Any Post-Fed Meeting Weakness is Usually a Good Buy Opportunity Today, the FOMC will meets for the fifth time this year and based upon CME Group’s FedWatch Tool there is a 96.9% chance they will not raise interest rates when the meeting ends on tomorrow. Instead, Fed watchers will be looking for any hint of when the Fed may begin shrinking its balance sheet. In the above chart the 30 trading days before and after the last 75 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 more frequently followed by weakness. Of the last 75 announcement days, the S&P 500 finished the day positive 44 times. Of these 44 positive days S&P 500 was down 25 times (56.8%) the next day. Of the 31 down announcement days, the following day was down 17 times (54.8%). All 75 announcement days have 0.45% average S&P 500 gains while the day after has been a net loser with S&P 500 declining 0.31% on average.
The S&P 500 Is Breaking Out, Now What? Posted by lplresearch With the S&P 500 breaking out to new all-time highs, the big question is: How high can it go? For starters, the S&P 500 has made seven new all-time highs this month, the most for any one month since November 2014 had 12 new all-time highs. Here’s where things get interesting: The previous two years before this breakout represent one of the tightest two-year ranges ever for the S&P 500. What does that mean? Think about it—all we hear about is how volatile equities have been recently. From the surprise China yuan devaluation that induced a 14% pullback starting last August, to the more than 10% dive to start 2016 due to global growth concerns—volatility has been everywhere in the past year. Not to mention how quickly stocks bounced back after both of those sudden drops. Of course, these shocks came on the heels of more than three-and-a-half years without so much as a 10% correction, so maybe the volatility of the past year is normal and everyone just forgot what volatility is? Last week, we noted the S&P 500 was more than 20% above the February lows and one could argue it is starting a new bull market. In reality, this should probably be considered a continuation of the bull market that has been alive for the past seven years. Building on this, in the two years ending in June 2016, the S&P 500 traded in a range of less than 18%—one of the tightest two-year ranges for the S&P 500 ever. Again, we’ve had some big drops and bounces recently, but looking at the big picture shows there is a good reason to think that the S&P 500 has simply consolidated in a sideways pattern for the past two years—in essence, catching its breath after the huge gains during the previous years. Going back to 1980, three other times saw tight two-year ranges like we are in now, and all three took place ahead of multi-year bull markets. The two-year range before early 1985 kicked off a +80% rise in the S&P 500 over the next two-and-a-half years before the crash of 1987. Then, the tight range of the mid-1990s led to the late 1990s bull market, which saw the S&P 500 soar more than 200% during the next five-plus years. Lastly, a tight two-year range in 2004 and 2005 occurred before a 24% rally in the next 20 months. In conclusion, breaking out of this tight range after two years of consolidation could potentially be a good sign for continued equity gains. For more on the subject of breakouts—and also what worries us about equities—be sure to read our Weekly Market Commentary, due out later today. The Lack Of A Pullback Is A Global Thing Posted by lplresearch Pullbacks so far in 2017 have been historically small for equities here in the U.S., with the S&P 500 Index’s last 5% correction occurring more than a year ago and the last 3% dip as far back as nine months ago. Incredibly, the largest pullback so far in 2017 for the S&P 500 is only 2.8%, marking the smallest intra-year pullback since 1995 and the second smallest going back to the Great Depression. Now here’s the catch: This lack of a substantial pullback is not limited to the U.S. Per Ryan Detrick, Senior Market Strategist, “There must be something in the water around the globe, because the S&P 500 isn’t the only major index that hasn’t pulled back much in 2017, and we’ve never seen anything like this before. 1995 is widely considered one of the least volatile years ever, with the max intra-year pullback for the S&P 500 standing at a record low of 2.5%. But did you know that the MSCI Emerging Markets (EM) Index pulled back 18.4% that year while the Japanese Nikkei lost 26.4% from peak to trough? Well, this year EM has pulled back only 3.0% and the Nikkei 6.5%, making 2017 stand alone as the year that global volatility stopped.” Since 1990, if you add up the max intra-year pullback on the S&P 500, EM, Nikkei, and the MSCI EAFE Index (Europe/Asia/Far East), the total combined pullback from the four major indexes so far this year is only 14.6%, well below the previous record of 32.3% from 2005. What does it mean? History would suggest that what we’ve seen so far this year is extremely rare, and to see it continue through the end of the year would be even rarer. Some type of increased volatility around the globe would be perfectly normal. When it comes, it will be important to remember that volatility is just that: normal. We appreciate that it can be easy to get lulled into a sense of comfort after such a long stretch of market serenity, but that isn’t how markets usually work.
