March Outlook: Homestretch of “Best Six Months”
By: Jeffrey Hirsch & Christopher Mistal
February 28, 2017
Jeff is reporting in from The TradersExpo New York after just stepping off the stage of his afternoon presentation. Similar to other recent appearances the mood in the audience at his workshops and crowd at the event was engaged and looking for answers, but with a decent level of anxiety and concern about the continuation of this “Trump Rally.” Perhaps our Best Six Months seasonal patterns have something to do with it, but one cannot deny the performance since the election has been above average.
Mr. Trump’s speech tonight to a joint session of Congress may provide deeper insight into what will actually be implemented by this brand new administration. The market itself continues to price in success with accelerating economic growth that will positively impact the stock market. 
But as with the skeptical sentiment Jeff has been sensing on his radar comments like, “With the Dow Jones Industrial Average posting gains in every session since the president promised a ‘phenomenal’ plan to cut taxes, the risk of investor disappointment is high,” from Bloomberg News’ Five Things You Need to Know to Start Your Day, underscore the underlying level of worry in the media, on Main Street and Wall Street. 
This is clearly creating a classic “Wall of Worry” the market loves to climb. Continuing market strength triggered positive readings across the board for our January Indicator Trifecta and outstanding market gains in February as well. While we always remain vigilant for changes in the market climate we are currently in a bullish phase as the last two months of the Best Six Months get under way tomorrow and market strength tends to beget more market strength.
As we settle in for the homestretch of the Best Six Months enjoying solid gains in our stock and ETF portfolios since our MACD Buy Signal on October 24, 2016, let’s all remember the upcoming seasonal and cyclical trouble spots at the end of March/Q1 after the first Triple Witching of 2017 and potentially the Trump Administration. It’s looking more likely the Fed will hike again at the March meeting and the market’s reaction to that will be instructive.
Also, be ready to shift into defensive/risk off mode any time after April 1st when we issue our Best Six Months Seasonal MACD Sell Signal. That does not mean do anything on April 1 per se, but know that we can get our Sell Trigger any time after April 1. It might not come until well into May, but be ready. Despite our research on the outperformance of The Worst Six Months in Post-Election Years with a Positive January Indicator Trifecta, this may very well be an apropos year to heed the Seasonal Sell Signal. 
However, this will not be a signal to dump everything and go short or into cash. It is the time for portfolio house cleaning and to prepare some defensive trades, positions and portfolio maneuvers. In keeping with our Golden Rule of investing, we will sell losers and underperforming positions and let our winners ride. Stops will tightened up on remaining positions and we will begin to deploy downside risk protection as merited by market events and conditions and our analysis of them.
Pulse of the Market
DJIA’s struggles with 20,000 ended at the start of February when it finally broke out to new all-time highs (1). As of yesterday’s close, DJIA was on a record matching streak of 12 consecutive new all-time highs. The last streak of this duration was in January 1987. A positive DJIA close today would be a new record, 13 consecutive new all-time highs. This streak is nothing to fear; only when new highs dry up is caution warranted. 
As a result of DJIA’s thrust higher in February both the faster and slower moving MACD indicators (2) are positive. However, DJIA’s recent sluggish trading is beginning to weigh on these indicators and both are beginning to show signs of losing momentum. At some point, DJIA will take another breather to consolidate recent gains. Historically early March has been a time when this occurred.
Dow Jones Industrials & MACD Chart
Over the last 20 weeks, DJIA (3) has been leading the way higher with 14 weekly gains for a cumulative 2581.27 DJIA points. S&P 500 (5) and NASDAQ (6) have been catching up recently with five straight weekly gains each compared to DJIA’s four of the last five. Solid gains on Fridays and the following Monday (4) is a sign of confidence in the market and less fear or headline risk over the weekend.
NYSE Weekly Advancers and Decliners (7) continue to favor the bulls, but the ratio of Advancers to Decliners is shrinking. A larger margin of Advancers to Decliners would signal broader participation in the rally while the current dwindling ratio is suggesting the rally is stretched and in need of a pause. Continued new all-time highs accompanied by an expanding number of weekly advancers would be a signal the rally has further to go. At present, it appears to be about to stall.
NYSE Weekly New Highs (8) resumed trending higher at the start of February, but slipped last week. February’s New High peak of 504 is well below mid-December’s 676. Here again is a sign of a narrowing rally that could be in its twilight. NYSE Weekly New Lows remain subdued at less than 60 each week in 2017. This pattern is not likely to change until there is a meaningful pullback of at least 5%.
Contrary to many investor and trader sentiment surveys, Weekly CBOE Put/Call (9) readings have been largely neutral in a range between 0.60 and 0.70. There have been six readings outside of this range over the last 20 weeks. The highest reading of 0.80 (week ending November 4) accompanied a 1.9% weekly S&P 500 loss. The lowest reading of 0.53 (week ending December 9) saw S&P 500 jump 3.1%.
Pulse of the Market Table