Seasonal MACD Switching Strategy Update: Let’s Not Jump the Gun
By: Christopher Mistal
April 02, 2015
If you are reading this, then there is little doubt that you are reasonably familiar with our “Best Months” Switching strategies based upon DJIA’s and S&P 500’s “Best Six Months” November to April and NASDAQ’s “Best Eight Months” from November to June. You also know that now is the time we begin looking for an MACD Sell signal for DJIA and S&P 500 accompanied by corresponding early warning signs of market weakness. We are NOT issuing our Seasonal MACD Sell Signal today. Continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.”

In the past, we have issued a sell signal as early as the close of trading on the first day of April (2002, 2005, 2006, 2012 and 2013). In those previous years, MACD was already negative even before the calendar indicated it was April. Out of these five early signals, only 2002 proved substantially timely as the “Worst Six Months” were down over 20% that year. In 2005, the market did decline in April, but came roaring back in May. In 2006 the market peaked in early May before declining. Holding until the end of April 2012 would have been a better exit and in 2013 the market also continued higher through April into May.

[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]

As you can see in the charts above, this April also began with MACD negative. With the exception of three trading days in March, it has been negative since March 4 for S&P 500. DJIA has been negative since March 5 with just two brief days positive. The MACD signals that occurred on the fourth and fifth of March, just a few days after DJIA and S&P 500 closed at all-time highs, highlight the importance of  MACD crossovers. Since then, DJIA and S&P 500 have been trading in an increasingly narrow range on either side of their respective 50-day moving averages while Stochastic, MACD and relative strength indicators have drifted lower toward oversold levels. Selling with indicators near oversold levels is not the best exit.

Furthermore, although the market has been weak recently it has been so during a typically seasonally weak time period. We repeatedly pointed out the markets tendency to decline after mid-March and into the end of the first quarter on end-of-quarter portfolio restructuring. Even the market’s poor performance on the usually strong first trading day of April is most likely the result of the confluence of Passover and Easter this week and all the vacations that often occur as a result of school breaks.

April’s prowess for gains, in all years, and especially pre-election years like 2015 is yet another reason to stick around a bit longer. DJIA has been up nine years in a row in April with an average gain of 3.1%. April is also DJIA’s best month of the year and S&P 500’s third best since 1950. Even in years when March was negative, the odds of a solid advance in April remain respectably high. Going back to 1950, both DJIA and S&P 500 have declined 22 times in March. Following that decline, DJIA and S&P 500 advanced 14 times in April with average gains exceeding 1%.

[DJIA Down March since 1950]
[S&P 500 Down March since 1950]

Historically the anticipation of Q1 earnings has frequently driven the market higher in April. First quarter earnings estimates have been revised significantly lower, but this only improves the odds for more companies to beat the lower bar. Without a doubt, the strong U.S. dollar will prove to be a drag on revenues for some companies, but continued productivity improvements, cost cutting and stock buybacks are going to boost the bottom line.

Recent resilience by tech and small-cap indices is also encouraging. NASDAQ and Russell 2000 also broke out to new highs this year, but unlike DJIA and S&P 500, they remain above their old trading ranges from late last year. This tech and small-cap strength bodes well for DJIA and S&P 500 especially now that tech enjoys a greater weighting in both indices. As of yesterday’s close information technology made up nearly 20% of the S&P 500 while Apple’s addition to DJIA increases tech exposure there.

Taking all of this into consideration along with the fact that NASDAQ and Small-caps typically enjoy a “Best Eight Months” that lasts until the end of June, we will continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.”  We will issue our Seasonal MACD Sell signal when corresponding MACD Sell indicators crossover to sell again or sooner if NASDAQ and Russell 2000 show signs of breaking down. In the meantime, continue to heed all stop losses in the Almanac Investor Stock and ETF portfolios.

[Almanac Investor ETF Portfolio April 1, Closes]

Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in UNG, USO, XLU and XLV.