Using the SPY chart, counting the cause from the consolidation range we just broke, i count a move to 259, which equals 2,590 for the S&P Most of my 401k is tied up in an S&P index, im staying in til 2,550 $1.00 x 3 box reversal P&F
All Good Streaks End, DJIA 10 Straight & Counting Today DJIA extended its consecutive daily winning streak to 10 trading days. Nine of these days were also new all-time highs. Neither is a record-setting feat, but DJIA is getting closer. Its longest winning streak on record going back to 1901 was 13 trading day in January 1987. Its longest streak of consecutive new all-time highs was also in January 1987 at 12. DJIA matched that previous all-time high winning streak earlier this year in February. Ten trading day or longer daily winning streaks are rare. DJIA has had only 21 of them prior to the current streak since 1901. Of those 21 winning streaks, four were also new all-time high streaks that latest 10 or more trading days (August 1927, July 1929, January 1987 and February 2017). In the following chart, the 30 trading days before and 60 after the daily winning streak of 10 or more trading days came to end. Generally, DJIA remained bullish over the next 60 trading days (approximately three calendar months), only the pace of gains slowed. Looking further ahead, DJIA’s performance six months and one year later are in the following table. By the one year later point, DJIA’s performance is mixed, higher only 55% of the time with meager average gains of just 0.89%. Click here for full size table…
August-September Weakness Could be a Positive for the Market Over the last 30 years (1987 to 2016) August and September combined have been the worst two consecutive months of the year for DJIA, S&P 500 and NASDAQ. August ranks dead last while September has been second worst. This one-two combo has resulted in average losses of 0.2% by NASDAQ to 1.8% by DJIA. S&P 500 average decline has been 1.3%. As recently as 2015 the period was hit with a sizable pullback. In many years, this weakness proved to have been a great buying opportunity. In the following table, August-September performance by DJIA, S&P 500 and NASDAQ has been ranked from strongest to weakest with subsequent fourth performance. In years when August and September combined for a net loss, fourth quarter average performance more than doubled for DJIA and S&P 500 while the frequency of fourth quarter gains also improved. Of the 14 down August-September periods suffered by S&P 500, just one subsequent fourth quarter was also down, 2008. Our Tactical Seasonal Switching Strategy currently has the Almanac Investor Stock and ETF Portfolios in a defensive posture with a mixture of long, short and defensive positions along with some cash. Well-chosen defensive positions in healthcare, utilities and bonds have ensured the portfolios have not fallen significantly behind the major indexes during their grind modestly higher the past few months while still being well-aligned to survive any potentially weakness lurking ahead. Our Seasonal MACD Buy Signal will confirm when it is safe to be more aggressive sometime after October 1, well ahead of any fourth quarter or yearend rally.
Putting The Dow 10-Day Win Streak In Perspective Posted by lplresearch The Dow Jones Industrial Average finished slightly red yesterday (August 8, 2017), ending a streak of 10 consecutive closes higher. This was the second 10-day win streak of the year, with a 12-day win streak ending in late February. We wrote about what happens after 10-day win streaks here and looking back (correctly) concluded that long winning streaks have rarely been bearish signals. The recent 10-day win streak, the second this year, marks the first year since 1959 to have two separate 10-day win streaks; that’s nearly 60 years! It doesn’t stop there though. Per Ryan Detrick, Senior Market Strategist, “The Dow’s 10-day win streak gets all the headlines, but looking under the hood reveals this was the worst return during a 10-day win streak ever at 2.8%. Also, the S&P 500 Index was up only six days out of the 10 with a small 0.4% gain during the period. Both indexes’ performances were the worst ever amid a 10-day win streak for the Dow. In other words, the streak is impressive, but it isn’t like this rally is blasting off into space–it is historically reserved actually.” What does it all mean? First off, it is actually encouraging that markets aren’t soaring to new highs. Slow and steady tends to win the race when it comes to investing. Additionally, we won’t get too tied up into schematics here; but the bottom line is this bull market is strong and new highs tend to beget new highs. The recent divergence between the two indexes could be a simple function of the differences in how the indexes are constructed-the Dow being price-weighted while the S&P 500 is market cap weighted. Thus, some of the smallest components of the Dow by market cap have the highest weights due to the price-weighting nature of the index, and those have had a good run during the past two weeks–thus skewing things.
