Market & Stock Portfolio Updates: DF/DM Cluster Jitters By: Christopher Mistal | September 08, 2022 | Email | Print

Earlier this week, DJIA recorded its twelfth Down Friday/Down Monday (DF/DM) occurrence of the year. In the case of DF/DM’s Monday always refers to the first trading day of the week and Friday refers to the last trading day of the week when ever Monday or Friday is a holiday. Historically, DF/DM’s have occurred at market inflection points and have been a reliable indicator of a shift in market sentiment. When traders are reluctant and they close out long positions before the weekend and then fail to buy at the start of the next week, the market’s current trend is usually being closely evaluated. As noted on page 78 of the 2022 Almanac, DF/DM’s tend to be most prevalent and damaging in bear market years.

 

The recent DF/DM was rather unique in it was also the third consecutive occurrence. Going back to 1953, the first full year that did not have Saturday trading, there have only been 40 other times where there were three or more DF/DM’s in a row. The longest streak was six beginning January 4 through February 11, 1957, in which DJIA declined 8.2% from the first Friday’s close to the last Monday’s close. For the full year, DJIA was down a modest 12.8%. A mild bear began in April of 1956 and ended in October 1957 and a recession occurred from August 1957 to April 1958.

 

 

In the above chart we have plotted the 30 trading days before and 60 trading days after all 40 previous three in a row or more DF/DM’s since 1953. On average the majority of DJIA’s declines have transpired as the DF/DM’s were taking place. Differences emerge once the streak has come to an end. The most bearish scenario was when Monday’s close was never recovered during the next seven calendar days. This occurred nine times and is represented by the red line labeled “No Bounce.” The most bullish scenario happened eight times and is represented by the green line called “Monday Holds.” In this situation, DJIA quickly reversed course and continued to climb higher over the next week. However, there were also 23 times where DJIA moved higher initially only to eventually lose momentum and turn lower again (purple line, “Bounce & Monday Broken”).

 

 

Here in this table we have compiled DJIA’s performance at various fixed time points after the last DF/DM Monday. On average, 1-, 3-, and 6-month after performance was meager and generally disappointing, but by 1-year later it did improve. One month after, DJIA was higher on average by 0.94%, but advanced only 47.5% of the time. At three months, the frequency of gains improves to 60.0%, but average performance was 1.66%. At six months, DJIA was higher 50.0% of the time and at the 1-year mark it was up 75.0% of the time with a respectable 10.47% average gain.

 

A definitive conclusion based solely upon DJIA’s recent cluster of three DF/DM’s is challenging based upon the broad historical results. However, when it is factored into the overall picture it does appear to be indicative of the elevated levels of uncertainty that the market is currently contending with. Historically, DF/DM’s have a bearish bias sometime during the next 90 calendar days. This is consistent with our current outlook. We continue to anticipate the market to continue to trade choppily through the balance of September and possibly into early Q4. Once Q4 begins we will look to our Seasonal MACD indicator to aid in signaling when the “Sweet Spot” of the four-year-cycle has begun. 

 

 

Over the last four weeks since last update through today’s close, S&P 500 retreated 4.8% while Russell 2000 fell 6.2%. Over the same time period the entire stock portfolio slipped 0.3% lower, excluding dividends and any fees. The portfolio’s cash balance remains high at a little over 86% of the total hypothetical value. As it has done for much of this year, the cash has mitigated the impacts of broad market declines. 

 

Outside of the Large-cap portion of the portfolio, positions actually performed well. MGP Ingredients (MGPI) had another solid four-week period and lifted Small-cap positions 2.4% since last update. With today’s gains, MGPI is a mere $0.28 from its 52-week high reached on August 17. MGPI is on Hold.

 

Our single remaining position in the Mid-cap portfolio, Black Hills (BKH) did not participate in today’s gains, but it did advance 0.7% over the last four weeks as the market weakened again. BKH may be just a dull Utility-sector stock, but it is positive year-to-date and continues to pay a respectable dividend. BKH is on Hold.

 

Three of four Large-cap positions declined since last update. Southern Company (SO) was the only position to advance. The biggest loser was AT&T (T). Challenges persist for T, but it continues to pay a solid dividend and it will likely find support and climb higher when broader market sentiment begins to improve. 

 

All positions are on Hold. Please see the table below for updated stop losses and current advice for positions not covered above.