As has been the case in years gone by, especially recent years, when other market forces override seasonality folks get a little impatient with the seasonal patterns and our system. Our Seasonal Switching Strategy underperformed during the Worst Months this year. But we are pleased to inform you that this is not unusual and that despite the imperfect history of the system and seasonal market patterns, they have outperformed over the long haul.
In recent years since the 2009 generational low, the DJIA Best Six Months + MACD Timing have outpaced the Worst Six Months in each last seven years. Compared to full-year performance the BSM+MACD have beaten full years three times in the last seven years (2011, 2012 and 2015), lagged by a fraction twice (2014 and 2016), off by a few percentage points in 2010 and way off the mark in 2013. View the complete history and other index data on our website at
https://www.stocktradersalmanac.com/Strategy.aspx.
Like any other strategy, our Seasonal Switching Strategy will experience periods of underperformance and periods of outperformance. During periods of underperformance we must resist emotion and remain focused on the long-term objectives of the strategy which are to capture the majority of the market’s gains while avoiding much of the market’s losses by being “out of the market” during the “Worst Months.” The long-term track record of the strategy remains intact and that is what we remain focused on, the long-term.
So we believe it is prudent to stick to the strategy. If we had overridden it and the market collapsed or corrected substantially, we would have been displeased with ourselves and surely would have received an earful from all of you, our loyal subscribers, as well the media and financial market pundits. Who would have thought the plethora of increasingly more capable and lethal missile launches from North Korea would have so little impact on the stock market.
It’s all about the long-term results and efficacy of seasonality and historically recurring market patterns for frequency and magnitude. Besides we have never been a proponent blindly selling in May and going away. Sure, we sell some positions when we get our Seasonal BSM MACD Sell Signal, especially underperforming stocks, but we faithfully hang on to our winners, which is the key to long term investment success along with sticking to our proven effective Seasonal Switching Strategy. Have a look at some of the
outstanding stock picks in our portfolio, like
Arista Networks (ANET), up another $10 for a 187% gain since we presented it last October. (
Full Disclosure: We own shares in ANET.)
Late MACD Buy Signal
Furthermore, this late MACD Buy Signal we issued two days ago is not a bad sign. In the table below we lined up all the BSM+MACD Buy Signals that came after November 1. DJIA was up in all 15 subsequent BSM with zero losses, for an average of 9.2% right in line with the average of 9.3% for all BSM+MACD since 1950. So history is still on our side.
Speaking of history, we are month away from the beginning of the midterm election year, which has been notoriously fraught with market declines, recessions, bear markets and political battles. The rally looks intact for now, but if this tax cut becomes law and goes into effect during the often volatile and treacherous midterm year in 2018 it could be one of the straws that break this bull market’s back.
From all the bipartisan analysis we’ve seen this tax cut plan does not seem built to help the middle class and small business. Obamacare has been a drain on the middle class and small business. Health insurance rates keep going up and are set to increase by another wide margin in 2018 for most working Americans who get their health insurance from the Exchanges. The poor, the rich, and folks who work in larger unions and corporations have not been hurt so much by Obamacare, but much of the country has.
And now, the tax cut legislation appears poised to benefit big business over hardworking Americans and small business, the backbone of this country. Comments this week from Vanguard Founder John Bogle highlight the potential deficiencies of this tax proposal and how it could be a disadvantage to the bulk of the tax-paying class.
As reported by
Bloomberg News, at an event Tuesday sponsored by the Council on Foreign Relations in New York Vanguard Group founder John Bogle said that “the tax proposals in Washington are a ‘moral abomination’ because they favor corporations at the expense of workers.”
Bogle went on to say, “Just think about this: Corporate profits after taxes last year were the highest they’ve ever been in the history of GDP going back to 1929 and we are thinking of giving relief to the corporations at the highest levels ever. Individual wages are at the lowest level in about 15 years as a percent of GDP…. So we are helping people who are doing very well and doing nothing for the people doing very badly. One of the flaws is that corporations are putting their shareholders ahead of the people that built the corporation…. worst part of it is that corporations are making so much money now that they don’t know what to do with it. They aren’t investing in new equipment, in innovation. They’re buying back their own stock.” Stock buybacks have been a huge driver of the bull market.
While it remains to be seen, this possible new tax legislation – and any other new, disruptive laws – have the potential to knock the stock market off its high horse. Uncertainty and new laws can create fundamental changes to the Wall Street playbook and rock the market. Mr. Bogle makes a valid point.
In the chart below from The Federal Reserve Bank of St. Louis’ most excellent
FRED Database we try to illustrate Mr. Bogle’s argument. We have plotted out two lines, one showing Corporate Profits as a percent of GDP and one showing Employee Wages as a percent of GDP (adjusted to be on the same scale as the Corporate Profits ratio). Our numbers are not quite at the extreme levels Mr. Bogle mentions, but they are rather close and on trend with Bogle’s comments. After tax profits are way up and wages are way down. Let’s hope Washington gets tax cuts right along with the numerous other agenda, policy and legislative initiatives we could use.
Pulse of the Market
Ever increasing expectations that tax reform is going to occur has propelled DJIA up to and through 24000 (1). Prior to the jump higher this week, DJIA spent two weeks treading water in mid-November. This sideways to modestly lower trading was enough to send both the slower and faster moving MACD indicators lower. On Tuesday, November 28, DJIA leapt higher turning its MACD Buy indicator positive (2) which finally satisfied the criteria to issue our Seasonal MACD Buy Signal.
DJIA (3) and S&P 500 (4) weekly winning streaks came to an end on November 10 after eight straight weeks of gains. Winning streaks always end, but due to the obvious bullish nature of this streak, losses were mild and quickly recovered as the holiday spirit kicked in ahead of Thanksgiving.
NASDAQ’s weekly winning streak may not have lasted as long, ending at six, but it only declined 0.2% in a single week before returning to its winning ways (5). As of today’s close NASDAQ is up 27.7% year-to-date which is a sizable lead over DJIA and S&P 500.
Tepid NYSE Weekly Advancers and Decliners data has finally given way to a healthy, better than two-to-one advantage to Advancers (6). Although the major indexes never suffered a meaningful pullback in October or early November, they very easily could have if some of the larger market cap constituents would have declined. Weekly Decliners outnumbered Weekly Advancers for two weeks straight at the end of October and the beginning of November while DJIA, S&P 500 and NASDAQ still posted gains. It would seem the mega-cap stocks kept their respective indexes afloat at that time while many other individual stocks were in retreat.
After four weeks of trending in a negative direction, New Highs and New Lows (7) appear to have reversed the trend. Expanding numbers of New Highs and shrinking numbers of New Lows is positive. This trend will likely be supported further by this week’s trading.
Tame inflation data, somewhat tepid long-term growth expectations and a Fed that is slowly raising short-term rates has caused the spread between the 90-Day Treasury rate and the 30-Year Treasury rate (8) to narrow even further in recent weeks. At some point this trend could cause trouble for lenders, but it could also reverse direction quickly if inflation and/or growth expectations accelerated.