All Good Things Come to an End Fri, Apr 12, 2024 The rally from the October lows through the end of March was enough to make any bull giddy, but April has brought a decidedly different market mood. Stocks have hit the pause button, and in many cases the rewind button. While the S&P 500 was comfortably above its 50-day moving average (DMA) from early November through the end of March, it has been creeping towards that level all April, and as of Friday afternoon, it even dipped slightly below. If the S&P 500 closes around these levels this afternoon, it will snap a streak of 109 trading days of closing above its 50-DMA. This streak, though impressive, wasn't record-breaking, but since 1953, only ten were longer, with the last exceeding it coming in 2011. (See chart below for historical context) The chart below shows where each sector, the S&P 500, Nasdaq, and Russell 2000 are trading relative to their 50-DMAs now versus where they were trading on 3/28 when the S&P 500 last closed at a record high. Not surprisingly, every sector and index is less extended now. Nearly half of the eleven sectors have also broken below their 50 DMAs, while three others (Industrials, Materials, and Technology) are precariously close. While corrections, or what in this case has merely been a pullback, can be unsettling, they are a natural part of any market, even a bull market, environment.
April 2 Seasonal MACD Signal Triggered Right on Time We issued our Best Six Months MACD Seasonal Sell signal for DJIA and S&P 500 to newsletter subscribers on April 2 when slower moving MACD indicators applied to DJIA and S&P 500 both turned negative after the start of the last month of the BSMs. This marked the start of our transition to a more cautious stance. Arrows in the charts point to a crossover or negative histogram on the slower moving MACD used by our Seasonal Switching Strategy to issue a sell signal. NASDAQ’s “Best Eight Months” lasts until June. Subscribe to our Almanac Investor Newsletter and get all our trades. https://stocktradersalmanac.com/Alerts.aspx We do not merely “sell in May and go away.” Instead, we take some profits, trim or outright sell underperforming stock and ETF positions, tighten stop losses and limit adding new long exposure to positions from sectors that have a demonstrated a record of outperforming during the “Worst Months” period.
Election Year Drawdowns Happen – S&P 500 Average Pullback 13% since 1952 After five straight months of gains and numerous new all-time highs, recent weakness and the corresponding spike in volatility seem unfamiliar. Despite lingering inflation and escalating geopolitical tensions, S&P 500 was down 3.86% from its closing all-time high of 5254.35 on March 28 through its close on April 16. This is well below the average historical largest drawdown during an election year since 1952 of 13.07%. Were it not for steep declines in 2020 and 2008, election years have tended to enjoy relatively modest drawdowns. Of the last 18 election years, 11 experienced single-digit drawdowns. The smallest was just 3.55% in 1964. DJIA’s record is similar to S&P 500 while the higher beta stocks of the NASDAQ Comp have experienced larger election year drawdowns.
Stocks Can Go Down “However beautiful the strategy, you should occasionally look at the results.”- Winston Churchill After more than a 30% total return on the S&P 500 the past 12 calendar months, a five month win streak, and a 27% rally in the first 100 trading days off the late October lows, we could finally be looking at a well deserved break. We want to stress, this isn’t something to fear, as it is all part of the process. In fact, now could be a good time to remind investors that volatility is the toll we pay to invest. Meaning, we all want the gains, but sometimes you have some pain along the way. Or to quote Ben Franklin, “There are no gains without some pains.” Remember last year? Stocks gained more than 20%, yet there was a 10% correction into late October and many investors were quite worried at what was a fairly normal stock market development. Here’s a great table that we’ve shared before on volatility in most years. Thanks to help from our friends at Ned Davis Research, the average year has more than seven 3% dips a year, more than three 5% mild corrections a year, and a 10% correction a year on average. After yesterday we’ve officially had our first 3% dip. That’s it, one 3% dip and your average year tends to see more than seven. That should put in perspective just how calm things have been lately. Here’s one more way to look at things. The average year for the S&P 500 since 1980 saw a peak-to-trough correction of 14.2%, with the smallest ever at only 2.5% in 1995. More than three months into 2024 and stocks have only pulled back 3.7%, which would make it one of the smallest ever. Even last year, when stocks gained more than 25% there was a 10% correction into late October. Once again, we think we are in a bull market and stocks will be higher from where they are now until the end of the year, but to think it’ll be an easy ride getting there isn’t very likely. Looking at the past 44 years, 23 times stocks fell at least 10% peak-to-trough at some point during the year and 13 of those times (so more than half the time) stocks managed to finish green. The average gain those 13 years? 17.5% on average, suggesting that a correction can indeed happen quite often, but that doesn’t mean stocks have to have a bad year. Lastly, the S&P 500 closed beneath it’s 50-day moving average for the first time in more than five months yesterday (or 110 trading days to be precise). This was the longest such streak since 2011! I looked at other long streaks that lasted at least 100 days and what happened after an eventual close beneath this important trendline. Sure enough, three months later stocks were higher more than 87% of the time and six months later higher more than 81% of the time. Could there be a little more weakness, yes, that wouldn’t be out of the ordinary, but big picture we expect any weakness to be well contained and this bull market is still alive and well.
May Almanac: Historically Poor in Election Years May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 “flash crash”. It used to be part of what we once called the “May/June disaster area.” From 1965 to 1984 the S&P 500 was down during May fifteen out of twenty times. Then from 1985 through 1997 May was the best month, gaining ground every single year (13 straight gains) on the S&P, up 3.3% on average with the DJIA falling once and NASDAQ suffering two losses. In the years since 1997, May’s performance has remained erratic; DJIA up fourteen times in the past twenty-six years (four of the years had gains exceeding 4%). NASDAQ suffered five May losses in a row from 1998-2001, down –11.9% in 2000, followed by fourteen sizable gains of 2.5% or better and seven losses, the worst of which was 8.3% in 2010 followed by another substantial loss of 7.9% in 2019. Since 1950, election-year Mays rank rather poorly, #9 DJIA and S&P 500, #8 NASDAQ and Russell 2000 and #7 Russell 1000. Average performance in election years has also been weak ranging from a 0.4% DJIA loss to a 0.6% gain by Russell 2000. Aside from DJIA, the frequency of gains in election year Mays is bullish, but down Mays have tended to be big losers. In 2012, DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 all declined more than 6%.
Bears Come Out of Hibernation Thu, Apr 25, 2024 The S&P 500 may have rebounded since this time last week, but sentiment has continued its slide. This week's AAII Sentiment Survey saw only 32.1% of respondents report as bullish, the lowest percentage since 11/2/23. In total, bullish sentiment has declined 17.9 percentage points since just four weeks ago when it hit 50%. That is the largest drop since December 2021 for any given four-week span. Given the drop in bulls, bears have picked up to 34%. However, that reading was little changed week-over-week with a modest 0.1 percentage point increase. Like bulls, this is the highest bearish sentiment reading since last November. Although the increase in bearish sentiment has been less pronounced, the inverse moves with bullish sentiment have been enough to push the bull-bear spread into negative territory for the first time since 11/3. The 24 consecutive weeks with a positive bull-bear spread was one of the longest streaks in the survey's history and was tied with the 24-week streak that ended in July 2021 for the longest since 2015 (31 weeks). In all, there have only been 11 streaks that lasted at least 20 weeks in a row.
