Despite New Highs Typical September Action Ripe for Fall Folks have been questioning recently the validity and efficacy of seasonal market patterns as the equity markets have shown resiliency over the worst six months and the major indices log new highs, except for the Russell 2000. I have been hearing a good bit of frustration with our worst six months seasonality and out rather cautious stance. But it is at times like this when traders and investors throw in the towel on these evidence-based patterns that they often come home to roost. We have cited recently many of the fundamental, technical, psychological and geopolitical risks and reasons the market is ripe for a correction in addition to the seasonals. Our Best Six and Eight Month Switching Strategies have served us and our clients and subscribers well over the long and short terms. So while the market has held up pretty well since “Sell in May” it has not done much since our June 9 NASDAQ MACD Sell Signal when we went more fully risk off. At that time we held our big winners, sold underperformers, tightened up stops, limited new longs and implemented some defensive positions. After logging double-digit gains from our October 24 MACD Buy Signal, since June 9 DJIA is up 4.0%, S&P 500 2.7%, NASDAQ 4.0% and the Russell 2000 0.1%. In addition, September may look extremely robust on first blush, but look at the update chart below of a typical September with 2017 so far overlaid. It still looks like we are on track for a late month selloff, or at least set up for some month-end softness.
If not September, perhaps October then Last month we presented updated 1-Year Seasonal Pattern charts for DJIA, S&P 500 and NASDAQ with historical patterns beginning at the start of the second half of 2017. At that time, volatility was on the rise and the market was slipping modestly lower and since then the market recovered and DJIA, S&P 500 and NASDAQ all closed at new all-time highs again today. At today’s close DJIA, S&P 500 and NASDAQ are all performing modestly better than their respective best case scenario seasonal patterns for this point in the second half of the year. The prospects for a tepid second half of September still remain and even if September does buck historical patterns this year with solid gains, October could still present an issue as two of four (the most optimistic) seasonal patterns tracked in the charts above and below, turn negative.
Octoberphobia could still strike markets Let’s step out on another limb today and just go ahead and declare the Los Angeles Dodgers this year’s World Series Champs. Never mind completing the balance of regular season games or playoffs, they have the best record in all of MLB today. Congratulations LA Dodgers, 2017 World Champs!!! This is exactly what is happening today with the market. New all-time highs in September (and August) apparently automatically mean that “Selling in May” failed this year and the market can only go one direction from here. Let’s not forget its September 14, 2017 and the “Worst Four/Six Months” don’t actually end until November 1. That’s over six weeks from now and those six weeks are riddled with some nasty sell offs throughout recent history. In the above chart, we can see DJIA, S&P 500, NASDAQ and Russell 2000 rallying off their respective mid-August lows in the top pane and solid support by Advance/Decline lines in the lower panes. But, note how quickly things have changed in the past. A late-July peak in A/D lines and subsequent pullback was accompanied by a similar move in the major indexes. And from their respective May 2017 closes through yesterday’s close DJIA is up 5.5%, S&P 500 3.6%, NASDAQ 4.2% and Russell 2000 is up 4.1%. It would only take a few 1 percent daily losses to wipe out those gains. The next six plus weeks have a history of that and often much more. First off, next week is the week after September options expiration week and it has a dreadful history of declines particularly since 1990. S&P 500 has been down 22 times in the last 27 years with an average weekly loss of 1%. Then even before the trading week concludes, the eight-day span between Rosh Hashanah and Yom Kippur commences. DJIA has averaged a 0.6% loss during the period going back to 1971. And finally, 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. Absent a bear market in progress, October’s historical tendency for bear market bottoms is a moot point. October’s record in years ending in seven is of concern. October 2007 was a bull market high, in October 1997 DJIA plunged 12.4% from October 7 to October 27 and during the crash of October 1987 DJIA tanked 23% in two days. Keeping all of this mind and recognizing that more than six weeks remain before the “Best Six/Eight Months” of the year actually begin on November 1, it is far too early to sound the “all clear.” We will continue to maintain a defensive posture in the Almanac Investor Portfolios. We will also look forward to enjoying the remainder of the baseball season and playoffs. S&P 500 down 22 of last 27 week after September options expiration, average loss 1.00% Next week is the week after September options expiration week and it has a dreadful history of declines particularly since 1990. This week has been a nearly constant source of pain with only a few meaningful exceptions over the past 27 years (shaded in grey). Substantial and across the board gains have occurred just four times: 1998, 2002, 2010 and 2016 while many more weeks were hit with sizable losses. Since 1990, average weekly losses are even worse; DJIA –1.07%, S&P 500 –1.00%, NASDAQ –0.98% and a stout –1.50% for Russell 2000. End-of-Q3 portfolio restructuring is the most likely explanation for this trend as managers trim summer losers and reposition portfolios for the upcoming fourth quarter.
