With three days left in the historically scary month of October for markets it looks like we will sidestep October’s penchant for volatility and sharp negative market surprises. On top of the banner “Worst Six Months” that are about to come to a close this continuing upside momentum bodes well for the next “Best Six Months” and 2018 until something shocks the system.
This market is so robust at the moment that it will likely take some systemic market event. Perhaps it will be triggered by a run in the mushrooming ETF arena, Federal Reserve tightening, a new major international conflict, a breakdown in the US or other major economy, or something on the geopolitical front. 2018 is a midterm year and it is already getting hot in DC.
Midterm mudsling will ramp up early next year and if the Trump Administration and Congress have failed to deliver, an impatient electorate could dethrone GOP control of Congress, upsetting Wall Street. Additionally, any disruptive legislation that changes the playing field could cause market participants to readjust and rock financial markets.
But for now all is well. Last month we showed you how Great Worst Six Months are usually followed by above average Best Six Months, full-year gains, as well as strong following years. Well, this current WSM has advanced even further into “Great” territory. Last month the S&P 500 was up 5.3% for the WSM so far. As of today’s close S&P is up 7.4% for the current WSM.
In the chart below we added year-to-date performance for perspective. By almost all accounts this year’s combination of a Great WSM and YTD gains will likely beget further gains. The only blemishes on this chart are 1968-69, 1981-82, and 1989-90.
Vietnam and the bear market that lasted from December 1968 to May 1970 put the squeeze on stocks in 1968 and 1969. Reagan’s recession and a bear market in the wake of reigning in high interests, inflation and dysfunctional government battered markets in 1981 and 1982. The markets responded negatively in 1990 when the first President Bush reneged on his 1988 campaign promise not to raise taxes and Gulf War I consumed the psyche of the planet.
But the news is good for now and we remain optimistic for further gains through yearend and into early next. When we get our Best Six Months Seasonal MACD Buy Signal we will shift our bias more bullish. MACD and other indicators have or are on the brink of rolling over to sell signals. So we are not entirely out of woods yet and we are still vulnerable to some Octoberphobia and a pullback of some degree before the WSM, or year, is over.
After that, expect the next BSM to be stronger than average after a great WSM. Then we look for a continuation of the rally into and through yearend. But starting in Q1-Q2 next year we begin to get concerned with the extended valuations and length of this bull market and the bearish tendencies of midterm election years, and what promises to be overarching monetary policy and geopolitical risk.
Pulse of the Market
After a brief pause near the end of September, DJIA has been steadily climbing higher. DJIA closed above 23,000 for the first time last week (1) on October 18. DJIA has been propelled higher by growing hopes and expectations that tax reform will happen sooner rather than later. Earnings have also been widely positive adding further support.
As the calendar turned to October and the window to issue our Seasonal MACD Buy signal opened, DJIA’s MACD “Buy” indicator turned positive (2), however S&P 500 and NASDAQ MACD indicators were already positive in September. As a result, the
criteria to issue our Seasonal MACD Buy signal was not meet.
During DJIA’s recent run it has had two Down Friday/Down Monday (DF/DM) warnings (3). Historically a DF/DM occurrence was nearly always followed by a decline sometime during the next 90 calendar days. Thus far, both of the most recent occurrences (and even the one in July) have been nonevents. Considering the longer-term, heavily lopsided data associated with past DF/DM’s, the last two warnings should not be overlooked.
DJIA (4) and S&P 500 (5) were up six weeks straight and eight of the last nine weeks. NASDAQ (6) has been up four straight and seven of the last nine weeks. These
winning streaks will come to an end, but that does not mean the end of the rally.
One potential sign that the rally is beginning to run out of steam can be found in NYSE Weekly Advancers and Decliners (7). The total number of advancers has been slipping while the number of decliners is climbing. This would indicate a shrinking number of stocks are involved in the rally. Further signs of a fizzling rally can be seen in the number of NYSE Weekly New Highs and New Lows (8). New Highs appear to have peaked during the first week of October while New Lows bottomed that week. New Highs have been falling while New Lows have been climbing.
As of last Friday, the 30-Year Treasury rate (9) is unchanged over the last 20 weeks and was still lower than it was at the start of the year. Perhaps the multi-decade bull market in bonds is ending, but that ending is still quite difficult to see in the weekly data.