June Outlook: Best 8 Months End, Midterm Machinations Suggest Cruel Summer for Stocks
By: Jeffrey A. Hirsch & Christopher Mistal
May 31, 2018
To all the market seasonality naysayers and “Sell in May” or Best Six Months/Worst Six Months critics, we say thank you for your skepticism. Despite your disbelief (and perhaps because of it) the recurring seasonal market patterns highlighted in the Stock Trader’s Almanac continue to persist. Of course they are not perfect and do not work 100% of the time, and some have fallen by the wayside and some have shifted – we’ve tracked and updated those. 
However, supported by a host of academic studies and papers (just Google them yourself) and now years of evidence-based results, our Tactical Seasonal Best & Worst Six Months Switching Strategy, a slightly more sophisticated version of “Sell in May and Go Away,” continues to outperform over the long and short term, 2017 notwithstanding. Yes the Worst Six Months (or “Sell in May”) was quite positive in 2017 and better than the Best Six. 
This has happened before as it did in 2009 (Post Financial Crisis) and 2003 (Iraq war) and it will again. But that has not changed or tainted the seasonality, strategy or results. Just think back to how well the market and the Switching Strategy did following those years. And remember we are not talking about the plain vanilla “Sell in May” on May first (see page 52 of the Stock Trader’s Almanac 2018 for the results of our Best Six Months Switching Strategy using MACD Timing). Here are the results since 2009 to give you an idea.
End of NASDAQ’s Best 8 Months
So far since our Best Six Months Seasonal MACD Sell Signal for the Dow and S&P 500 the Dow is up about 2.1% and the S&P 500 is up about 2.6%. Definitely a solid move, but this has enabled us to take some profits and sell losers at favorable prices. And our defensive, risk-off bond positions in iShares 20+ Year Treasury (TLT) and iShares Core US Aggregate Bond (AGG) are up and on the rise as stocks have begun to weaken again as seasonality and midterm machinations begin to kick in.
As most presidents do, President Trump has ramped up his efforts to push through his more difficult, less savory policy initiatives before the usual loss of Congressional seats in the midterm election. It will be more difficult to pass any new legislation and more likely he’ll receive greater pushback from Congress on his executive orders, decrees and decisions if he loses a majority in one or both Houses of Congress. 
Meanwhile democratic midterm election rhetoric has begun to heat up and the Russia collusion probe battle continues. Geopolitically, dysfunction in Italy has rekindled Eurozone breakup fears and rattled the market and now President Trump is playing hardball again on Tariffs with everybody, changing his tune and upending international trade agreements. Good, bad, or indifferent, this is the kind of uncertainty that can roil the stock market. And we still have the on-again/off-again potential powder keg situations in North Korea, Iran, Syria and the rest of the Mideast and Near East hotspots where the action has picked up again.
This is why we believe that “Sell in May” is critical this year. Not selling willy-nilly and going away, but making the kinds of tactical, strategic moves we have already begun to implement and waiting for a better buying opportunity more likely later in Q3 or early Q4 as is quite common in the midterm year – what we call the “Bottom Picker’s Paradise” right at the sweet spot of the 4-year cycle.
As we enter the cruel month of June, the last month of NASDAQ’s Best 8 Months, our MACD Sell indicator is on the brink of triggering a Sell Signal for NASDAQ. Since our November 28 Buy Signal NASDAQ is up 7.75% in the chart below. Highlighted in the chart below in the yellow box with the black arrow is the MACD Sell Indicator on the verge of a Sell Signal. Also note NASDAQ is stalling just above the red-dotted line monthly pivot point resistance. Stochastics and Relative Strength are exhibiting weakness and the chart is struggling to break the downtrend since the March high with a down-trending 50-day moving average in the pink line heading toward the red line 200-day moving average. So be nimble, stay vigilant and ready to take on a more defensive, risk-off position over the next several days, weeks and months.
Pulse of the Market
Our “Best Six Months” Seasonal Sell signal for DJIA and S&P 500 triggered on the close of trading on May 2 after a tepid start to the month (1). This was our signal to begin lightening up on long positions outside of technology and small-cap related positions and begin adding some defensive positions. The markets mid-May rally offered adequate opportunity to do this before the return of weakness and volatility near the end of May. DJIA’s slower moving MACD indicator is once again negative (2) confirming the loss of upward momentum.
In recent years, the Friday before the three-day Memorial Day weekend has become an early get away day leading to mild average losses on the day. This was once again the situation this year as DJIA slipped 0.24% last Friday. Anyone that trimmed long positions that day was spared even larger losses on Tuesday when DJIA fell 1.58% completing the fourth Down Friday/Down Monday (DF/DM) warning of the year (3). This DF/DM warning confirms traders and investors are becoming increasingly less confident in the market in the near-term. Based upon historical DF/DM occurrences there is also an increased likelihood of higher volatility and additional losses. Both of which were witnessed today.
NASDAQ’s outperformance relative (5) to DJIA (3) and S&P 500 (4) over the past four weeks is not unusual for this time of the year. Technology focused NASDAQ enjoys a Best Eight Months that runs from November until June. Tech strength could last into early July, but is beginning to waver.
Market breath remains generally positive with NYSE Weekly Advancers out numbering NYSE Weekly Decliners in three of the last four weeks (6). New Highs and New Lows (7) have also been trending in positive directions. New Highs have expanded for four weeks straight while New Lows are in a choppy trend lower. This week’s stats could mark the end of these trends.
30-year Treasury bond yields (8) continue to linger just above 3% suggesting long-term growth and inflation are likely modest and in check. However, the 90-day Treasury yield has maintained its slow and steady rise higher which is flattening out the yield curve and putting some pressure on the banks.
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[Pulse of the Market Table]