Sell Rosh Hashanah, Buy Yom Kippur Some of you may remember the old saying on the Street, “Buy Rosh Hashanah, Sell Yom Kippur.” Though it had a good record at one time, it stopped working in the middle of the last century. It still gets tossed around every autumn when the “high holidays” are on the minds of traders as many of their Jewish colleagues take off to observe the Jewish New Year and Day of Atonement. The basis for the new pattern is that with many traders and investors busy with religious observance and family, positions are closed out and volume fades creating a buying vacuum. Holiday seasonality around official market holidays is something we pay close attention to (page 88 Stock Trader’s Almanac). Actual stats on the most observed Hebrew holidays have been compiled in the table here. We present the data back to 1971 and when the holiday falls on a weekend the prior market close is used. It’s no coincidence that Rosh Hashanah and Yom Kippur fall in September and/or October, two dangerous and sometimes opportune months. We then took it a step further and calculated the return from Yom Kippur to Passover, which conveniently occurs in March or April, right near the end of our “Best Six Months” Tactical Switching strategy. Perhaps it’s Talmudic wisdom but, selling stocks before the eight-day span of the high holidays has avoided many declines, especially during uncertain times. While being long Yom Kippur to Passover has produced more than twice as many advances, averaging gains of 7.2%. It often pays to be a contrarian when old bromides are tossed around, buying instead of selling Yom Kippur – and selling Passover.
Another Look at Seasonality Posted by lplresearch As we noted in Is It Time for That September Weakness?, the second half of September can be troublesome from a historical standpoint. Below is a popular chart we’ve shared before that shows how late-September can be weak, but in a different fashion. It illustrates how often each day of the year has been positive for the S&P 500 Index over the past 20 years. As you can see, we are in the heart of one of the least likely times of the year to expect equity strength. Per Ryan Detrick, Senior Market Strategist, “Although seasonality is something we watch, in the end, fundamentals, technicals, and valuations matter more. Still, given that the S&P 500 has gone 10 months without so much as a 3% correction, which is the second longest streak ever, it is important to remember to pay attention to the calendar and be ready for any potential volatility.”
Small-cap surge coming to an end In mid-August we noted that small-cap stocks tended to outperform large-cap stocksfrom around the 18th trading day of August until the 12th trading day of September. This certainly was the situation this year as the Russell 2000 index surged 4.8% from August 24 through yesterday’s close compared to a 2.8% gain by the Russell 1000 during the same time period. The Russell 2000 is still outperforming today, but there are signs that this trend could be coming to an end. The first sign is the historical seasonal pattern highlighted in the above chart is on the verge of heading lower once again indicating that small-cap underperformance will return. Other headwinds to the continuation of the small-cap rally are Stochastic, relative strength and MACD indicators that are all in overbought territory (in the following chart). Russell 2000 is also sitting right around projected monthly resistance (red-dashed line). Stretched technical indicators at the end of a favorable seasonal period suggest that the bulk of the Russell 2000’s latest advance is most likely done.
