April Outlook: End Q1 Consolidation Resolves Higher In April By: Jeffrey A. Hirsch & Christopher Mistal | March 28, 2019 | Email | Print

April is the last month of DJIA’s and S&P 500’s “Best Six Months” of the year. Our Tactical Seasonal Switching Strategy MACD Sell Signal can trigger any time after April 1. Our October 31 MACD Buy signal avoided some of the decline last fall, but by no means all of it. 

 

Many of our stock and ETF positions were stopped out as the market tested and then broke support in November and December. Remaining defensive positions in the portfolio minimized the damage. Our Tactical Seasonal Switching Strategy ETF positions were held without a stop loss, avoiding getting whipsawed out of those positions. Then in early January we added to DIA, IWM, QQQ and SPY positions. As of today’s close they are up 5.5% on average with QQQ leading, up 7.8%, and IWM lagging, up 3.6%.

 

Our Free Lunch Stocks selected from the list of stocks making new 52-week lows on December 21 were the heroes this past quarter, netting a gain of 24.9% on average from our entry prices on December 24 until the last few were stopped out in late-February and early-March. A nasty selloff like we had this December was a quintessential setup for this strategy featured on page 112 of the 2019 Almanac.

 

As you can see in the accompanying chart of the “Pre-Election Year Seasonal Patterns” the major U.S. stock market indices have historically rallied quite sharply through April. Then DJIA in black and S&P 500 in green historically begin to move sideways at the beginning of the “Worst Six Months” (Sell in May) in May and June while NASDAQ in blue continues to run higher through June. This is a clear illustration of NASDAQ’s “Best 8 Months.”

 

 

It is during the “Worst 4 Months” July-October where the market is most prone to bumps, pullbacks and corrections with August and October standing out on the chart in Pre-Election Years. However, with our January Indicator Trifecta coming in 3-for-3 positive our 2019 Annual Forecast Best Case scenario looks to be playing out:

 

“Best Case – Everything resolves quickly. Fed becomes accommodative. Trade deals are worked out expeditiously. Trump tacks towards the center and works with congress and does not get “Muellered.” Typical pre-election year gains of 10-15% for Dow and S&P 500 and 20-30% for NASDAQ.”

 

We would not be sold bold as to say everything has resolved, but the Fed has surely become accommodative. President Trump has tacked to the center a bit and avoided being “Muellered.” It would help if Congress and the President would work more together, but you can’t expect everything. There is no trade deal with China yet, but it sure seems imminent. Then there is Brexit risk. The latest watercooler polls have even money on which comes first, a China trade deal or a resolution to Brexit. In-house handicapping is laying odds on China at the moment.

 

Technically speaking we are still dancing around the formidable resistance we discussed last month at the 2815 level on the S&P 500. It would not be surprising if we left 2815 behind for a while and made a run at new highs. We could easily test 2815 as support during a correction later this year. New highs are likely again in Q4. We are more concerned about a bear market next year when bare-knuckle election-year politics is likely to get nastier and global economic woes could take their toll.

 

 

Finally, let’s address all the hysteria around the latest yield curve inversion. Yes, an inverted yield curve is not a great sign, but our research finds that it really isn’t until the Effective Fed Funds Rate is higher than the entire yield curve, including the long end, that you get an indication that a recession is imminent. Note the red arrows in the accompanying chart where the complete yield curve inversions, with Fed Funds higher than the entire curve, precede the grey shaded recession areas. 

 

 

Even still the two complete inversions back in December 1985 and December 1986 were years before the Gulf War 1 fueled the July 1990 to March 1991 recession. Point being these short-middle end yield curve inversion are not especially indicative of an impending recession anytime soon.

 

So following the typically soft end of Q1, expect an April-June rally to test the highs, followed by a potential August-October hit, with a strong finish for 2019 before we have to contend with another contentious battle for control in Washington in 2020.

 

 

DJIA’s rally from its December low stalled in early March however the rally was enough to lift DJIA’s 50-day moving average back above its 200-day moving average to form a bullish “golden cross” (1). Historically golden crosses have been largely indicative of further gains. On average DJIA has been up 17.7% over the following nine months after some short-term consolidation.

 

DJIA’s fading momentum in late February into March was confirmed by both the faster and slower moving MACD indicators (2) turning negative on February 28. Both MACD indicators were still negative as of the market’s close on March 27. Beginning on April 1 we will be monitoring the slower moving “MACD Sell 12-26-9” indicator for a new sell crossover for DJIA and S&P 500. Until that occurs, the “Best Six Months” for DJIA and S&P 500 continue.

 

 

DJIA’s nine consecutive week winning streak came to an end in the first week in March (3). S&P 500 and NASDAQ faired better. NASDAQ (5) extended its weekly winning streak to ten and S&P 500 (4) also added one additional gain. Here again our research into past weekly winning streaks found that when past streaks came to an end there was usually a period of consolidation followed by a resumption of the rally. The see-saw weekly performance in March appears to be at least some portion of the consolidation phase.

 

Market breath measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has followed the same pattern as performance in March. In weeks with gains Advancers have outnumbered Decliners and in weeks with losses the opposite has held. For now this also looks like typical action during a market consolidation phase.

 

After declining briefly in the first half of March, Weekly New Highs have expanded to their largest amount since early in the fourth quarter of last year (7). Weekly New Lows have also ticked modestly higher but remain subdued with their total per week remaining below 100. New Weekly Lows making a move lower, first, could be an early sign that the rally is restarting. 

 

As a result of the Fed’s surprisingly dovish comments at its last meeting, 30-year Treasuries have slipped below 3% to 2.97%. At 2.97% (8) this is still higher than the 10-year Treasury which means the Treasury yield curve is not fully inverted. Lower rates could also breathe some life back into the housing sector.