MACD & Mid-Month Update: Diverging Market at Inflection Point
By: Christopher Mistal
May 16, 2017
As of the today’s close, the slower moving MACD “Sell” indicator applied to S&P 500 is still positive. DJIA’s slower moving MACD “Sell” indicator turned negative on the close on Friday, May 12th. To turn S&P 500’s slower moving MACD “Sell” indicator negative, a signal day loss exceeding 3.08 points (0.13%) is needed. DJIA’s MACD Sell indicator will remain negative tomorrow unless DJIA can gain at least 48.80 points (0.23%).
[DJIA Daily Bar Chart with MACD Sell Indicator] 
[S&P 500 Daily Bar Chart with MACD Sell Indicator]
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 issue a sell signal.
Possible Major Inflection Point
As of yesterday’s close DJIA was up 6.2% year-to-date. S&P 500 was up 7.3% and NASDAQ was up an impressive 14.2%. S&P 500 and NASDAQ are well above historical average performance compared to past post-election years. DJIA is also above average, but by a lesser degree. The magnitude of outperformance can be seen in the following charts.
[DJIA Seasonal Pattern Chart]
[S&P 500 Seasonal Pattern Chart]
[NASDAQ Seasonal Pattern Chart]
Although the major indices have clearly diverged from historical post-election year tendencies up until this point, there is still a possibility that they could revert to the mean before long. All three of the above charts have three distinct patterns that reasonably tracked one another until sometime in the second quarter of the year. S&P 500’s patterns converged in mid-April, DJIA’s patterns converged in April too and move in relative unison until mid-May. NASDAQ’s historical patterns also converged in mid-April and remain intertwined until mid-June. 
This would seem to indicate that the market could be at a major inflection point. At this point in the past, all post-election years, on average, tended to see the market move sideways. Newly elected Democrats historically enjoyed continued market gains while newly elected Republican presidents were not as fortunate as early gains where surrendered.
Further evidence of a possible major inflection point is the developing divergences between the major indices now. NASDAQ and S&P 500 have been trading at and closing at new all-time highs, but DJIA and Russell 2000 have not. The Dow Jones Transports Index is also struggling. The Transports last closed at an all-time high on March 1 and have been struggling to reclaim their 50-day moving average since mid-March. Without the support and confirmation of other major indices, NASDAQ and S&P 500 are not likely to move much higher.
Market breath has also weakened recently. The broadest of the most widely tracked, the NYSE Composite A/D Line, has been moving sideways since late-April. The S&P 500 A/D has also been flat. NASDAQ Comp and Russell 2000 A/D lines peaked at the end of April and are lower now. When A/D Lines move inversely to their related index or average this is usually an indication that the benchmark is about to change course as the bulk of its constituents are already moving in a different direction.
[NYSE, NASDAQ, Russell 2000 and S&P 500 A/D Lines and Daily Closes]
Recent developments on the political and geo-political stages are also beginning to pile up in front of the market. North Korea’s seemingly endless missile launches could easily trigger a response and escalation from the West while the Trump administration cannot seem to get out of its own way and stay focused on its goals and objectives. Each passing day seems to bring less and less confidence in any kind of major tax policy reform which was a major catalyst behind the markets gains since Election Day.
At this juncture the market could go either way. DJIA and Russell 2000 could catch up to S&P 500 and NASDAQ and trade at new all-time highs. This would confirm the upside breakout is for real and the rally still has some legs. In this situation our Seasonal MACD Sell signal would most likely be delayed further. If the market should decide to go the other way and DJIA and Russell 2000 pull S&P 500 and NASDAQ back down, then our Seasonal MACD Sell signal would arrive much sooner. It has also been 460 calendar days since S&P 500 had a 10% or greater correction which is close to the average duration between corrections since 1949 of 514 calendar days.
Based upon incoming data and news, our Base Case Annual Forecast odds are probably closer to 75% or 80% today than the 65% it was last December. The odds of Worst Case are unchanged at 5%, but the Best Case is now at 15-20%. The Trump Administration appears to be unable to stay focused and is still struggling to unite the Republican majority needed to achieve many of its goals.