Short Interest Report – Most Heavily Shorted Stocks Sep 27, 2017 Short interest figures for the middle of September were released after the close on Tuesday, so we have just updated our regular report on short interest trends for the market, sectors, and individual stocks for clients. Below we wanted to quickly highlight the stocks with the highest levels of short interest as a percentage of float. The list below shows the 29 stocks in the S&P 1500 that have more than a third of their free-floating shares sold short. Through yesterday’s close, the 29 stocks listed below have been crushing the market with an average gain of 8.14% (median: 6.03%) compared to the 1.24% gain for the S&P 1500. So unlike August where the most heavily shorted stocks were creamed, they’ve seen quite a bounce-back in September. Of the 29 names listed, just six stocks are down so far this month, and none of them are down by 10%. To the upside, six stocks are up by over 10%, and four of those have rallied more than 25%! In terms of sector representation, Consumer Discretionary has dominated the list with nearly half (14) of the 29 stocks shown. Behind Consumer Discretionary, the sector with the second most number of stocks listed is Energy with just four, so it’s pretty clear that Consumer Discretionary stocks are very much out of favor. In terms of individual stocks, the most heavily shorted stock in the S&P 1500 is Applied Optoelectronics (AAOI) which has nearly three-quarters of its float sold short, and behind AAOI another nine stocks have more than half of their float sold short. These names include Dillard’s (DDS), RH (where the CEO just purchased 14K shares on Tuesday), and Shake Shack (SHAK).
Trading Around Yom Kippur Bearish Over Last 21 Years Like Rosh Hashanah, Yom Kippur is also not an official market holiday, but is observed by many New York area schools and many Jewish. Their absence can dampen trading activity as positions are squared ahead of the holiday. This year Yom Kippur begins at sunset on Friday, September 29. Over the last 21 years the day before Yom Kippur has been weak. DJIA has advanced only 38.1% of the time and has recorded an average loss of 0.27% on the day. NASDAQ’s record is similar while S&P 500 has fared slightly better, up 47.6% of the time. Trading on Yom Kippur (or the next trading day) also leans bearish. DJIA, S&P 500 and NASDAQ all have average losses. NASDAQ’s record is the weakest, down 66.7% of the time.
The Most Volatile Month of the Year Oct 2, 2017 While it has historically been positive, October has the distinction of being known as the most volatile month of the year. What that means in a year where volatility has been non-existent remains to be seen, but if the market was going to become more unsettled at some point, history says that now is the time. Today, we wanted to show two examples of how volatility tends to spike during October. In terms of the S&P 500’s average intra-month range, going back to 1928, the percentage spread between its closing high and low during the month of October has been a staggering 8.30%. That’s more than 1.3 percentage points above the next highest month (November – 7.0%). After October and November, though, volatility really recedes with an average spread of only 5.26% in December. As shown in the chart above, February and December tend to have the smallest intra-month ranges, but February also has the fewest amount of trading days as well, so that skews things. Another way to look at monthly volatility on a more apples to apples basis is by measuring the index’s average daily percentage move (up or down) during each trading day of the month. Using this approach, the picture is very similar; volatility tends to pick up in September, October, and November and then fades in December to close out the year. Once again, October sees the largest average daily percentage move at 91 basis points (bps). In other words, the S&P 500 has historically averaged moves of close to +/-1% on trading days throughout the month of October. The key difference between this chart and the one above is that on this basis volatility in February is right inline with the other first eight months of the year. In fact, it’s pretty striking how average daily volatility tends to be so uniform for the first eight months of the year before going haywire in the final third.
Bullish Sentiment Approaching 40% Oct 12, 2017 This week’s sentiment survey from AAII showed an increase in bullish sentiment back near 40% and back near the recent high of 41.29% from mid-September. While 40% is hardly an extreme reading by any stretch of the imagination, this year there have only been four weeks where bullish sentiment actually topped 40%. With 40% being hard enough, an actual majority is a long way off, and that should keep the current streak of 145 straight weeks below 50% safe for the foreseeable future. As you might expect, bearish sentiment declined this week, falling from 32.8% down to 26.9%. That’s the lowest reading in five weeks and sixth lowest weekly print in bearish sentiment this year.