Small caps outperform ahead of Labor Day In the following chart, thirty-eight years of daily data for the Russell 2000 index of smaller companies are divided by the Russell 1000 index of largest companies, and then compressed into a single year to show an idealized yearly pattern. When the graph is descending, large-cap companies are outperforming small-cap companies; when the graph is rising, smaller companies are moving up faster than their larger brethren. The most prominent period of outperformance generally begins in mid-December and lasts until late-February or early March with a surge in January. This time of outperformance by small-caps is known as the “January Effect.” In recent years, another sizable move is quite evident just before Labor Day. One possible explanation for this move is individual investors begin to return to work after summertime vacations and are searching for “bargain” stocks. In a typical year, small-caps would have been lagging and could represent an opportunity relative to other large-cap possibilities. As of today’s close, Russell 2000 is up 1.9% compared to the Russell 1000 being up 9.8% year-to-date. However, the small-cap advantage does wane around mid-September.
Small-Cap Labor Day Advantage: Just the Numbers Yesterday we noted the tendency of small-cap stocks to outperform large-cap stocks around the Labor Day holiday. Today we present the numbers based upon the Russell 1000 and Russell 2000 indexes from 1979 to 2016. Small-cap advantage typically begins on or around the 18th trading day in August and lasts until the 12th trading day in September. On average the Russell 2000 has outperformed the Russell 1000 by 0.8% during this time span with the Russell 2000 outperforming 71.1% of the time over the last 38 years.
What Could A Government Shutdown Mean For Equities? Posted by lplresearch Although we consider it unlikely, the U.S. government could shut down later this month for the first time since 2013 if a must-pass spending bill does not clear Congress. Shutdowns have been rare the past two decades, but they happened quite often in the ‘70s and ‘80s. Per Ryan Detrick, Senior Market Strategist, “There has been slight underperformance on average during times of a shutdown, but recent history suggests markets look past Washington’s squabbling, regardless of the length of a shutdown. The previous two shutdowns in 1995/1996 and 2013 did little to slow down those bull markets, despite each lasting more than two weeks.” Two final things to consider: The last two times a government shutdown happened when Republicans controlled both the House and Senate (as they do now), the market rose. The previous 18 shutdowns started in September, October, November, or December. This could be the first shutdown in any other month, making an April shutdown all the more interesting.
The S&P 500 Hasn’t Done This For 50 Weeks Posted by lplresearch The S&P 500 Index gained 0.7% last week, halting a two-week losing streak. But under the surface something very rare happened: it was the 50th consecutive week that the index hasn’t posted a weekly decline of at least 2%. We’ve noted many times over the past few months how historically rare 2017 has been regarding its lack of volatility, and this is yet another way to show it. Per Ryan Detrick, Senior Market Strategist, “Bull markets tend to advance amid calm trends and turn more volatile near tops, while volatility usually takes full grip during bear markets. We expect more volatility to start soon, but tranquility has reached historic proportions, so we’d view an increase in volatility as perfectly normal; by no means are we seeing reasons to think this bull market is over.” How meaningful is a streak of 50 consecutive weeks without a 2% drop? Well, for starters, this is only the sixth time in history it has happened. Also, the 14.8% gain over the past 50 weeks is the weakest advance over that stretch compared with the other five periods. Still, it’s what happens next that gets our attention. During all five instances, the S&P 500 was higher six months after with an average gain of 9.5%, while a year later it was also higher on every occasion with an impressive 19.8% average gain. As discussed in our latest Weekly Economic Commentary, we believe the chances of a recession starting soon are slim. This study further supports the notion that long periods without volatility amid a bull market do not mean it’s almost over, and we don’t think a peak in this cycle is on the horizon. At the same time, it won’t be an easy ride; we expect volatility to increase over the coming months. 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.
Trading before Labor Day Slightly Bullish In recent years, Labor Day has become the unofficial end of summer and the three-day weekend has become prime vacation time for many. Business activity ahead of the holiday was more energetic in the old days. From 1950 through 1977 the three days before Labor Day pushed the DJIA higher in twenty-five of twenty-eight years. However, since then the days leading up to the long weekend have become mixed. In the last 22 years, the Friday before Labor Day is slightly bullish, but only slightly. The Russell 2000 small-cap index has the best record of gains, up 63.6% of the time, but sizable declines in 2013 and 2011 keep its overall average performance in check. September’s Waning First Trading Day Bullishness Although the first trading day of September has been up in 13 of the last 22 years, this trend appears to be fading as the S&P 500 has been down seven of the last nine first trading days. This trend is mostly reflected in the DJIA while NASDAQ has been up in five of the last nine first trading days. 2015’s nearly 3% across the board shelling was the worst first trading day of September since 2002. This year the first trading day falls on Friday before the three-day Labor Day holiday weekend and could be influenced by lower than average volume due to the holiday.
