Second Half of 2017 May Not Be So Bright: Seasonal Patterns Meander Since the start of the year we have been tracking various 1-Year seasonal patterns alongside 2017’s performance. As you likely know by now, 2017 is a post-election year, it is the seventh year of the decade, we have the first year of a newly elected Republican administration and 2017 also registered a positive January Trifecta reading (Santa Claus Rally, First Five Days and January Barometer were all positive). In the above two charts, the 1-Year seasonal pattern for all of these scenarios appears along 2017 performance through last Friday’s close for DJIA and S&P 500. A full-year comparison reveals a potentially broad range by yearend. “Positive January Trifecta” years display the greatest historical gains while “First Elected Republicans” actually racked up average losses by yearend. In the next two charts, the beginning point has been shifted to July 1 and only the last six months of the year are displayed. Presented in this manner, the sizable mid-year performance discrepancies shrink noticeable. This is due to the fact that regardless of the pattern selected, DJIA and S&P 500 did not do very much during July and August. In September “First Elected Republicans” stumbled while 1987’s October crash tanked “Seventh Years of Decades”. If all goes well, with the economy and in Washington, and DJIA & S&P 500 follow the best case “Positive January Trifecta” pattern, then gains of an additional 6% are possible. If Washington fumbles (healthcare, tax reform, budget and/or debt ceiling are a few major obstacles) then losses on the order of 5 to 6% at yearend are not out of the question.
had posted this chart on the weekly thread yesterday ... curious to see if we see some weakness coming through to the markets heading into aug/sept then finding a bottom in oct. for the traditional year end rally
Typical August Pattern: Mid-Month Surge Over the last 21 years the market’s performance in August has been abysmal. August ranks dead last for DJIA, S&P 500, NASDAQ and Russell 1000. August is second worst for Russell 2000. Average losses range from 0.6% by NASDAQ to a 1.3% decline by DJIA. Based upon the above chart the best opportunity for a long trade begins on the eighth or ninth trading day of August and lasts until the thirteenth. Early month performance is dominated by average declines and August generally finishes on a negative note with declines on the penultimate and last days.
August, Worst Month of Post-Election Year Money flows from harvesting made August a great stock market month in the first half of the Twentieth Century. It was the best month from 1901 to 1951. In 1900, 37.5% of the population was farming. Now that less than 2% farm, August is amongst the worst months of the year. It is the worst DJIA and S&P 500 month from 1988-2016 with average declines of 1.3% and 1.0% respectively. August is also the worst month for NASDAQ (–0.3%), Russell 1000 (–0.9%) and Russell 2000 (–0.7%) over the same time period. In post-election years since 1953, Augusts’ rankings are little changed: #12 DJIA, #11 S&P 500, #11 NASDAQ (since 1973), #11 Russell 1000 and #10 Russell 2000 (since 1981). Contributing to this poor performance since 1987; the shortest bear market in history (45 days) caused by turmoil in Russia, the Asian currency crisis and the Long-Term Capital Management hedge fund debacle ending August 31, 1998 with the DJIA shedding 6.4% that day. DJIA dropped a record 1344.22 points for the month, off 15.1%—which is the second worst monthly percentage DJIA loss since 1950. Saddam Hussein triggered a 10.0% slide in August 1990. The best DJIA gains occurred in 1982 (11.5%) and 1984 (9.8%) as bear markets ended. Sizeable losses in 2010, 2011, 2013 and 2015 of over 4% on DJIA have widened Augusts’ average decline. A strong August in 2014 of S&P 3.8% and NASDAQ 4.8% preceded corrections of 7.4% and 8.4% respectively from mid-September to mid-October.