Friday the 13th in October? Oh No! Posted by lplresearch Tomorrow is the first Friday the 13th to happen in October since 2006. Of course, this is a big day if you are unfortunate enough to suffer from triskaidekaphobia—the fear of the number 13. A fear of the actual day of Friday the 13th is called paraskevidekatriaphobia or friggatriskaidekaphobia. Now that those big words are out of the way, does this fateful day really mean anything? The table below shows how the S&P 500 Index has performed historically each day of the week. But it’s really no surprise. Generally speaking, no one likes Monday, and it shows as it is by far the worst day of the week for the index. Since 1928, there have been 152 instances of Friday the 13th; and wouldn’t you know it, the S&P 500 does a little worse on average with an annualized 4.2% gain versus 12.8% for all Fridays*. Comparing the daily performance in the chart below, the index’s average return on Friday the 13th is notably below the median, which tells us that the average is skewed by some rather large drops. Speaking of those large drops, would you believe that they tend to take place in October? That’s right; the two worst “Friday the 13th”daily returns for the S&P 500 took place in the month of October: -3.8% in 1933 and -6.1% in 1989. The fun doesn’t stop there though, as tomorrow will be the thirteenth Friday the 13th to occur in October. Breaking it down by month, sure enough October tends to see some of the worst performances on Friday the 13th. Per Ryan Detrick, Senior Market Strategist, “Unless you break a mirror or see a black cat on Friday, we aren’t in any way saying one day matters more or less than another. Still, wouldn’t you know it— Friday the 13th tends to be a weak day on average; but taking it a step further, this day does even worse during October. You can’t make this stuff up!” Happy Friday the 13th everyone.
The Most Hated Stocks in the Market Oct 16, 2017 Short interest figures for the end of September were released last week, and we just recently sent out our regular update of overall and stock specific trends in short interest levels to clients. In the table below, though, we wanted to provide a quick look at which stocks in the S&P 1500 have the highest levels of short interest (as a percentage of float). All 25 names shown have at least 30% of their free-floating shares sold short, but amazingly, eight of those stocks have more than half of their float sold short. The most shorted stock in the S&P 1500 is Applied Optoelectronics (AAOI), which has more than 70% of its float sold short. It’s not very often that you see a stock with this high a level of short interest, but given the stock is down by a third this month alone, the high short interest looks justified. Other notable names with high levels of short interest include retail-related names like Dillard’s (DDS), Shake Shack (SHAK), Fred’s (FRED), RH (formerly Restoration Hardware), JC Penney (JCP), and Big Lots (BIG). Outside of SHAK and RH, these retail names are all down MTD. Overall, the 25 names listed below have seen an average decline of 2.91% (median: 3.19%) this month, compared to a gain of 1.47% for the S&P 1500. Normally, stocks with high short interest rally during periods when the market is strong, but these days, investors generally want nothing to do with them.
Trouble brewing in advance/decline lines? DJIA, S&P 500 and NASDAQ all closed at new all-time highs yet again today. S&P 500 and NASDAQ just barely made it. Russell 2000 came up short. This accomplishment by the major indexes is masking a potentially ominous sign. In the chart below, DJIA, S&P 500, NASDAQ and Russell 2000 all appear in the top pane while their corresponding advance/decline (a/d) line charts appear in the lower four panes. S&P 500 and NYSE a/d lines have been steadily trending higher since mid-August and appear to still be headed in that direction. NASDAQ and Russell 2000 a/d lines appear to have peaked earlier this month and have begun to move lower. This is of potential concern because fewer and fewer NASDAQ and Russell 2000 stocks are participating in the rally and generally what the majority of stocks do, eventually the index will do. A similar condition existed back in mid to late-July. NASDAQ and Russell 2000 a/d lines turned lower and shortly thereafter NYSE and S&P 500 a/d lines turned. NASDAQ then slipped 3.3% from late-July to mid-August while Russell 2000 dropped 6.4% over the same time period. DJIA and S&P 500 saw milder retreats of 2% and 2.2% respectively from August 7 to 18.
Small caps not participating in October rally As of today’s close, the market is just past the half-way point in October. DJIA has been the star of the month, up 2.64% already, comfortably above its average full-month of October performance of 2% over the last 21 years. NASDAQ is second best, up 1.97% nearly matching its full-month performance of 2.44%. S&P 500 and Russell 1000 are up 1.59% and 1.56% respectively. However the Russell 2000 Small-cap index has been headed lower since the fourth trading day of October. This small-cap trend is a divergence from the typical October pattern seen above. All five indexes typically rally in unison in October, just at different magnitudes. The last time Russell 2000 fell behind was in late July. Shortly thereafter DJIA, S&P 500 and NASDAQ also faded.
