April Outlook: Brief Respite Before Worst Six Months & Midterm Bottom Pickers Paradise
By: Jeffrey A. Hirsch & Christopher Mistal
March 29, 2018
Holiday inspired trading before the Good Friday holiday market closing tomorrow helped trim losses for the month of March and Q1 2018. There are however two bright spots in the market’s performance this March and first quarter. The Russel 2000 index of small cap stocks posted a gain of 1.1% for the month of March and the NASDAQ Composite is up 2.3% for Q1 2018. So while there is much negativity on the news and in market action this year, we wanted to point out some positives and encourage patience through what promises to be a tumultuous ride over the next several months as the market and economy search for support for the next leg higher.
The volatility this March was actually not all that unusual. Last month we summoned the famous warning Julius Caesar failed to heed as a reminder to beware The Ides of March. As it did this year the market tends to come into March strong, but then after mid-month is prone to weakness and big end-of-Q1 hits. Most of the damage occurred the week after the Ides, which is also the week after March Triple Witching (when stock options, index options and index futures contracts all expire on the third Friday) as it does most years.
Much like the weather surrounding the vernal equinox, March market action has been rather volatile and turbulent in recent years with wild fluctuations and large gains and losses. This is precisely what we witnessed in 2018.
This is also typical midterm election year market behavior. In fact, the timing of President Trump’s policy successes and more unsettling agenda initiatives like the tariff and trade machinations have been similar to the timing of a democratic president, who usually don’t ramp up their less savory policy pushes until the midterm year. This is what generally makes post-election years worse for republicans and midterm years worse for democrats. The policies are not “democratic” in nature, but the timing is and this is setting up a typically more pronounced midterm year Worst Six Months (May-October) for 2018.
Midterm Aprils are historically a bit softer, but since we’ve come down so much ahead of April, we expect a bit of a respite this April. Then we expect the weakest two quarters of the 4-year cycle and the worst six months to suffer from sideways action at a minimum to a slightly deeper correction and maybe even a mini Ned Davis Research defined bear of -13-19.99% that finds bottom in Q2-Q3. Since 1949 the second and third quarters of midterm years have averaged losses of -1.8% for DJIA, -2.2% for S&P 500 and -6.7% since 1971 for NASDAQ. And remember since 1961, 9 of the last 17 bear markets bottomed in the midterm year.
But this would be a textbook set up for the sweet spot of the 4-year cycle and the “Midterm Year Bottom Picker’s Paradise.” The “sweet spot” of the 4-year cycle is the 3-quarter span from Q4 midterm year to Q2 pre-election year. Since 1949, market gains from the fourth quarter of midterm year to the second quarter of the pre-election year have averaged +20.4% for DJIA, +21.1% for S&P 500 and +32.0% since 1971 for NASDAQ. Also the gain from the midterm low to pre-election year high has averaged +47.4 since 1914 for DJIA and +70.2% NASDAQ since 1971.
So while we are less sanguine after April for the worst six months, our Base Case Annual Forecast scenario is still on track for above average midterm year gains in the range of 8-15%, with a mild worst six months correction or pullback. This is further supported by the Positive January Indicator Trifecta we registered with the Santa Claus Rally, the First Five Days and the full-month January Barometer all up this year. 
We will be looking at first quarter corporate earnings announcements in April to shed some light on the health and growth prospects of corporate America and companies around the world and the 30-Year Treasury Bond for signs of overall economic strength as the recent softness in 30-Year Treasury yields was driven by a cooling of growth and inflation expectations. On the risk side, we will be keeping an eye out for more state tax increases like what’s going on in Utah and a technical breakdown in all the major averages below the February lows for signs of weakness. So far we have once again found support around the 200-day moving averages.
Best Six Months MACD Sell Signal Update
Since April is the last month of the Best Six Months, we begin tracking the MACD indicators for new crossover Sell Signals after April 1. We enter April 2018 with most of our technical indicators way oversold and finding solid support. All MACD indicators are deep in “sell” territory and have been there since the Ides of March. 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 signals. At this juncture the market is poised for a bounce and rally, so for now continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.”
Pulse of the Market
Two months after peaking above 26,000, DJIA continues to struggle. Typical week after March options expiration weakness was much more prominent, but DJIA did find support just above its 200-day moving average (1). The brisk pace of declines last week quickly squashed the modest improvement in both the faster and slower moving MACD indicators applied to DJIA. The slower moving MACD Sell indicator was positive in mid-March, but is now negative (2) even after today’s gain.
Last week’s 1413.31 DJIA point loss (3) was the second worst weekly point decline ever. The worst ever was in October 2008. On a percent basis, DJIA shed 5.7% last week which was its worst decline since January 2016. S&P 500 (4) and NASDAQ (5) suffered even larger weekly declines of 6.0% and 6.5% respectively.
NYSE Weekly Decliners outnumbered Weekly Advancers (6) by 5.4 to 1. Clearly a negative reading, but it was not as bad as the nearly 10 to 1 reading that occurred during the week ending February 2, 2018. This could be an early indication or possible sign that selling pressures are diminishing. 
New Highs and New Lows (7) were also at better levels last week than at the start of February. This could also be an early positive sign that will likely be backed up by this week’s data. The three week trend of expanding lows and shrinking highs likely came to an end this week.
After peaking in the second half of February (8), the yield on the 30-year Treasury bond has meandered lower. If the initial spike in rates was due to inflation expectations rapidly rising then the recent pullback in rates could be an indication that longer-term inflation fears cooled. Some inflation is good, but too much is not.
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[Pulse of the Market Table]