Day after Labor Day Solidly Bullish In the last 22 years, DJIA, S&P 500, NASDAQ and Russell 2000 have all registered average gains of around 0.5% on the Tuesday after the long Labor Day weekend. NASDAQ and Russell 2000 have been up five years in a row however, DJIA and S&P 500 have been down in four of the last seven years. On Wednesday the market’s performance has been varied. DJIA has performed the best, up 72.7% of the time with an average gain of 0.13%. NASDAQ is worst, up only 50% of the time with an average loss of 0.13%.
Will The S&P 500 Ever Correct Again? Posted by lplresearch Think about this: the last time the S&P 500 Index was more than 3% away from its all-time high was November 7, 2016. That means there have been 10 consecutive months without so much as a 3% correction in the S&P 500. In mid-August we recommended Taking A Little Risk off The Table; we believe the bull market will continue and our longer-term outlook for the economy looks good. However, several near-term catalysts could trigger a bout of volatility, and being more prudent at this point in the economic cycle also makes sense. Per Ryan Detrick, Senior Market Strategist, “Consider that the S&P 500 has closed higher 17 of the previous 18 months on a total return basis. Trees don’t grow forever and neither do bull markets. Things still look good, but 10 months without a 3% correction is now the second longest streak ever and is adding to our conviction in being more cautious here and now.” While we have our concerns, as the chart below shows, most of the long streaks (5 months or more) without a 3% correction took place amid bull markets, and often, following each one the market ascended. For example, long streaks without a 3% correction took place in the mid ‘60s, early ‘80s, and mid ‘90s – all times that saw continued gains well after the initial 3% correction. This likely suggests that should the inevitable correction come, the bull market isn’t near its end; it’s more likely taking a breather.
Another New High: Finally Sep 11, 2017 With the S&P 500 poised for an all-time closing high today, bulls are breathing a sigh of relief after what seems like forever since the S&P 500’s last record close. The reality is that the last record closing high for the S&P 500 was just 23 trading days ago. The chart below shows prior streaks for the S&P 500 where the index had consecutive closes without a new all-time high since April 2013 when the S&P 500 made its first record closing high for the current bull market. Shortly before the current streak, the S&P 500 went nearly twice as long without closing at a new high, and then in the period leading up to last November’s election, the length of time without a new high was just about triple the current streak. As if that wasn’t bad enough, before that streak from the middle of last year, we all remember the 285 trading day stretch from May 2015 through July 2016. All in all, there have been eleven other streaks in the last ~4 years that were about as long or longer than the current streak. This streak may have seemed ‘long,” but that’s more indicative of investors potentially feeling entitled to gains than anything else.
Why The S&P 500 Monthly Win Streak Could Have Bulls Smiling Posted by lplresearch The run stocks have been on since the February ’16 lows is truly an impressive feat. Per Ryan Detrick, Senior Market Strategist, “The S&P 500 is up 10 consecutive months on a total return basis and has been higher 17 of the past 18 months. Other than those test rockets Elon Musk is firing into outer space, not much has been consistently higher than equities over this timeframe.” So on a total return basis the S&P 500 is up 10 consecutive months, but take note this does include dividends. Going by only price shows it has been higher five consecutive months for the first time since a five-month win streak coming off the February ’16 lows. Here’s the catch, going back in history a five-month win streak is one of the more bullish signals for longer-term returns. According to Ryan Detrick, “This is the 25th time the S&P 500 was up five straight months since 1950. The good news for bulls is a year later it was higher 23 out of the previous 24 times and higher 13.2% on average.” Be aware though, that this current streak was also the weakest return over a five-month win streak at +4.6%. None the less, although near-term we could see an increase in volatility, we believe this is one the bulls can hang their hat on that the bull market is far from over.
