even though new Presidential Administrations only come along once every eight years (the trend since 1992), the market’s recent behavior is not all that different from when a major Fed meeting is scheduled. Trades are made in advance to position portfolios for the most likely outcome. This appears to be precisely what is happening, only in slow(er) motion. The market sprinted higher following Election Day results in anticipation of numerous, potential earnings boosting actions by a new Republican President and a Republican controlled Congress. De-regulation, tax cuts, increased infrastructure spending and defense spending, the repeal (replace) of Obamacare—basically a major course change in D.C. is expected. Everyone is positioned for the myriad potential benefits, now we all wait to see what will actually unfold.
In less than 24 hours Donald Trump will take office and we will finally begin to see if the right trades were made or not. Unfortunately, we will not be delivered a single statement at a specified date and time like a Fed meeting. It will take time for the new administration and Congress to work through its long list of want-to-do. The longer it takes the more volatile trading is likely to become.
Ever since the ratification of the 20th Amendment to the U.S. Constitution in 1933, Inauguration Day has been January 20. During the time since passage of the amendment 13 different men have held the position of President of the United States though 20 four-year election cycles. Democrats (year bolded) have been inaugurated 11 times and Republicans 9 times. President-Elect Donald Trump will be the 10th Republican to be inaugurated this Friday, January 20.
Trading the day before and on Inauguration Day has been bearish for DJIA and S&P 500 since FDR’s second inauguration ceremony in 1937. New Presidents (shaded in grey) have been accompanied by even weaker market performance. The day after Inauguration Day is the most bullish of the three days, but not by an overwhelming margin. NASDAQ’s fewer years of data exhibit a similar pattern to DJIA and S&P 500, but performance on the day before has been more bullish.
This Friday, Donald Trump will be inaugurated as the 45th President of the United States and a new administration will be in place. The market’s rally since Election Day has been one of this best in records going back to 1952 at various points along the way and remains near the top today even after some mild losses. The pace of gains has slowed as an increasing number of traders and investors ponder whether or not the rally can continue. Based upon the following seasonal pattern charts, the rally has a reasonably good chance of lasting, but gains are likely to be limited to around 6-8% at yearend for DJIA and S&P 500 and around 10% for NASDAQ.
In the above charts, four different seasonal patterns are plotted alongside 2017 year-to-date as of today’s close. The baseline is “All Years” and includes every year of data. DJIA data begins in 1901, S&P 500 in 1930 and NASDAQ is since 1971. 2017 is a post-election year and a comparison to “All Post-Election Years” is included. This year will also be the first year of a new administration which is represented by “1st Year of New Administration.” Lastly, “7th Years of Decades” is included. 7th Years of Decades have a rather nasty history and are the second worst performing year for DJIA going back to 1881 (page 129 of Stock Trader’s Almanac 2017). Zero years have the worst record however; we don’t place much emphasis on the decennial cycle currently as the four-year presidential cycle exhibits more influence.
Over the past thirty-four years, since 1983, the S&P 500’s performance during January’s option expiration week has been essentially a mixed bag. Friday has been up 18 and down 16, and the entire week has been down roughly three times for every two times it has been up. However, in the past eighteen years (1999-2016), the S&P 500’s performance has taken a turn for the worse with expiration day falling ten times with an average loss of .21% and the full-week declining 13 times with an average loss of 1.06%. DJIA and NASDAQ have similar track records since 1999.
This year will be the 20th year that the stock market is closed to honor Dr. King and his contributions to the world and civil rights. Martin Luther King, Jr. Day has only been observed since 1998 and market behavior around this holiday has not been added to the Stock Trader’s Almanac yet. So I wanted to share with you the history of market performance around this holiday.
Overall the market has been more positive, on average, on the Friday before MLK day and weaker the Tuesday after. Though trading is rather mixed with a relatively even split of ups and downs on the day before and the day after. This mixed and choppy performance is possibly due to the fact that MLK day can either land in options expiration week or the week after. Both weeks have been rather volatile and weak since 1999.
Top image: http://events.worldbeatcenter.org/
I am taking the 50th Anniversary show back on the road. Next month I will be speaking at two events. I hope you can join me at one of them. More 2017 dates are being added and don’t hesitate to contact me if you’d like to have me present to your group or at your event.
February 8-11, 2017 (Wednesday-Saturday) – The MoneyShow Orlando at Omni Orlando Resort at ChampionsGate.
Now that the election is behind us, you need to examine your portfolio to ensure you are ready to profit from opportunities that lie ahead.
Join me for The MoneyShow Orlando, February 8-11, at the Omni Orlando Resort at ChampionsGate. Over four days you’ll meet me and other experts in a wide variety of investment specialties who will share market outlooks, time-tested strategies, and favorite stock, bond, fund and ETF ideas.
Whether you are looking for value or growth, domestic or global exposure, short-term trades or long-term blue chips and dividend opportunities, the experts will ensure that your experience at this event will make you a more knowledgeable, confident, and successful investor.
I’m looking forward to sharing opportunities that I’m seeing in the markets and will discuss ideas for how you can profit in 2017 and beyond.
My Presentation Schedule:
How to Deploy Market Seasonality: Tactical Sector Rotation & Stock
Friday, February 10, 2017 | 5:15 pm – 6:00 pm
Post-Election Perspectives from 50 Years on Wall Street
Saturday, February 11, 2017 | 12:30 pm - 1:15 pm
February 26-28, 2017 (Sunday-Tuesday) – The Traders Expo New
York at the Marriott Marquis Hotel.