Weekly winning streaks since 1950 – All goods things come to an end S&P 500 and DJIA have racked up six consecutive weekly gains as of last Friday’s close. Historically, this feat is somewhat rare. S&P 500 has recorded 51 (including the current) weekly winning streaks of six or more weeks since 1950. The longest was 13 weeks in 1957. DJIA has recorded 45 (including the current) weekly winning streaks of six or more weeks over the same timeframe. DJIA’s longest streak was 14 weeks in 1965. DJIA and S&P 500 have both had concurrent weekly winning streaks 30 times of six or more weeks since 1950. Looking at the two charts below that graph the average daily performance 30 trading days before and 60 trading days after, DJIA and S&P 500 typically declined a little more than 1% when past weekly winning streaks came to an end. When the decline abated the trend higher remained intact, but gains were at a reduced pace.
Richmond Area Manufacturing Receding Tue, Jan 26, 2021 Just like yesterday's reading out Dallas, this morning's release of the Richmond Fed's Manufacturing survey was disappointing relative to expectations. Forecasts were calling for the index to hold steady at the December reading of 19. Instead, it fell 5 points to the lowest level since July. Like the Dallas Fed's survey, this reading points to a still-growing but also decelerating manufacturing sector in the Fifth District that also goes contrary to other strong readings like those from Markit and the neighboring Philly Fed; both released last week. That decline in the headline number was shared in most of the underlying components. Of the 17 sub-indices, 12 were lower month over month. For some of these, those declines were historically large and brought the indices to the bottom percentiles of historical readings. Currently, there are now four indices indicating contraction. Two have to do with expenditures, one with finished good inventories, and the other for the availability of skills. As for the indices for future expectations, breadth was similarly weak. New Orders erased all of the move higher from December as it came in at 12, just as it did in November. With New Orders growing at a slower pace, the Backlog of Orders likewise grew at a more muted pace. That index fell to 6, the lowest reading since August. The 11 point MoM drop was also in the bottom decile of all monthly moves. Given the deceleration of these two, Shipments likewise pulled back. The index for Shipments fell to 10, the lowest reading since the last contractionary reading back in June. While that slowdown in shipments is likely in part due to some slowing in demand, supply issues also appear to be a potential issue. Higher readings in the Vendor Lead Time index means that suppliers' products are taking longer to reach the surveyed manufacturers. This month, the index rose to a reading of 39. That is in the top 1% of all readings in the history of the survey. The only higher readings came early in the survey's life in December of 1994 (282) and January of 1996 (75). As orders still grow, manufacturers are taking on more employees. The index for the Number of Employees rose from 20 in December to 23 in January. That ties the pandemic highs from September and October for the highest reading since August of 2018. Similarly, the index for expectations for Number of Employees made its way higher in January. At 34, the index has only been higher once back in September. Although employers are taking on more people and expect to keep doing so at a historic rate, both of the indices for Wages and the Average Workweek were lower. Regardless, they both remain at historically strong levels and consistent with further growth. Additionally, one of the components of the report that is the most at an extreme is the index for Availability of Skills. The index dropped another 10 points in January and now sits in the bottom 3% of all readings since the series begins just over a decade ago. In other words, firms are experiencing a historic shortage of labor with desired skills. Contrary to the increase in employment, firms are cutting costs elsewhere. For the current conditions indices of the three expenditure related topics, each one was lower in January with Equipment and Software Expenditure and Business Services Expenditure both falling into contractionary territory. Finally, just as we have seen in other manufacturing surveys, prices are showing further acceleration for both prices paid and received. Prices paid came in at the highest level since April of 2019 and prices received at the highest level in 11 months.