Brewing trouble in A/D lines After a bumpy start, July came to a close today with typical post-election year performance. DJIA finished the month with a respectable 2.5% advance, S&P 500 logged a 1.9% gain, NASDAQ jumped 3.4% and Russell 2000 added 0.7%. These are respectable numbers for July which is usually the best month of the third quarter. Tomorrow August begins and it has been the worst performing month since 1988 and even before it begins there already a few potentially troublesome indications brewing. In the above chart appear DJIA, S&P 500, NASDAQ and Russell 2000 indexes above Advance/Decline lines. NASDAQ and Russell 2000 Advance/Decline lines appear to have peaked last week and have turned lower. S&P 500 and NYSE have turned flat and appear to be leaning lower. Generally, when the majority of and index’s components are declining the index already is doing the same or may soon do so.
Been getting a few bear emails lately, we really need a decent correction that's for sure. Come a long way since Nov/Dec lows and 2009 for that matter.
Second half seasonal patterns suggest a cool down Back in July we split our 1-Year Seasonal Pattern charts for DJIA and S&P 500 in half in order to highlight how various scenarios all began to align in July and August. This year is a Post-Election Year, the Seventh Year of the Decade, the First year of a new Republican Administration and a Positive January Trifecta was recorded. Those charts have been updated with actual 2017 performance through today’s close below. DJIA surged ahead in late July to modestly exceed the upper range of all historical seasonal patterns, but the past two days of weakness are following the historical trends timing quite closely. S&P 500 also made a move higher in July, but it stayed within the boundaries of historical seasonal patterns. Off all the patterns only the Positive January Trifecta posts a modest full-month August gain. First Elected Republicans fared the worst in August and September. The market has largely ignored what has been going on (Russia investigations, lack of healthcare reform and minimal progress on tax overhaul/reform) in D.C. this year. The latest threats from North Korea are the first significant challenge for the new administration with potentially disastrous consequences. In the end a peaceful resolution is still the most likely outcome, but the path there could contain a market pullback trigger or two.
NASDAQ Second half seasonal patterns In response to yesterday’s post, today we present a chart of NASDAQ’s second half of the year seasonal patterns. Today’s chart uses the same four scenarios presented yesterday and in other posts; Post-Election Year, the Seventh Year of the Decade, the First year of a new Republican Administration and a Positive January Trifecta. Please keep in mind that NASDAQ’s patterns are using data from 1971 to present and two of the scenarios have very limited data. New Elected Republican Administrations are just three years, 1981, 1989 and 2001. The pattern’s near 15% plunge from July 1 to late September is due mainly to 2001. Seventh Year of Decades is also limited to just four years, 1977, 1987, 1997 and 2007. Here 1987 creates the near 13% plunge from early October to late October. Compared to the patterns of DJIA and S&P 500, NASDAQ is quite similar only the magnitude of its moves are greater. All four patterns finish out the second half of the year in a range from slightly less than down 5% to up a little better than 6%. Prior to today, 2017 was in the upper ranges of these four patterns. The sizable range in these patterns best suggests some volatile trading could persist throughout the remainder of the third quarter and into the early fourth quarter.
Mounting Tensions Between the U.S. and North Korea Posted by lplresearch After largely ignoring the flare up between the U.S. and North Korea, markets appeared to have finally acknowledged concern with the situation last Thursday (August 10, 2017) with a 1.5% sell-off in the S&P 500 Index that led to its second-worst week of the year. The sell-off coincided with a series of comments and tweets from President Trump, in which he conveyed direct warnings in response to North Korea’s recent test fire of two intercontinental ballistic missiles, which North Korea claims have the ability to reach U.S. territories. With global financial markets seeming to finally react to heightened tensions between the two nations, some may be wondering whether they should consider doing the same in their portfolios. Here is where historical context can help. First, our disclaimer: Every event is different, and no one knows with any degree of certainty which crises will escalate and which will be contained. That said, history has repeatedly shown that political and geopolitical crises, after any initial market adjustment, do not typically result in lasting downturns. Rather, geopolitical events have been accompanied by a troubled economy to have a lasting market impact. Looking back at some of the more notable events in recent decades shows that the stock market has generally shrugged them off—recouping losses, if any, within days or weeks (see below chart). Conflicts that have triggered large declines without a subsequent rebound, such as Iraq’s invasion of Kuwait (1990), tend to be associated with economic weakness; sometimes indirectly. And amid strong corporate earnings and steady economic growth in the U.S., investors appear to be refocusing on the fundamentals as the S&P 500 is already less than one half percent away from recouping all of last Thursday’s sell-off as of the August 14, 2017 market close. While not being dismissive of the current threat, LPL Research does not foresee a sustained drop in global equity markets barring a military conflict, which we believe is very unlikely at this point. We do not recommend any major changes to asset allocation because of the recent U.S./North Korea developments; however, taking some risk off the table for clients who are overly concerned with the geopolitical risk and want to protect gains probably makes sense given the strong stock market performance in 2017.
