Stock Portfolio Update: Strong Market Gains Are A Strong Indication
By: Jeffrey A. Hirsch & Christopher Mistal
February 14, 2019
One of the basic stock market indicators is the market itself. A market like we are experiencing right now with powerful gains following a deep fast correction is a positive indication in and of itself. Several colleagues have been expounding lately on the record following such gains. LPL Financial Senior Market Strategist Ryan Detrick put out some research showing the last five times since WWII that the S&P 500 was up 10% year-to-date (YTD) in February and the gains for the rest of the year were strong, except for pesky 1987. 
Sam Stovall, Chief Investment Strategist at CFRA Research pointed out in his latest note that if the S&P 500 posted a gain for February, “it would trigger an encouraging signal for the entire year.” Sam observed that of the 28 years since WWII when the S&P 500 gained ground in both January and February, “In 100% of these observations, the S&P 500 was up for the full year and recorded an average total return of nearly 24%. What's more, the S&P 500 was higher in the remaining 10 months of the year 93% of the time, returning an average 13.5%.”
We wanted to dig a little deeper. So I expanded the YTD study beyond 10% gains to examine a larger data set and ran the data on consecutive up January and February using the cash S&P 500 index instead of the “total return” index and overlaid both with the positive January Indicator Trifectas, when the Santa Claus Rally, the First Five Days and the full-month January Barometer are all positive. In the tables below positive January Trifecta years are highlighted in grey.
At yesterday’s close February 13 the S&P 500 was up 9.8% YTD. The top 30 YTD gains at the February high are ranked by gain in Table 1. S&P 500 tacked on gains in 25 of those 30 years for an averages gain of 11.3%. Overlay the Trifecta and two losses disappear.
In Table 2 of the 27 years that the S&P 500 gained ground in both January and February since WWII there is only one full year loss on the S&P cash index in 2011 and it’s puny, and there are only 2 losses in the following March-December period in 1987 and 2011 – both were in Trifecta years.
So, no matter how you slice it, gains earlier in the year are generally a solid indication for gains the rest of the year.
[Table 1]
[Table 2]
Stock Portfolio & Free Lunch Update
Over the last four weeks since last update, S&P 500 climbed 5.2% through yesterday’s close while Russell 2000 added 6.1% over the same time frame. Overall, the entire Stock Portfolio rose 2.5% excluding any dividends or trading fees. Large-Caps performed best, up 6.1% as defensive positions continued to perform and recent additions improved. Small-Caps were second best advancing 1.9%. Gains here came from remaining Free Lunch positions. Mid-Caps enjoyed a 1.6% advance.
Our Free Lunch strategy this year has been a resounding success. The entire basket, including closed positions, through yesterday’s close was up an average 27.8% compared to gains of 13.0% for NYSE Comp and 17.2% for NASDAQ. NYSE-listed positions have enjoyed the largest gains, up 29.5% on average. NASDAQ positions have also done well, up 27.1%.
Many of the original positions have been stopped out, but that is the nature of the strategy. Free Lunch is a short-term trade with a different set of guidelines that takes advantage of yearend selling for tax reasons, the January Effect of small-cap outperformance, the Santa Claus Rally and the First Five Days. Free Lunch stocks were not purchased for typical reasons and typically their holding period is brief. As of the close on February 13, just five of the twenty-three Free Lunch stocks remained in the portfolio; OMI, GTHX, NNBR, PRTK and UCTT. Continue to hold these positions with an 8% trailing stop loss, updated using daily closing price.
Remaining positions from last June’s defensive basket (Presented Date of 6/14/2018) also continue to contribute to the portfolios overall performance with price appreciation (measured in results) and dividends (not included in performance tracking). These eleven remaining defensive positions are all positive with an average gain of 17.2%. McCormick & Company (MKC), once the performance leader of this group, was stopped out on January 24 the day after earnings narrowly missed expectations.
December’s Seasonal Sector Trades that were presented to take advantage of strength in copper have been added to the portfolio. Freeport-McMoRan (FCX) and Southern Copper (SCCO) were both added on December 13, 2018, as both opened the trading day below their respective buy limits. FCX and SCCO are on Hold
All other positions in the portfolio are on Hold. Please see portfolio table below for Current Advice and Stop Losses.
[Almanac Investor Stock Portfolio – February 13, 2019 Closes]