Seasonal MACD Update & Election-Year Worst Months Prep By: Christopher Mistal | April 16, 2020 | Email | Print

 

Thus far, April has lived up to its historic reputation of delivering market gains. DJIA is up 7.4% this April as of today’s close and S&P 500 is up 8.3%. Even with these gains DJIA is still down 12.2% and S&P is down 5.7% since our Seasonal MACD Buy Signal last October. NASDAQ, which has a “Best Eight Months” lasting until June is currently up 5.9% since our Seasonal Buy Signal. This is an improvement for S&P 500 and NASDAQ since last update. This is encouraging and continues to support the possibility of additional DJIA and S&P 500 gains this “Best Six Months.”

 

 

Again, we present daily bar charts of DJIA and S&P 500 with the current status of MACD displayed. The current rally has slowed further this week, but MACD is still positive and trending higher (indicated by the blue arrow and higher trending bars). Continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.” We will issue our Seasonal MACD Sell signal when corresponding MACD Sell indicators applied to DJIA and S&P 500 both crossover and issue a new sell signal. 

 

Based upon the magnitude and still relatively brief duration of the current rally, MACD is not likely to turn negative very soon. As of today’s close it would still take a single-day decline in excess of 12% (this is not a typo) by DJIA and S&P 500 to turn MACD negative.

 

 

We are not issuing the signal at this time.

 

The long-term track record of our Seasonal Switching Strategy, which is based upon the “Best Six Months” in conjunction with our MACD Technical Buy and Sell Signal signals, still has a solid track record of outperformance with potentially less risk compared to a buy and hold approach over the long-term. Since 1950, DJIA’s average annual gain has been 8.5%. Over the same time period, DJIA has lost an average 0.7% during the “Worst Six Months,” May through October, and gained an average 9.1% during the “Best Six Months,” November through April.

 

Detractors are quick to point out that there have been positive “bad” months and negative “good” months. This is absolutely true as there is no trading or investment strategy that works 100% of the time (even the best will report a trading loss every once and a while). If the current “good” months period does finish with a loss, it will be just the tenth loss in 70 years. In election years, the second-best performing year of the four-year cycle (page 130, STA20), there have been selloffs. The “Worst Months” in 2008 hosted the largest decline. Weakness also occurred in 2000, 2004 and in 2012. Each of the last 17 Election-Year “Worst Months” can be seen in the following table. DJIA and S&P 500 Worst Six Months are May through the end of October. NASDAQ’s “Worst Four Months” are June through October.

 

 

Considering the paltry historical average gains, even in election years, during the “Worst Months” a cautious approach is worth consideration. The market has rebounded from its lows in March, but uncertainty is still high as the coronavirus battle rages on. The U.S. has already seen historic job losses and recent economic data has reflected the impacts of social distancing and the shutdown of non-essential business. Future economic data releases are likely to be flooded with the terms “historic,” “record,” “the worst in decades” and similar. Restarting the global economy is not likely going to be as easy as it was to stop/slow. Without a cure or vaccine readily available, consumers may still be reluctant to resume past activities which could result in a slower economic recovery. History does suggest the economy and the market will recover; it may just not be as soon as most would prefer.

 

 

Because of the elevated level of risk that has been historically observed during the “Worst Six Months” of the year and its historically tepid returns combined with current economic uncertainty, reducing long exposure and deploying a defensive strategy is the approach taken in the Almanac Investor Stock and ETF Portfolios. We do not merely “sell in May and go away.” Instead we take some profits, trim or outright sell underperforming stock and ETF positions, tighten stop losses and limit adding new long exposure to positions from sectors that have a demonstrated record of outperforming during the period. The selloff in March cleaned out the Stock & ETF Portfolios and the trade ideas presented last week were a mix of defensive and speculative.

 

For those with a lower risk tolerance or a desire to take a break from trading, the “Worst Months” are a great opportunity to unwind longs and move into the relative safety of cash, Treasury bonds, gold and/or some combination of. Preservation of capital may be more important than growth and with historical averages and frequency of gains reduced; the “Worst Six Months” are a good time to simply step aside completely if you prefer. August, September and/or October have provided some excellent buying opportunities in recent years and could do the same again this year. 

 

 

We are not issuing the signal at this time.

 

When we issue our DJIA and S&P 500 Seasonal Sell signal we will either sell associated positions outright or implement tight trailing stop losses. Additional bearish/defensive positions in: iShares 7-10 Year Treasury (IEF), iShares 20+ Year Treasury (TLT), ProShares Short Dow 30 (DOG), ProShares Short S&P 500 (SH) and/or other protective strategies may also be considered. All current stock and ETF holdings will be reevaluated at that time as well as the “Worst Months” outlook is fluid. 

 

For traders and investors employing the “Best 6 + 4-Year Cycle” as detailed on page 62 of the Stock Trader’s Almanac 2020, this year’s upcoming Seasonal MACD Sell signal could be ignored as the multi-year hold period is underway. It may still be prudent to use the signal as a reminder to review all holdings and objectives.