Do Transports Really Matter? Posted by lplresearch The Dow Jones Transports (transports) have been one of the weakest segments of the market since July. As Charles Dow suggested more than 100 years ago, for the primary trend to be in place we need to see the transports confirm the action in the DowJones Industrial Average (Dow). In other words, if the Dow makes a new high and the transports group doesn’t, that is a potential warning sign. Well, on August 1, 2017 the Dow closed at a new 52-week high, yet the transports group closed at a new 52-week low relative to the Dow. In others words, the performance gap, or spread, between the two is at its widest over the past year. So it would seem transports aren’t carrying their weight; and the question is: Is this a major warning sign? Per Ryan Detrick, Senior Market Strategist, “Going back in history, we have often seen the rare combo of a 52-week high in the Dow and a 52-week relative low in transports precede some tumultuous times. It took place ahead of the ‘73/’74 bear market, the ’87 crash, and the ’00 peak for starters, which makes the signal seen earlier this month something we aren’t taking lightly.” Now here’s the good news: The track record of this rare signal is far from spotless. Per Ryan Detrick, “Although on the surface this sounds scary, looking at all the signals (to remove clusters, each instance must be at least three months apart to define a new signal) in which the Dow and Dow/transports spread hit new 52-week highs, the Dow has been up a median 17.1% over the following year. We’d still say the weakness in transports is a concern, but a bigger concern is that we’ve gone more than a year without a 5% correction, and there are multiple big events (think debt ceiling, tax reform, and infrastructure spending) out of Washington on the horizon that could trip up the market.”
August living up to its poor reputation As of today’s close, this August is on track for worse than average declines. DJIA is off 0.86%, S&P 500 is down 1.70%, NASDAQ has shed 2.13%, Russell 1000 has fallen 1.78% and Russell 2000 has sunk a whopping 4.79%. In the above updated typical August pattern chart, the major indexes have been tracking the pattern of the previous 21 years somewhat closely (magnitude of moves has been larger). There was weakness over the first nine trading days, a brief mid-month surge that ended a day early, on the 12thtrading day instead of the 13th trading day and mixed weakness through today, the 15thtrading day. If the major indexes continue to track the pattern, a few days of strength are likely on the 16th and 17th trading days, followed by more mixed to weak trading to finish out the month.
Breadth Still Not Great Aug 23, 2017 The S&P 500 re-took its 50-day moving average yesterday, but unfortunately it did so without more than half of its index members closing above their 50-days as well. As shown below, only 48% of stocks in the S&P are currently above their 50-day moving averages. Bulls would like to see a much stronger reading than that based on where the S&P is currently trading. Below is a look at the percentage of stocks above their 50-day moving averages by sector. As shown, five cyclical sectors have breadth readings that are weaker than the 48% reading for the broad S&P 500. Energy is all the way down at 16%, while Industrials and Consumer Discretionary are at 40% or less. The two sectors with the strongest breadth levels are both defensive in nature — Utilities and Consumer Staples. We’d prefer to see the script flipped with cyclicals leading and defensives lagging.
Regardless of August performance, September also challenging In the above table the last 67 years of August S&P 500 performance has been split into positive and negative. Thirty-one negative Augusts were followed by September losses 51.6% of the time with an average loss of 0.44%. Thirty-five positive Augusts were followed by September losses 54.8% of the time with a slightly larger loss of 0.58%. August’s performance, positive or negative appears to have little influence upon September and its tendency for declines. However, past August declines were followed by bigger gains in the fourth quarter, 5.67% compared to 2.72%.