What Happens If You Miss the 10 Worst Days of the Year? Posted by lplresearch Did you know that if you could have avoided the 10 worst days of each year for the S&P 500 Index since 1990, you would have been higher every single year with average annual gains of close to 40%? Of course, saying you’ll do that—and actually being able to accomplish it—are two totally different things. What if you missed the 10 best days of the year? Well, in that case, you would have been down on average 13.6% a year since 1990. Per Ryan Detrick, Senior Market Strategist, “Let’s get one thing straight, no one can predict the 10 best or 10 worst days of the year. Although it would be fun to somehow do this, the exercise hammers home how for the average investor, being invested and not making a lot of short-term bets is likely the best way to accumulate long-term wealth.” Here are some key takeaways: Even if you missed the 10 best days of each year, you would have still been in the green five times (1991, 1995, 1996, 1997, and 2013) If you missed the 10 worst days and the 10 best days in 1993 and 2005, you had the smallest difference at 28.2% If you missed the 10 worst days in 2009, you added 88.8% for the year—which is the largest gain If you missed the 10 worst days and the 10 best days in 2009, you had the widest difference at 107.5% If you missed the 10 worst days in 2011, your return went from 0% to 48.1%—which is the largest swing
Could a Move Higher in the S&P 500 Biotechnology Index Be Your Cup of Tea? Posted by lplresearch The S&P 500 Biotechnology Index may be ready to break out of a multi-year base in the form of a bullish cup-and-handle chart pattern. If this type of chart pattern executes, then based on historical data, the index price is likely to move higher over the long term. Technical analysts describe a bullish cup and handle as a continuation-type pattern in which the price consolidates into what resembles a tea cup, followed by a breakout in the form of the cup’s handle. Once the pattern is complete, the price is likely to continue to move upward. To determine how much higher the price is likely to move following a breakout, you simply measure the price change from the bottom of the cup to the beginning of the handle, and add that value to the top of the handle. The final number is your bullish price objective. The current pattern, which began in August 2015, took approximately two years to form its base, or cup. More recently, over the months of July and August 2017, the handle became more visible (Figure 1). Earlier this month, the index price has remained above the 4,000 level for more than three trading days, which increases the likelihood that the pattern executes to the upside, and the price continues higher over the next 3–12 months. Looking at historical data going back to 1994, there were 19 instances when the S&P 500 Biotechnology Index executed a bullish cup-and-handle chart pattern, and both average and median returns over the subsequent 3- to 12-month periods were impressive (Figure 2). The recent cup-and-handle pattern breakout on the index is providing an initial signal that the longer-term trend may be changing, which may result in the S&P 500 Biotechnology Index’s price to continue moving higher. Will this be the cup of tea investors have been long awaiting as a signal for a potential biotechnology-related trade? Well, considering that this multi-year base formation has just recently been triggered, it may be prudent to wait for further confirmation of a trend reversal prior to investing to help mitigate the possibility that this is a false signal. Stay tuned to the LPL Research blog for future analysis of S&P 500 industry groups.
Welcome to the Second Largest Bull Market Since WWII Posted by lplresearch Last Monday may not have felt like an important day for investors, but did you know it was the day that the current bull market in the S&P 500 Index officially became the second strongest since World War II (WWII), as the chart below shows? Per Ryan Detrick, Senior Market Strategist, “The current bull market is now up nearly 270%, besting the 267% gain from June ’49 to August ’56. Only the huge bull market of the 1990s stands in the way of its gold medal.” As we’ve mentioned before, in terms of length, the current economic expansion recently turned eight—which ranks it third since WWII. While the expansion that began in 1961 remains in second place (for now, at least), the period saw two bear markets: a roughly 30% decline from late-1961 to June 1962, which some refer to as the “Kennedy Slide of 1962”; and the nearly 22% drop in 1966 attributed to the Federal Reserve’s tightening of credit conditions amid heightened government spending for the Vietnam War and President Johnson’s social programs. Source: LPL Research, National Bureau of Economic Research 06/22/17 The logical question we continue to receive is: how much further can it go? We have an old bull market and an old expansion. When will the music stop? The current bull market is officially 101 months old, which might sound old (and it is), but remember that bull markets don’t die of old age, they die of excesses. As we laid out in the Recession Watch Update and update monthly on our House of Charts site, we simply aren’t seeing the type of excesses that have historically preceded major market and economic peaks. All in all, within the near term we do have our concerns, but when looking at the bigger picture, the global economy continues to chug along, inflation is low, the odds of a recession over the next 12 months are low, and central banks remain accommodative. All of that suggests that this bull might be old, but it still could have some tricks up its sleeves.
