Mid-Month Update: Recent Struggles Setting Up a Bounce

By: Christopher Mistal & Jeffrey A. Hirsch

April 13, 2017

Essentially at the half-way point of April, the month has been a disappointment thus far. As of the close today, DJIA is down 1.0%, S&P 500 is off 1.4%, NASDAQ has slipped 1.8% and Russell 2000 is lower by 2.9% so far this April. Geopolitical tensions have heightened, ambitious goals of the new administration have been stymied and the fact that the Federal government is set to run out of funding at the end of month are tempering confidence in the economy and the market.

Economic data has also weakened recently. March’s jobs report was softer than expected with just 98,000 net new jobs. Although the unemployment rate still declined 0.2% to 4.5% in March. Due to a significant drop in the labor force participation rate, initial weekly unemployment claims continue to hover around multi-decade lows. Absent a steady pickup in weekly claims, the data would suggest the labor market is reasonably healthy, but it could be better.

Atlanta Fed’s GDPNow real GDP forecast for the first quarter of 2017 is a paltry 0.6% as of April 7. Even though the Fed would prefer to have some additional leeway to combat any future economic weakness, it may need to reconsider its current projected pace of rate increases as 0.6% is not runaway growth or does it indicate inflation is going to become an urgent issue anytime soon.

Big bank earnings were broadly upbeat. JPMorgan, Citigroup and PNC all beat. Wells Fargo beat on the bottom line, but missed on revenue. Based upon the market’s reaction today, expectations may have been higher or today was just a good day to take profits. Considering the magnitude of gains enjoyed by many bank stocks since Election Day, some profit taking is reasonable.

Next week is options expiration week. The week also hosts a bullish cluster of five consecutive bullish S&P 500 days. April option expiration is generally bullish across the board with solid gains on the last day of the week, the entire week and the week after. Since 1982, DJIA and S&P 500 have both advanced 23 times in 35 years on expiration day with an average gain of just under 0.2%. Both the S&P 500 and DJIA have been up seven of the past eleven expiration days. Expiration week as a whole has a slightly more bullish track record over the past 35 years to expiration day. Average weekly gains are 1% or better for S&P 500, DJIA and NASDAQ. The bullish bias of April expiration also persists during the week after. DJIA has posted a full-week gain in eleven of the last thirteen weeks following expiration.

In addition to the bullish options expiration seasonality next week, technical indicators applied to DJIA, S&P 500 and NASDAQ are also setting up for a potential bounce. Faster and slower moving MACD indicators applied to DJIA and S&P 500 could quickly turn positive after being negative since early March. Relative strength indicators applied to DJIA and S&P 500 are dipping into oversold territory. Support at their respective 50-day moving averages may not have held, but monthly pivot point support could hold. Those levels are right around DJIA 20330 and S&P 500 2323.

Although Wall Street and Washington have been jittery lately the market continues to track our Base Case Annual Forecast which we gave odds of 65% last December when we released it. Our analysis was that President Trump would not be able to achieve much and that there would be little change. And as we are seeing quite dramatically this week Trump would be forced to resort to a lot of compromise while lukewarm economic activity persisted, keeping 2017 market gains in the single digit to low double digit area. And that is precisely where we are at with DJIA up 3.5% year-to-date, S&P up 4.0%, NASDAQ up 7.8% and Russell 2000 off a fractional 0.1%.

Perhaps all the Republican squabbling and Democratic grandstanding will create that type of gridlock that the market thrives on where Washington does little to interfere with the private sector. The current geopolitical and domestic policy obstacle, especially the looming government shutdown if Congress does not get the government funded by month end, are likely to continue to put downside pressure on stocks.

But we believe that downside move will be limited to a 5-15% summer/fall correction. For now though we are still bullish and expect another leg up. Continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.” We will issue our Seasonal MACD Sell signal when corresponding MACD Sell indicators applied to DJIA and S&P 500 both crossover and issue a new sell.