November Outlook: Midterm Time Is Bullish
By: Jeffrey A. Hirsch & Christopher Mistal
October 25, 2018
We have been advocating continued patience during the Worst Six Months this year, even in the face of rather bullish indications last month, and that has paid off. Folks were ready to declare “Sell in May” or our Worst Six Months dead, but they forgot about October. We did not and Octoberphobia has stuck again. 
The turnaround appears imminent and we expect a clear and solid signal from our MACD Buy Indicator for our Best Months Tactical Seasonal Switching Strategy, but we will remain patient until such signal occurs. The recent volatility and selloff is promising to setup up a more beneficial entry point.
As of today’s close, our Seasonal MACD Buy Signal remains on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ are all negative (blue arrows in charts below). Currently, single day gains of 619.08 DJIA points, 73.50 S&P 500 points and 128.94 NASDAQ points are needed to turn our MACD indicators positive on all three indexes. In percentage terms, DJIA and S&P 500 would need to gain 2.5% and 2.7% respectively while NASDAQ needs 1.8% in a day.
[S&P 500 MACD Chart]
As a reminder, the criteria to issue our Seasonal MACD Buy Signal is a new buy signal using our 8-17-9 MACD indicator on or after the first trading day of October and DJIA, S&P 500 and NASDAQ must be in agreement. These criteria are not currently satisfied.
In the meantime our defensive positons continue to outperform, especially spice-maker McCormick & Co (MKC), well-known on your supermarket shelf, but under Wall Street’s radar when we presented to you last June. Notwithstanding the recent market decline, MKC hit a new all-time high last Friday and traded even higher intraday yesterday and is now up 31.8% from our June write-up to today’s close.
Meanwhile, midterm election bombast and backbiting have kicked into high gear and speculation is rampant on both sides of the aisle about who is going to control congress, especially the House of Representatives. It is considered a bit of a coup for a sitting President to have a small loss or gain of House seats. 
Pages 32 and 100 of the Stock Trader’s Almanac 2018 details how prosperity is more important than peace to the outcome of the midterm elections and how bullish the days surrounding the midterm elections have been. Many have been concerned that the market will be in trouble if President Trump and the Republican Party lose The House. We have crunched the numbers further and found this has not been the case in the past.
Since the passage of the 20th “Lame Duck” Amendment to the Constitution in 1933, which moved the beginning of terms for newly elected members of Congress in the midterms to January 3 right after the election instead of the following December, 13 months later, there have been 5 instances when the sitting President lost control of The House. 
As you can see in the table here, it did not have a major negative impact on the market; in fact the market has performed more positively in the past after The House flips from the president’s party to the opposition in the midterms.
This selloff may actually make the “Sweet Spot” of the 4-Year Cycle (October 2018 to June 2019) even sweeter. The overbought condition of the market has clearly been remedied. Overarching economic and corporate fundamentals remain solid despite tariff worries and tech weakness. Complacent bullish sentiment has retreated. The Best Months of the year are about to begin in the Sweet Spot of the 4-Year Cycle. An attractive buying opportunity looms large. So be ready for our technical MACD Buy Signal to confirm momentum has shifted and it’s time to go long and put risk on again in the US stock market.
Pulse of the Market
DJIA’s time at new all-time highs in September was brief as an increasing hawkish Fed caused bond yields to creep higher. This, amongst numerous other factors, then triggered the current market retreat and a corresponding spike in market volatility. DJIA quickly slipped through its 50-day moving average, bounced and then its 200-day moving average was broken (1). DJIA’s breakdown has turned both the faster moving and slower moving MACD indicators negative (2). The near-term technical outlook is negative, with earlier year lows potentially coming in play. As long as earlier lows hold and fundamentals don’t erode, the longer-term bullish trend remains intact.
After gaining ground in ten out of twelve weeks, DJIA suffered three straight weekly declines (3). Last week’s 1107.06 DJIA point loss was the fifth worst weekly loss by points for DJIA ever. However, in percentage terms the 4.2% loss did not even make it into the Top 200 list. S&P 500 (4) and NASDAQ (5) also suffered three straight weeks of declines.
Market breath measured by NYSE Weekly Advancers and NYSE Weekly Decliners turned clearly bearish during the weeks with losses, but did not reach the extreme lopsided reading achieved during the January/February correction earlier this year. During the week ending October 12, Decliners outnumbered Advancers by a margin of slightly more than 5 to 1 (6) compared to the extreme reading of nearly 10 to 1 that occurred during the week ending February 2, 2018.
Weekly New Highs and New Lows reacted as one would expect during a brisk retreat. New Lows (7) exploded to their highest level since February 2016 while New Highs declined to their lowest level also since February 2016. Look for an expanding number of New Highs and shrinking number of New Lows for confirmation that the market’s pullback has come to an end.
30-year Treasury bond yields (8) are at their highest level since July 2014 which is probably not really an issue. The 90-day Treasury rate however, is at its highest level since February 2008. After such a protracted period of near zero interest rates, the Fed’s tightening could be beginning to bite. 
Click image to view full size…
[Pulse of the Market Table]