As Goes January, So Goes The Year Stocks got off to a nice start in 2021, until the late January selloff, as everyone got GameStop fever. Should bulls worry about what a down January might mean for the rest of 2021? There’s an old adage on Wall Street that suggests, “As goes January, so goes the year.” This was first discussed in 1972 by Yale Hirsh of the Stock Trader’s Almanac, and it has an impressive track record. Simply put, when the first month of the year was green, it bodes well for the rest of the year (and vice versa). Given stocks closed red in January, how worried should investors be? As shown below in the LPL Chart of the Day, the numbers confirm that when the S&P 500 has been green in January, the index has been up 11.9% on average over the rest of the year (final 11 months) and higher 86% of the time. However, when that first month was red, stocks rose only 1.7% on average over the final 11 months and were higher barely 60% of the time. “A weak January could foretell of rough times ahead in 2021,” explained LPL Financial Chief Market Strategist Ryan Detrick. “The good news is lately the trend has been broken, as stocks have done quite well after a weak January.” In fact, 8 of the past 9 times January saw stocks lower the final 11 months finished higher.
Typical February Trading: Lackluster Over Last 21 Years February has historically been a rather bland month. Since 1950, S&P 500 has averaged a measly –0.04%. Over the last 21-year period S&P 500 average performance has declined to a loss of 0.6% in February. February’s first trading day has historically been good, like yesterday, and trading days eight, nine, ten and eleven have offered repeatable long opportunities over the last 21 years. Outside of these five days, the balance of February has been somewhat disappointing for bulls.
Post-Election Februarys Have Been Even More Troublesome From yesterday’s post, we knew February has a tepid recent record. In post-election years, February’s historically record has been even worse as historical average losses swell. In order to include as much data as we have available, we are using DJIA data since 1901, S&P 500 since 1930, NASDAQ from 1971 and Russell 1000& 2000 data beginning in 1979. When comparing post-election year February to the recent 21-year February seasonal pattern, the overall shape and trend does not change greatly however, weakness becomes more prevalent as the mid-month surge is less pronounced and second half declines expand. Breaking down historical performance by year confirms frequent post-election-year February losses, most notably by NASDAQ and DJIA. Generally speaking, when February is positive it is an “ok” month, but when the month has been down, it has frequently been down by sizable amounts. There are seven double-digit losses in the table and not a single double-digit gain.
Over a Quarter Eying a Correction Thu, Feb 4, 2021 In spite of the continued craziness in the headlines over the past week, sentiment has seen little in the way of change. AAII's weekly sentiment survey saw bullish sentiment fall just 0.3 percentage points to 37.4%. That is a third consecutive decline and leaves bullish sentiment at the lowest level since the end of October. Bearish sentiment was also lower this week dropping to 35.6% compared to last week's reading of 38.3% which was the highest level since early October. That leaves bearish sentiment right in the middle of the range of the past year, still several percentage points below last year's elevated levels and the more recent historically low readings. The bigger decline in bearish sentiment relative to the move in bullish sentiment resulted in the bull-bear spread to move back into positive territory after briefly dipping to -0.6 last week; the first negative reading since mid-October. Neutral sentiment picked up the losses rising to 27.1% from 24% last week. That 3.1 percentage point week over week increase only brings neutral sentiment back to similar levels to the end of 2020. In another sentiment survey from Investor's Intelligence, which surveys newsletter writers rather than individual investors, the readings were similar. Bullish sentiment in this survey also came in at some of the lowest levels since the fall. At 57.8%, it was the first sub-60% reading since mid-November and the lowest reading since November 4th. Bearish sentiment was slightly higher rising to 16.7% from 16.5% though it is still below levels from two weeks ago. While these survey results still lean historically bullish with the bull-bear spread at 41.1—which is in the top decline of readings going back to the 1960s—a higher share of respondents did report that they are looking for a correction. That reading climbed above 25% for the first time since the first week of November. While that is far from a historically high reading (historical average of 25.77%), it did end a streak of consecutive readings below 25% at 12 weeks long. Across the history of the survey, there have been 42 streaks of readings of "looking for a correction" below 25% that lasted for at least 12 consecutive weeks. In the table below, we show the 14 of these instances that occurred without a prior occurrence in the past year. These streaks coming to an end have typically pointed to some short term weakness with the next month and 3 month periods averaging a decline. For the one month period, returns have only been positive 30.77% of the time. Six months later performance has leaned positive but underperforms the norm. On the bright side, one year after these streaks come to an end performance has much more consistently been positive with slightly above-average returns.
