Tepid Best Six Months Elevates Odds of Worst Six Months Trouble
By: Christopher Mistal
March 08, 2016
Since the closing lows of February 11, DJIA rallied 9.0% through yesterday’s close. S&P 500 was up 9.4% over the same timeframe. NASDAQ peaked last Friday and was up 10.6%. That was an impressive rally for these broad indices considering it took just three weeks. However, the rally also caused the appearance of overbought signals. Stochastic, relative strength and MACD indicators were all stretched and have begun to roll over confirming the recent shift in momentum. See charts below.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
Given the magnitude and duration of the recent rally, a pause and period of consolidation is not unquestionable. After blasting through their respective 50-day moving averages, DJIA, S&P 500 and NASDAQ all paused right around projected monthly resistance (red dashed line). If 50-day moving averages hold during the consolidation, then the next move will likely be higher towards the 200-day moving average and perhaps beyond. A breakdown below the 50-day moving average would likely signal lower.
Down Best Six Months
From the Stock Trader’s Almanac, it is known that the “Best Six Months” (BSM) for DJIA and S&P 500 are November through April. These are the months where DJIA and S&P 500 log the majority of their gains, time and time again. Since October 1949, DJIA has racked up a BSM gain 52 times in 66 years with an average advance of 7.6%. S&P 500 has an identical record with a modestly lower average gain of 7.2%. 52 gains in 66 periods works out to a 78.8% success rate, a solid result.
Unfortunately, there is no guarantee that this will happen every time. This BSM period is turning out to be one of those exceptions going back to November 1949. As of yesterday’s close, DJIA was off 3.3% and S&P 500 was down 3.7% for the current BSM. We could pin this weakness on the Fed raising interest rates, slowing global growth, the plunge in energy and other commodities and shrinking corporate profits. Given the relatively few examples of negative BSM periods to compare to we decided to look at two different scenarios to determine what if any impact a weak or negative BSM period has on the subsequent “Worst Six Months” (WSM), May through October.
Although the WSM period is rightfully named, it is not always negative. Instead, there are generally less frequent gains and of lower magnitude. Looking back over the past 66 years, DJIA has advanced 39 times in the WSM and S&P 500 has 41 advances. However, average gains are significantly lower at 0.4% and 1.4% respectively.
[DJIA Below Average Best Months Table]
[S&P 500 Below Average Best Months Table]
In the above two tables, all below average BSM periods for DJIA and S&P 500 appear with the subsequent WSM lined up in the right side of the table. Any BSW that was less than 7.6% for DJIA and 7.2% for S&P 500 was included. This resulted in 33 occurrences for each. For DJIA, the subsequent WSM period in this scenario differed little when compared to all 66 years. Its average gain at 0.37% is only fractionally lower and the frequency of losses was also little changed (39.4% compared to 40.9% in all 66 years). S&P 500 however, did see a more substantial deterioration during the WSM. Its average turned to a negative 0.6% and frequency of declines jumped from 37.9% to 48.5%.
[DJIA Down Best Months Table]
[S&P 500 Down Best Months Table]
In these two tables only down BSM periods were examined. In this scenario the subsequent WSM period was considerably worse. The frequency of losses for DJIA and S&P 500 jumped to 57.1% and average performance slipped even further with losses exceeding 4%. Furthermore, double-digit WSM gains only occurred twice. In 2009, the worst bear market since the Great Depression ended during the previous BSM period and in 1982 the market finally exited the last secular bear market that was in place throughout all of the seventies. If the current BSM does indeed finish with a loss, then this summer could prove especially volatile.