Mid-Month Update: Mild January Break Underway
By: Christopher Mistal
January 17, 2017
This Friday, Donald Trump will be inaugurated as the 45th President of the United States and a new administration will be in place. The market’s rally since Election Day has been one of this best in records going back to 1952 at various points along the way and remains near the top today even after some mild losses. The pace of gains has slowed as an increasing number of traders and investors ponder whether or not the rally can continue. Based upon the following seasonal pattern charts, the rally has a reasonably good chance of lasting, but gains are likely to be limited to around 6-8% at yearend for DJIA and S&P 500 and around 10% for NASDAQ.
[DJIA Seasonal Pattern Chart]
[S&P 500 Seasonal Pattern Chart]
[NASDAQ Seasonal Pattern Chart]
In the above charts, four different seasonal patterns are plotted alongside 2017 year-to-date as of today’s close. The baseline is “All Years” and includes every year of data. DJIA data begins in 1901, S&P 500 in 1930 and NASDAQ is since 1971. 2017 is a post-election year and a comparison to “All Post-Election Years” is included. This year will also be the first year of a new administration which is represented by “1st Year of New Administration.” Lastly, “7th Years of Decades” is included. 7th Years of Decades have a rather nasty history and are the second worst performing year for DJIA going back to 1881 (page 129 of Stock Trader’s Almanac 2017). Zero years have the worst record however; we don’t place much emphasis on the decennial cycle currently as the four-year presidential cycle exhibits more influence.
Allowing for the fact that all “1st Years of New Administrations” are also Post-Election Years, all four seasonal patterns are quite similar. The first two months of 2009 (a Post-Election Year and a 1st Year of New Administration) are responsible for much the difference in the first three months and 1937 and 1987 are responsible for the plunge in “7th Years of Decades.”
Shifting the focus back to the near-term, the anticipated January Break appears to be materializing. This emerging trend has seen the S&P 500 decline in 18 of the last 21 Januarys with an average retreat of 3.6% from its closing high in the first seven trading days of January to its closing low sometime during the last seven trading days of the month. 
Optimism fueled by the prospects of less regulation, rising interest rates and a stronger U.S. dollar looks to be fading. Bank earnings have been mostly better than expected thus far this earnings season, but valuations, the length of the current bull market and recently increased forward earnings expectations are all being questioned. The incoming administration’s apparent lack of focus could also be contributing to a resetting of expectations. A mild pullback could be exactly what the market needs and the ETF Portfolio is ready with positions in ProShares UltraShort S&P 500 (SDS) and ProShares UltraPro Short S&P 500 (SPXU). As a reminder, this is a short-duration trade that we will look to exit sometime this week or early next week at the latest.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
Technology shares, measured by NASDAQ above, lagged somewhat in the early stages of the rally that started after Election Day eventually caught up and broke out to new all-time highs and the streak has continued in the New Year. However, DJIA and S&P 500 have stalled out. DJIA cannot seem to build sufficient momentum to break through 20,000 and S&P 500 cannot seem to break through and close above 2280. A mild pullback to just above respective 50-day moving averages (solid magenta line) would likely temper excessive bullish sentiment and reset stretched technical indicators. Combined with still respectable fundamentals and seasonal factors, the path higher would once again be open.
Based upon a positive Santa Claus Rally and First Five Days, we would anticipate S&P 500 finishing January with a gain thus making the January Barometer positive and completing a bullish January Trifecta. From there, we will need to see how effective the Trump administration is. For now our Base Case scenario for 2017 remains the most likely with a 65% chance.
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in SDS and SPXU.