Mid-Month Update: Breaking Out or Faking Out
By: Christopher Mistal
April 14, 2016
Last week on Tuesday after the market had closed, we issued our Tactical Seasonal Switching Strategy Sell Signal for DJIA and S&P 500. Faster and slower moving MACD indicators applied to DJIA and S&P 500 were all negative. MACD indicators do not pick exact tops (or bottoms); they are useful in showing shifts in momentum. That momentum can shift back the other way again as it has does this week. From the close on April 5 through yesterday’s close DJIA has gained 1.7%, S&P 500 1.8%. From April 6, the first day that one would have been able to act upon the Sell Signal, DJIA is up 1.1% and S&P 500 just 0.8%.
Our Sell Signal on April 5 applied only to DJIA and S&P 500 related positions. NASDAQ’s “Best Eight Months” last until June. We continue to hold technology and small-cap positions in both our Almanac Investor ETF and Stock Portfolios. Our Sell Signal for DJIA and S&P 500 is used to remind us to lighten up on long positions and begin looking at tightening stop losses and other defensive positions such as Treasury bonds as the historically “Best Six Months” of the year are nearing their end and the odds of further significant gains are beginning to fall. 
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
The double-digit market rally off the February lows is clearly visible in the charts above. At the start of April Stochastic, relative strength and MACD indicators were all stretched and signaling overbought conditions. A few days of minor losses turned MACD and Stochastic indicators negative and relative strength also dipped. DJIA and S&P 500 have essentially recovered all of their respective losses from late last year and early this and are roughly back at Q4 highs. NASDAQ has lagged. Whether or not the market fails at resistance or breaks out above its Q4 highs will depend largely on earnings and incoming data.
Odds Are...
Seasonally, April is the best month for DJIA with an average gain of 1.9% since 1950. April has been up in 44 of the last 66 years. However, average election-year performance over the same period has been weaker, 0.9% gain with 9 advances and 7 declines in election-year Aprils. April’s week after options expiration also has a solid track record, up 10 of the last 12 years with and average gain of 0.7%. This strength is echoed by S&P 500 with five straight bullish days beginning April 15 and running until April 21. April’s seasonal strengths do support some further market gains.
Economic data remains mixed though and could halt the rally in its tracks. Just this week, U.S. retails sales fell 0.3% in March versus an expected rise of 0.1%. Consumer spending accounts for more than two-thirds of U.S. economic activity. This tepid result helps explain the Atlanta Fed’s GDPNow model forecast of just 0.3% real GDP growth in the first quarter. Considering lower energy costs and the apparently strong labor market something would seem amiss. 
Today’s initial weekly jobless claims were just 253,000, the lowest since 1973. This appears to be an outstandingly firm data point or is it? Digging deeper reveals the labor force participation rate, at 63% is also the lowest it has been since the late 1970s. It would seem, and the lack of meaningful wage growth also tends to support, that there is more slack in the labor market than the headline numbers indicate. The employed are also confronting higher healthcare and higher education costs. In many areas substantially higher state and local taxes are absorbing the savings from lower energy and any wage gains.
Corporate earnings and revenue, on a year-over-year basis, are also concerning. Early reporter, JPMorgan Chase (JPM), reported earnings that beat expectations, but total revenue was down 3% and earnings actually declined 6.7%. They did beat the obviously low expectations of The Street, but it was mostly due to cost cutting measures. While Bank of American (BAC) reported a 6.7% drop in revenues and a 13% decline in earnings despite a 6.4% drop in expenses. Loan-loss provisions increased at both banks. Both reports seemed to lack any real catalyst for their recent share price strength other than they were not as bad as expected. Negative year-over-year results, mixed data and tepid growth could halt the rally at any point.
Then there is the Fed that seems overly focused on concerns outside of the U.S. They hiked the benchmark rate in December and have taken no action since citing recent global weakness and a dependence on incoming data and forecasts. Most recent PPI and CPI data suggest inflation is cooling again. There was not much inflation or growth before they moved to raise rates in December and there is even less today. As a result, CME Group’s FedWatch tool has the highest probability of the next hike being in December. Just further uncertainty that could disrupt the market.
Positive seasonal factors are winding down and the Presidential Election is heating up. Earnings, economic data and the Fed are mixed and unclear. The market gave us all a brief glimpse of how fast it can unravel earlier this year and the rally off the February lows has been brisk. Taking some risk out of portfolios seems to be the prudent course of action at this junction. This can be done through outright sells, tighter stop losses and the rotation into other typically defensive positions. It has been nearly a year since DJIA or S&P 500 traded at their highs and current strength is likely to fade before they do again.