May Outlook: Rally Stalling At End of Best Six Months, Time To Get Shorty
By: Jeffrey A. Hirsch & Christopher Mistal
April 28, 2016
Two months ago as the market was still in panic mode, we showed that March and April market strength often follows a back-to-back down January and down February. March delivered well above average gains, up 6.6% on the S&P for the month. While the S&P is off a bit intraday today on Carl Icahn’s disclosure on CNBC’s Power Lunch show that he is out of Apple (AAPL) and no longer has a position, it is still up 1.5% for April at this writing. The billionaire activist shareholder still likes AAPL, but blames China for his exit from the stock position. 
Nevertheless, the market has performed rather true to historical seasonal patterns this year, especially this spring. Last month, we expected the “rally to continue into and through April, but to fall short of new highs.” Now that the market has rallied into the end of April and appears to be stalling, it may be time to put in the prevent defense and consider some short positions. 
After issuing our Best Six Months Seasonal MACD Sell Signal on April 5, the S&P has rallied 2%, but this is not unusual. Our system does not, nor does any, pick exact tops. Both fast and slow MACDs on both the Dow and S&P had gone positive for several days, but they all turned negative again last Friday. 
When we issued the Sell Signal we sold SPDR DJIA (DIA), SPDR S&P 500 (SPY), Vanguard REIT (VNQ) and iPath Bloomberg Copper TR Sub-Index ETN (JJC), added AdvisorShares Ranger Equity Bear (HDGE), iShares 20+ Year Treasury (TLT) and iShares Core US Aggregate Bond (AGG) on dips, and tightened up stops on other positions.
Subsequent, to our Sell Signal and the portfolio adjustments we made at the time, we have recently suggested several downside/bearish/short trades. The gold stock Direxion Daily Jr Gold Miners Bear 3X (JDST) trade was a bust and was stopped out quickly, but the Financials, Transports and Materials sector shorts are still in play. And our Five Seasonal Sector Shorts are set up well.
The market has been rather forgiving this earnings season, giving many stocks a pass (except AAPL) on misses and lower numbers, attributing it all to a tepid economy. But it has failed to breakout or breakdown, until perhaps today. So the $64,000 question is: What will knock the market down if all the disappointing news has not done so already?
Maybe its Apple and Icahn, but Apple was already down. 
Perhaps a surprise hike from the Fed in June might be the straw. While the FOMC cleared the way this week in their announcement for a hike in June, the futures market has the odds very low. Many pundits have been haranguing the Fed for not being independent or prescient. So maybe June is the time the Fed stakes its ground and hikes a quarter point as Oil is up 75% since February and inflation is brewing and the market is still near all-time highs. This could set up a typical summer swoon.
Pulse of the Market
Since issuing our Tactical Seasonal Switching Strategy MACD Sell Signal after the market’s close on April 5, DJIA and S&P 500 meandered 2.5% and 2.4% higher as of yesterday’s close. As of yesterday, both the slower and faster moving MACD indicators applied to DJIA (1) and S&P 500 were negative. Recent market resiliency has provided an opportunity to unwind some long positions as it still appears there is significant resistance at the all-time highs of last May.
For the second time in about four months, DJIA’s 50-day moving average has crossed back above its 200-day moving average (2). This crossover is known as a golden cross and has been traditionally a bullish omen, except that was not the case four months ago nor many of DJIA’s other recent occurrences.
Dow Jones Industrials & MACD Chart
One reason why this golden cross could be a false sign of further is gains is the fact that the market has been running in streaks recently and the current winning streak is looking quite long in the tooth (3). After declining in seven of ten weeks from week ending December 11, 2015 through February 12, 2016, DJIA and S&P 500 (4) have been up in eight of the last ten weeks. NASDAQ has one more week of losses (6) over the past ten weeks and is currently on track for two losses in a row.
Aside from two weeks when DJIA and S&P 500 were down, NYSE Weekly Advancers have outnumbered NYSE Weekly Decliners (7) by a healthy margin. This confirms broad participation in the rally which is a healthy sign. However, weekly New Highs (8) peaked during the week ending April 1. This would suggest that the market’s recent push toward all-time highs has run out of steam. An expanding number of New Highs will be needed for the market to make any meaningful move higher. Last year’s DJIA/S&P 500 peak in May was also accompanied by a decline in New Highs.
Weekly CBOE Put/Call remains modestly elevated at 0.69 last week (9). This suggests that there is plenty skepticism about the current rally or it could mean traders and investors are anticipating some weakness once “Sell in May” officially arrives next week.
Click for larger graphic…
Pulse of the Market Table