Seasonal MACD Update: Stalled with Stimulus Talks & Election Day to Yearend
By: Jeffrey A. Hirsch & Christopher Mistal
October 15, 2020
As of today’s close, our Seasonal MACD Buy Signal is still on Hold. Our 8-17-9 MACD “Buy” indicator applied to DJIA, S&P 500 and NASDAQ is positive, but the crossover occurred in late-September. The rally since that late-September crossover has been brisk, fueled by renewed hopes that another massive round of fiscal stimulus would arrive sooner rather than later. But it now appears unlikely that a stimulus deal will be struck before Election Day. As negotiations in Washington began to breakdown (again), DJIA, S&P 500 and NASDAQ have also weakened. Following three days of losses our MACD Buy indicator is fading as well.
In the following charts (lower pane of each chart) the MACD Buy indicator appears. The late-September crossover and market rally are visible as well as recent weakness. The shrinking bars over the past few days in the MACD pane are an indication that it is trending toward a sell crossover. When that occurs MACD will be reset. At that point we will continue to monitor MACD for its next positive crossover. As a reminder, the criteria to issue our Seasonal MACD Buy Signal is:
1. A new buy signal crossover using our 8-17-9 MACD indicator AND
2. The crossover must occur on or after the first trading day of October AND
3. DJIA, S&P 500 and NASDAQ MACD indicators must all be in agreement.
The single reason why our Seasonal MACD Buy Signal is on Hold is because the most recent crossover was not on or after the first trading day of October. The last crossover was in September.
[S&P 500 MACD Chart]
Sticking with the Seasonal Switching Strategy
Over the long-term, since 1950, our Best Months Switching Strategy with MACD timing has outperformed the major indexes (pages 54 and 60 of 2020 Almanac). Throughout those 70 years for DJIA and S&P 500 and 49 years for NASDAQ there were periods where the strategy outperformed and periods where it underperformed. The roaring bull market of the nineties was one period were our Switching Strategy lagged as the market generally roared higher all year long. But when that period came to an end, the Switching Strategy reclaimed lost ground as DJIA suffered “Worst Months” declines in seven out of eight years from 1998 to 2005.
Shortly thereafter the credit and housing market bubbles burst triggering the financial crisis of 2008-09 along with the worst bear market and recession since the Great Depression. In response, the Federal government and Fed took unprecedented (then) actions to support the economy and the market. TARP and massive fiscal stimulus was provided by the government while the Fed cuts interest rates to nearly zero and the market and economy began to recover. Quantitative easing (treasury and mortgage bond buying) by the Fed provided further support and liquidity to the financial system. As a result the market and the economy began to recover, and the market enjoyed well above average gains during the “Worst Months” of 2009.
[Best Six Months Switching Strategy/Sell In May + MACD Timing] 
Since the March 2009 market bottom, the market has enjoyed four periods of outsized gains during the “Worst Months.” The first was 2009, then again in 2013, 2017 and 2020 so far has also saw a sizable “Worst Months” gain. A third round of QE boosted 2013, corporate tax cut anticipation lifted 2017 and this year recovery from the covid-19 shutdown is driving gains. It is primarily these four years and the corresponding seemingly one-off events that have resulted in the market outperforming our Seasonal Switching Strategy over the last twelve years. We are of the opinion that this is an exception, not some kind of new normal where black swan events and major disruptions occur every few years.
Some gains have been left on the table by the Seasonal Switching Strategy however, this is only part of the bigger picture. The potential benefits of reduced risk have not been taken into consideration. NASDAQ has not suffered a single decline during its “Best Months” since 2007 (page 60 2020 STA) and its average gain has been 11.2%. This year’s “Best Months” declines by DJIA and S&P 500 were their first since 2008. Even during the last twelve years the pattern of “Best Months” and “Worst Months” has held up. Even though the current “Worst Months” period has not ended yet, average performance is still better during the “Best Months.” 
Based upon history, the Seasonal Switching Strategy may be on the verge of beginning its next stretch of outperformance. The general consensus that we have been hearing and seeing is for a return to normal economy and way of life sometime in the next year or so. Uncertainty does remain high, but the desire to do normal things like attend a sporting event, live concert, college in person, dine out, etc. also appears high. We do not believe seasonality is dead, nor do we believe the Seasonal Switching Strategy to be ineffective.
Market Performance Election Day to Yearend
In this particularly heated election season party bosses and constituents have closed ranks and dug in their heels – as have the candidates. But in the meantime Wall Street soldiers on. From the March pandemic lows stocks were on a tear until seasonal forces returned to the fray and instigated a correction in historically weak September. 
Then the turn of the month from the end of September through the first eight days of October exhibited its usual strength. But as the battle for the White House is coming down to the wire a combination of typical mid-October weakness collided with an uptick in jobless claims, faltering stimulus talks and fears of a second wave of the COVID pandemic as cases and hospitalizations are on the rise worldwide.
We are all looking for an expeditious decision on the U.S. Presidential Election in less than three weeks. The fear of a prolonged election decision process like we had in the 2000 election is at the forefront of everyone’s mind. In an effort to alleviate investor anxiety we have laid out here the history of market performance from Election Day to yearend for the Dow, S&P 500, NASDAQ and the Russell 2000 small cap index. We’ve broken it out into two tables. One compares index returns for Incumbent Presidential Party Wins vs. Losses and the other for Republican vs. Democratic Presidential wins.
[Election Day to Yearend Market Performance table Incumbent Win-Loss]
DJIA and S&P have a longer history and show greater weakness after the election when incumbent party wins with DJIA up 55.6% of the time for on average gain of 1.0%. S&P is notable weaker, up only 44.4% of the time with an average gain of 0.2%, and a median loss of -0.2%, A post-WWII consolidation bear market that started in June 1948 is mostly responsible. 
Election years with incumbent party wins have produced better returns for Dow and S&P, but the impact of the undecided election in 2000 and The Great Recession and Financial Crisis in 2008 hit all indices hard with NASDAQ suffering the most. NASDAQ tech stocks and Russell 2000 small cap stocks have historically exhibited much more strength in November and December often outperforming DJIA and S&P large cap blue chip stock. This is clearly evident in all tables.
Looking at the breakdown along party lines the numbers are rather close with 1948 and 2008 causing the most damage to Democratic wins and 2000 taking the wind out of Republican victories. The overall yearend strength of NASDAQ tech stocks and the Russell 2000 small caps seems to be the prevailing trend.
[Election Day to Yearend Market Performance table by party]