September Worst Month of the Year Since 1950, September is the worst performing month of the year for DJIA (–0.8%), S&P 500 (–0.5%), NASDAQ (–0.5%) (since 1971), Russell 1000 (–0.6%), and Russell 2000 (–0.5%) (since 1979). September was creamed four years straight from 1999-2002 after four solid years from 1995-1998 during the dot.com bubble madness. In post-election years, September’s overall rank improves modestly in post-election years going back to 1953 (second, third or fourth worst month depending on index). Average losses are little changed. Although September 2001 does influence the average declines, the fact remains DJIA and S&P 500 have declined in 9 of the last 16 post-election year Septembers. Although the month has opened strong 13 of the last 22 years, once tans begin to fade and the new school year begins, fund managers tend to clean house as the end of the third quarter approaches, causing some nasty selloffs near month-end over the years. Recent substantial declines occurred following the terrorist attacks in 2001 (Dow: -11.1%) and the collapse of Lehman Brothers in 2008 (Dow: -6.0%). Solid September gains in 2010; DJIA’s 7.7%, S&P 500’s 8.8% were the best since 1939, but the month suffered nearly the same magnitude declines in 2011, confirming that September can be a volatile month.
September could get ugly Earlier this month we presented updated 1-Year Seasonal Pattern charts for DJIA and S&P 500 (soon thereafter NASDAQ) that reset historical patterns to begin at the start of the second half of 2017. Since that post, the market certainly has cooled, slipping modestly lower while volatility has also picked up from historical lows observed in July. Soon it will be September, the historically worst performing month of the year. Further downside potential in September is also indicated by two of the four patterns tracked, “Post-Election Years” and “First Elected Republican.” Pressure has been steady and plentiful on the Trump Administration since even before Inauguration Day, but that pressure appears to be increasing on an almost daily basis. No healthcare reform, no tax reform, North Korean saber rattling, Hurricane Harvey and a looming Federal debt limit are just a few or the numerous issues and concerns that appear to be piling up on the White House’s doorsteps. Individually, the market would likely manage, but all together, it could be too much for the market to quietly work through. A deeper pullback in September is increasingly probable.
Wasn't August the worst month of the year? Either way, I know Aug/Sept are the hardest for stocks. And the market is looking pretty weak right now. I think I'll be voting more Down than up in the coming weeks!
Typical September Pattern: Late-Month Breakdown Over the last 21 years the market’s performance in September has been turbulent. DJIA recorded back-to-back losses in 2001 and 2002 of 11.1% and 12.4% respectively, but DJIA was up 7.7% in 2010. Average losses range from 0.06% by NASDAQ to a 0.69% decline by DJIA. Based upon the above chart September typically begins well and all five indexes generally trade choppily higher until around the 15th trading day of the month. From this point until the month closes, DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 give back any early-month gains and drift into the red.
Breadth Lagging New Highs Sep 11, 2017 Below is a chart of the S&P 500-tracking SPY ETF from our Interactive Chart Tool platform (use it for free at any time here). If current prices hold, the S&P will make a new all-time closing high today…eclipsing highs last made in early August. We’ve been covering underlying market breadth quite a bit over the last few weeks, and as shown below, as of this afternoon, 62% of stocks in the S&P 500 are above their 50-day moving averages. We realize the S&P 500 just made a new high today, but 62% is well below prior high points seen for this breadth measure over the last year. We’d like to see it more elevated when a new high for the index is made.
S&P 500 down five straight on September option expiration day September’s option expiration week is up 54.3% of the time for DJIA and slightly better for S&P 500 and NASDAQ since 1982, but is has suffered several sizable losses. The worst loss followed the September 11 terrorist attacks in 2001. In the last fourteen years, NASDAQ has the best record during September’s option expiration week, up twelve times. Triple-Witching Friday had been firm with all three indices advancing every year 2004 to 2011, but S&P 500 has been down five straight since and DJIA and NASDAQ four of five.
