June Outlook: Rally Set to Pause at End of Best 8 Months
By: Jeffrey A. Hirsch & Christopher Mistal
May 28, 2020
Our Best Six Months Seasonal MACD Sell Signal for DJIA triggered on May 13 when this recovery rally took a brief pause. The rally then resumed adding to May’s gains and putting NASDAQ back in the black for the year and up nearly 5% year-to-date. But the market is bumping into some resistance here technically and looks set to pause again and pullback to recent support levels.
[S&P Technical Chart]
After blasting through key resistance levels in April at S&P 2580, 2725, 2815 and 2875 we began to stall at 2955. Now we are struggling to put 3010 behind us. 3010 is the level of the July and September 2019 highs. 3010 is also still right at the 200-day moving average. Above 3010 is 3115 where the big waterfall decline broke below the long uptrend line from the December 2018 low. Any upside above 3115 will likely be hard to come by.
With the country beginning to reopen, traders have been bidding up stock prices in anticipation of rejuvenated economy. Sure there are bright spots, but with the impact of the pandemic shutdown barely hitting the economic data, corporate guidance is not much more than a guessing game. The rally appears to be way ahead of the recovery. 
NASDAQ’s Best 8 Months ends in June so we will begin tracking NASDAQ’s MACD Sell indicator for a new negative crossover on or after June 1. After the current turn of the month bullish period from the last few days of May through the first couple days of June is over we would not be surprised if the market retreated. 
You can see this historic June retreat in the updated composite graph of the seasonal pattern for the 22 years since 1950 (NASDAQ 14 years since 1971) when both the January Barometer as measured by the S&P 500 were down and the Dow closed below its previous December closing low in the first quarter – known as the December Low Indicator on page 34 of the 2020 Stock Trader’s Almanac.
[Down JB/Dec Low Graph]
The dotted lines for the indices in 2020 are plotted on the right axis and show that despite the big difference in magnitude 2020 is tracking this pattern of down January Barometers and December Low Indicator triggers. This supports our cautious outlook for the Worst Six Months (May-October) and our analysis that while the bottom appears to be in, we should expect an overall sideways market bouncing up and down in a range, flirting with testing the lows and stalling at resistance near current levels. 
Jobless claims continue to trend lower, which is a good sign we have seen the market bottom as we detailed in the May Outlook. The chart below shows how the 2020 spike high in claims and rapid retreat is closely correlated with the March 23 low in similar fashion to the previous bear market lows in the longer term chart we published in the May Outlook last month at this time.
[Jobless Claims Chart]
But the latest reading of 2.1 million weekly initial jobless claims is still of epic and of historic proportions and brings the total jobless claims since mid-March to a staggering 40.8 million. The unemployment rate is expected to rise beyond last month’s 14.7%. Second quarter GDP is projection to be -40.4% by the Atlanta Fed’s GDPNow model.
So at a minimum we can expect to see some rather unpleasant economic numbers over the next several months. The market also appears to be pricing in a flawless reopening and fast-tracked vaccine solution. And now we are getting some diplomatic machinations with the White House and China. Disappointments on any of these fronts are bound to send stock prices lower. 
The good news is that both the Federal Reserve and Federal Government are fully committed to throwing unlimited sums of money at the situation – as are central banks and governments around the world. Nearly unlimited liquidity from the Fed and massive fiscal stimulus – to the tune of around $9 trillion worldwide so far – will likely prop up the market while economic and vaccine/pandemic disappointments are likely to keep a lid on new highs. 
This all reinforces our defensive posture and outlook for a choppy, sideways market over the next several months with the potential for a retest of the lows or at least the lower support levels around S&P 2725, which is near the S&P 500 50-day moving average, and 2580 on the S&P Technical chart above.
Pulse of the Market
During the first half of May, DJIA (and S&P 500) lost upward momentum and drifted sideways to lower (1). As a result, our Seasonal MACD Sell Signal was triggered on the close on May 13. During the next trading session correlating positions in the Tactical Seasonal Switching Strategy ETF portfolio were closed out. Tech and small-cap positions were held and have benefited greatly over the past few weeks. Shortly thereafter, DJIA (and S&P 500) were successful in breaking through resistance and have continued to move higher since.
DJIA’s new life has put the full month of May in positive territory and turned both the faster and slower moving MACD indicators (2) positive again. DJIA reclaimed its falling 50-day moving average in late April and its falling 200-day moving average could be the next key level of resistance. DJIA’s 200-day moving average is currently right around 26,300, so another pause could be just around the next corner.
Dow Jones Industrials & MACD Chart
Compared to the first three months of the year, Fridays (or the last trading day of the week) have improved significantly over the last seven weeks (3) with five DJIA gains and just two losses. Prior to this, DJIA had been down twelve times on fourteen Fridays. Continued improving Friday performance is a positive sign as it suggests confidence is being rebuilt and traders and investors are less concerned about potentially negative headlines over the weekend.
Although Fridays have improved, weekly performance has become something of a seesaw battle with DJIA, S&P 500 (4) and NASDAQ (5) alternating between weekly losses and gains. Should gains thus far this week hold then it will be the first back-to-back weekly winning streak since mid-April. Based upon weekly performance it would appear uncertainty is still elevated and more needs to be done before confidence is truly restored.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has, for the most part, tracked weekly performance with Advancers outnumbering Decliners in positive weeks and vice versa. One notable exception was the last week of April ending on May 1. Digging into daily numbers from that week shows sizable gains on the first three days that were reversed on Thursday and Friday. Cumulative Advance/Decline lines remain positive and trending higher, but still below their respective highs reached earlier in the year.
Weekly New Highs have begun to pick up slightly (7) while Weekly New Lows have remained subdued. This is encouraging but not all that informative as New Highs are not likely going to begin to pick up in any meaningful manner until all the major indexes are much nearer to previous highs.
After a volatile March and April, 90-day and 30-year Treasury rates appear to be settling down (8). Both rates are up from their respective lows but remain historically low. Even though other central banks have taken rates negative, the Fed does not appear comfortable with negative rates in the U.S. Unfortunately it may not be up to the Fed. If reopening does not work as smoothly as hoped and the restarting of the economy gets delayed rates could move lower again and potentially deeper into negative territory.
Click for larger graphic…
Pulse of the Market Table