Best Six Months Come to an End – Better Opportunities Down the Road
By: Christopher Mistal
May 03, 2018
Yesterday after the market closed, we sent out our Tactical Seasonal Switching Strategy Sell Alert for DJIA and S&P 500. NASDAQ’s “Best Eight Months” lasts until June and we continue to hold technology and small-cap related positions in the ETF. From now until when we issue our Seasonal Sell Alert for NASDAQ (sometime on or after June 1) we are shifting the ETF Portfolio to a market neutral position by adding some exposure to short and longer duration bonds. A similar stance already exists in the Stock Portfolio that has a sizable cash position.
This “Best Six Months” period for DJIA and S&P 500 started off well with a brisk rally to new all-time highs in late January at which point DJIA was up 11.7% and S&P 500 was up 9.4%, but tariffs, inflation and interest rate worries quickly knocked DJIA and S&P 500 back down. From our November 28 “Buy” signal through yesterday’s “Sell” signal DJIA advanced a meager 0.4% and S&P 500 0.3%. This is the poorest showing since the bear market years of 2007 to 2009. While disappointing, this does not mean seasonality is dead nor does it mean the strategy no longer works. It simple means there were stronger forces at work that overrode typical seasonal strength.
After spending much of his first year in office working to deliver favorable policy to the market (tax cuts, regulation cuts and defense spending increases), President Trump has shifted to less favorable policy initiatives in his second year. Renegotiating trade agreements that have been in place for decades and slapping tariffs on steel and aluminum imports have ignited legitimate fears about possible trade wars. Factor in a tightening Fed and somewhat lofty market valuations and many of the ingredients for a market correction (or possibly worse) are present.
[DJIA Daily Bar Chart]
[S&P 500 Bar Chart]
Since peaking in late January, DJIA and S&P 500 have bearishly made a series of lower highs, but have not yet made a series of lower lows. They have also managed to remain mostly above their respective 200-day moving averages. They have traded below them, but they have not repeatedly closed and remained below which is a positive. Other technical indicators such as Stochastics and relative strength are also tepid now. It looked and felt like the floor was falling out from under the market in early February, but that has not happened yet.
[Advance/Decline Line Charts]
Further confirmation that the market is merely treading water can be seen in the above Advance/Decline line charts for NYSE, NASDAQ, Russell 2000 and S&P 500. NYSE A/D line actually reached a modest new high in April, but like the rest it has moved modestly lower since then. Like the market, higher would be great, but sideways is still better than lower.
Sideways to slightly lower may be the best the market can muster in the near to mid-term as fiscal policy and monetary policy clash for influence. The Fed is currently tightening monetary policy while the Trump administration has delivered what could/should be pro-growth fiscal policy in the form of tax cuts, expanded defense spending and reduced regulation. As of now a clear cut winner cannot be identified and is sufficient reason to lighten up on long exposure, trim losing positions and consider additional defensive positions. There will be better opportunities down the road to put capital to work than now.