Midsummer Update: Talmudic Wisdom—Always Ask the Question “If Not?”
By: Jeffrey A. Hirsch & Christopher Mistal
August 11, 2022
Or in this case, “Is the Bottom In?”
As the U.S. stock market has been staging an impressive comeback rally off the June lows, pushing through technical resistance at the June highs we’ve taken a long hard look at our indicators and cycles. Our analysis is still for further weakness and another leg down that culminates in a lower low or retest of the lows at some point in the weak seasonal period August-October ahead of the midterm election.
But we are reminded of the wisdom in the Almanac quotations, particularly this one from billionaire businessman John Malone: “Moses Shapiro (of General Instrument) told me, “Son, this is Talmudic wisdom. Always ask the question ‘If not?’ Few people have good strategies for when their assumptions are wrong.” That’s the best business advice I ever got.
With the summer rally pushing DJIA up 11.4% from the June low with S&P up 14.8% and NASDAQ up 20.7% here’s what we are looking at. This week’s inflation numbers were certainly encouraging. But we would like to see further confirmation before moving into the bullish camp. We are bullish for Q4 and 2023 but remain vigilant about the potential for another leg down that either tests the June lows or makes a new low.
In preparation for the 2023 Stock Trader’s Almanac, we developed this brand-new Stock Trader’s Almanac Aggregate Cycle index (STAAC). And you, our most loyal newsletter subscribers are the first to see it. STA Aggregate Cycle is a combination of the 1-Year Seasonal Pattern for All Years, the 4-Year Presidential Election Cycle and the Decennial Cycle. In the chart here STAAC is all years, midterm years and second years of decades post-WWII from 1946-2021. 
[STAAC v. 2022 chart]
2022 uses the right axis scale and STAAC is on the left. While 2022’s decline is clearly much deeper, the trend and shape are remarkably close to 2022. Should 2022 continue to track this STAAC trend we are nearing the end of the summer rally and due for a slide into the end of September at a higher low before the quadrennial “Sweet Spot” rally from Q4 midterm year to Q2 pre-election year commences. 
This scenario also correlates to the Mamis Sentiment Cycle we presented in the August Outlook. It would suggest we have passed the Panic point and are on the other side of Discouragement and climbing the Wall of Worry toward Anxiety before a higher low at Aversion. 
Also updated here are the other analogs to previous midterm years we have been tracking throughout the year. Apart from the 2nd Year of New Democratic President’s and the 1974 lines they all suggest the June low was the bottom. 
[1962, 1970 & 1974 v. 2022 chart]
[Midterm Seasonal pattern v. 2022 chart]
All our research indicates that we are on the cusp of another leg down. The question remains whether we make a higher low or take out the June low. We still have concerns, so prudence demands that we hold off on issuing the “all clear” until we have further confirmation that the recent easing of inflation readings is not temporary. The correlation between 2022 and 1962 looks to be closest as is the analogy to our new STAAC pattern, which suggests a close retest of the June lows.
Oil prices and inflation level are quite closely correlated, and both exhibit a downward seasonal trend during the summer months. Several more weeks of data could easily reveal inflation has not eased as much as everyone has hoped and we would not be surprised to see $120 oil again ahead of winter with war in Ukraine dragging on and the prospects of an energy squeeze in Europe that carries over globally.
On the positive side we have: the pullback in inflation this month, a technically strong rally that has pushed through resistance at the June highs, a healthy bounce in sentiment, an upward trending Advance/Decline line and a Q3 Advance GDP forecast from the Atlanta Fed’s GDPNow model of 2.5% as of August 10. 
On the contrary opinion front there are too many folks riding on the weak seasonality and midterm cycle bandwagon looking for a classic midterm October bear market bottom for it to happen. That does not mean lower lows are off the table it is just not likely to happen as most people expect.
On the negative side of the ledger, we see: the potential for a contentious midterm election season, Ukraine, China, Iran, persistently high inflation with this month’s dip being temporary, a spike in oil from seasonal and geopolitical factors, weak seasonality, high valuations, a rather overbought condition, and the potential for the Fed to remain aggressive raising interest rates.
Recent market action and inflation readings have made a better case for the bear market bottom to be in. But in our view, it is still too early jump into the bull camp. The market continues to face several hurdles and this rally has gotten ahead itself and has been built on hope. At these levels risk is high again and we prefer to wait for our indicators and cycles to give us better readings before we go all in bullish.
Stock Portfolio Updates
Over the last four weeks since last update through yesterday’s close, S&P 500 jumped 10.7% higher while Russell 2000 advanced 14.1%. Over the same time period the entire stock portfolio inched 0.1% higher, excluding dividends and any fees. The cash portion of the portfolio has climbed to 86% now which greatly limited the portfolio’s performance during the current rally. In June the cash did limit the portfolios downside to just 0.2%. So even though the portfolio did not fully benefit from the current rally, it still remains closer to its highwater mark reached in December 2021 than the market.
Broad strength over the last four weeks did lift most of the stocks held in the portfolio. Two exceptions were AT&T (T) and Verizon (VZ). Both positions were originally added due to their sizable dividends and relatively stable prices. However, both T and VZ have struggled to keep pace with their competitor T-Mobile in the 5g buildout. As a result of waning investor interest, VZ was stopped out on July 22 at a 12.9% loss excluding dividends and any trading fees. T remains on Hold. T is facing many of the same headwinds as V, but analyst’s opinions do appear more favorable. 
Per last months’ update, Warner Brothers Discovery (WBD) was closed out of the portfolio on July 15 using its average price on that day. WBD did have a brief rally in early August, but as of today, it is still trading below the price it was closed out at in July. Streaming competition appears to be quite fierce, and the value currently being offered versus traditional sources also appears to be shrinking.
Although not originally added to the portfolio for its dividend, Atlantic Union Bankshares (AUB) recently announced a dividend increase from $0.28 to $0.30 (a 7.1% increase) which will be paid on August 26. This increase results in a dividend yield of approximately 3.5%. AUB is on Hold.
MGP Ingredients (MGPI) continues to climb higher as it has been doing for most of the year. Earlier this week on Monday, MGPI reached another new 52-week high. Sales and earnings both beat estimates for the most recent quarter. MGPI is on Hold and its stop loss has been increased
All other positions are on Hold. Please see the table below for updated stop losses and current advice for positions not covered above.
[Almanac Investor Stock Portfolio Table]