Want to make more money trading
the markets? The
Traders Expo New York brings you face to face with the world’s top traders
and gives you access to specific tactics and tools that will result in more
profitable trades. Join me, February 26-28 at the Marriott Marquis Times
Square, and you’ll learn a broad range of topics including high-probability
trade setups and strategies for stocks, ETFs, options, forex, futures, and
more. I’m looking forward to sharing new trading ideas and answering your
personal questions during this exciting three-day event.
My Presentation Schedule:
How to Deploy Market Seasonality: Tactical Seasonal Sector Rotation & Stock Trading Strategies
Tuesday, February 28, 2017 | 8:15 am - 9:00 am
Additional trading experts include Tom Sosnoff, Tom DeMark, Dr. Alexander Elder, Dan Gramza, Todd Gordon, Stefanie Kammerman, Jake Bernstein, Harry Boxer, Larry McMillan, and dozens more. Be sure to visit the interactive Exhibit Hall to learn about and test-drive the most technologically advanced tools, data sources, and trading platforms available today.
In honor of the 50th Anniversary 2017 Edition of the Stock Trader’s Almanac I am extending our 50th Tour Offer until March 31, 2017.
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Despite New Year bullishness from our early January indicators and our expectation for full-month January Barometer gains that will support our modestly bullish 2017 Forecast, a mid-January break in equities is looking increasingly likely. Since 1996 this January break has been more pronounced and more consistent. This trade, last featured in the Commodity Trader’s Almanac 2013, is beginning to set up nicely right now.
The stock market has demonstrated a tendency to retreat after the first of the New Year, especially when there has been a strong fourth quarter gain. Once the New Year begins we often see a profit taking correction. Investors tend to sell stocks to lock in profits in order to defer taxes from capital gains after the New Year begins. Even though the best time to be long the overall equity markets lasts from October through late April, this January break can certainly give short-term, nimble traders a nice return. With stocks struggling to move higher this week this trade is setting up a little later this year.
The table below of the “big” S&P 500 contract shows the typical January break. Since 1996 shorting the March contract on or about the second trading day of the New Year and holding for twelve trading days has produced gains 12 of the last 21 years for a success rate of 57.1% and a cumulative gain of $81,538 (based upon trading a single contract excluding fees and taxes).
The results in the above table are based upon specific entry and exit dates with no further analysis being applied. This trade potentially could have been successful in 18 of the last 21 January’s with the application of technical indicators. The average decline from the high close in the first seven trading days in January to the low close in the last seven trading days in January has been 3.6% since 1996 using the same “big” S&P 500 contract.
Even though today turned out to be a mixed day for the market (DJIA and S&P 500 down, NASDAQ up), S&P 500 is still positive year-to-date and thus our First Five Day (FFD) early warning system is also positive. Combined with last week’s positive Santa Claus Rally (SCR), our January Trifecta is now two for two. The January Trifecta could be satisfied with a positive reading from our January Barometer (JB) at month’s end.
When all three indicators, SCR, FFD and JB, are positive this has been the most bullish scenario for the next eleven months and the full year. In 28 previous Trifecta occurrences since 1950, S&P 500 advanced 89.3% of the time during the subsequent eleven months and 92.9% of the time for the full year. However, a January Indicator Trifecta does not guarantee the year will be bear free. The three losing “Last 11 Mon” years, shaded in grey, experienced short duration bear markets.
As defined in the Stock Trader’s Almanac, the Santa Claus Rally (SCR) is the propensity for the S&P 500 to rally the last five trading days of December and the first two of January an average of 1.4% since 1950.
The lack of a rally can be a preliminary indicator of tough times to come. This was certainly the case in 2008 and 2000. A 4.0% decline in 2000 foreshadowed the bursting of the tech bubble and a 2.5% loss in 2008 preceded the second worst bear market in history.
Including this year, Santa has paid Wall Street a visit 53 times since 1950. Of the previous 52 occasions, January’s First Five Days (FFD) and the January Barometer (JB) were both up 28 times. When all three indicators were positive, the full year was positive 26 times (92.9% of the time) with an average gain of 17.8% in all years.
A positive SCR is encouraging and further clarity will be gained when January’s First Five Days Early Warning System (page 14, STA 2017) gives its reading next week and when the January Barometer (page 16, STA 2017) reports at month’s end. A positive First Five Days and January Barometer would certainly boost prospects for full-year 2017.
In recent years it has become rather common for the market to be down on the last day of the year and then down again on the first trading day of the New Year. The market was indeed down on the last day of 2016, but rebounded solidly on the first day (and second day) of 2017. However, today the market struggled which could be a sign that the market is slipping back into its recent, disappointing January pattern.
In the above chart, January’s performance for the recent 21-year period has been plotted. Of the five major indices only NASDAQ finishes the month with an average gain. After early gains, first two or three trading days, DJIA, S&P 500, NASDAQ and Russell 1000 tend to weaken and slip until the sixteenth trading day. The only reprieve has been a brief mid-month (eleventh trading day) bounce.
However, past Post-Election Year Januarys have a substantially different pattern. Early gains are present, but the retreat afterwards comes to an end by the fifth, sixth or seventh trading day depending on index. From that low point the trend is sideways to higher by the end of the month with positive across the board average gains. If the major indices can shake of today’s minor setback and break out to new all-time highs, January 2017 will likely follow the much more bullish Post-Election Year January pattern.