Mid-Month Market Update: On Lookout for Seasonal Dip to Buy
By: Christopher Mistal
February 15, 2024
Mid-February has arrived and with it the probability of some market weakness in the near term is on the rise. February is the weak link in the Best Months and as we have pointed out on several occasions its average performance in election years, since 1950, has been tepid. As of yesterday’s close, NASDAQ was up 4.58% this February, S&P 500 was up 3.20% while DJIA was holding onto a 0.72% advance. Compared to the recent 21-year average performance, S&P 500 and NASDAQ were well above average levels at this point in February while DJIA was modestly lagging. Based upon the following chart, typical second half of February weakness could begin any day now.
[February 21-Year Seasonal Pattern Chart]
Zooming out to the familiar full-year seasonal pattern of S&P 500 and recently created NASDAQ chart, through the close on February 14, we see both indexes tracking the “Sitting President Running” seasonal pattern rather closely. Both S&P 500 and NASDAQ patterns have peaks around mid-February followed by modest weakness into March before the rally resumes. When comparing NASDAQ’s election year patterns to S&P 500, please note NASDAQ data starts in 1971 which means NASDAQ has five less elections years than S&P 500. As a result, the bearish “Open Field” election years 2000 and 2008 have a greater impact on NASDAQ’s average performance in those years.
[S&P 500 Election Year Seasonal Pattern Chart]
[NASDAQ Election Year Seasonal Pattern Chart]
In addition to seasonal patterns, sentiment may also be signaling a potential market pause and dip. Yes, many sentiment indicators have reached bullish levels not seen since late 2021 or early 2022, but we do not believe this alone is a signal that a sizable and damaging market pullback is imminent. In the following charts, from our preferred sentiment source Investors Intelligence, as of February 13, their most recent update, we can see the difference between bulls and bears and the ratio of bulls to bears are both hovering near multi-year highs and essentially in the range they were in for all of 2021.
[Investors Intelligence Bulls/Bears Difference Chart]
[Investors Intelligence Bulls/Bears Ratio Chart]
Focusing on 2021, we see that bullish sentiment can remain elevated for extended periods of time as the market climbs higher, and higher, and higher. Throughout the majority of 2021, each dip in bullish sentiment was also accompanied by a dip in the S&P 500 that subsequently proved to be a buying opportunity for new long positions. When S&P 500 finally peaked in early 2022, bullish sentiment had already retreated substantially. Market tops tend to be a lengthy process and based upon bullish sentiment trends, this process may only just be beginning and could easily last throughout the remainder of this year.
Outside of geopolitical concerns, the market’s expectation of Fed rate cuts is the most likely catalyst for a modest pullback inline with historical patterns and seasonal trends in the near term. This week’s CPI reading was a reminder that inflation has not been fully tamed by the Fed yet. When Treasury bonds yields jumped in response, the market briskly retreated that day. As of today’s close, the market has already shrugged off the CPI report, but tomorrow's PPI report has the potential to trigger a similar response. And if not PPI, then the Fed Minutes scheduled to be released next Wednesday could be next to throw water on overly optimistic rate cut expectations.
It is clear that the market is expecting the Fed to cut rates, but what is not all that clear is when that will actually start. Spurred by this week’s CPI report, we took our old CPI projection chart and made a new chart using the Fed’s preferred inflation metric, Personal Consumption Expenditures (PCE). The data can be found here in the St. Louis Fed’s FRED database. We selected this data series for the seemingly obvious reason that it was the only one that we found that is clearly labeled as the “Federal Reserve’s preferred measure of inflation” in the notes.
[12-month PCE % Change Projection Chart]
From the most recent December reading, released on January 26, the path back to the Fed’s stated 2% target is a quite optimistic 0.1% or less monthly change. If that ends up being January’s PCE reading, the 12-month rate will be 2.1%. Any monthly change greater will likely only further delay the Fed. Unless January’s PCE is surprisingly lower, we still do not expect the Fed to begin cutting rates until at least around mid-year and possibly later.
Support Levels to Watch
[S&P 500 Technical Chart]
[NASDAQ Technical Chart]
In the near term we are looking for some market weakness in line with seasonal trends. S&P 500 has punched through the nice round number of 5000 but leaving it behind for good and continuing higher may need a period of consolidation while NASDAQ Comp has yet to close above its old all-time set back in November 2021. For S&P 500, the first level of support is around 4800. This is right around its previous all-time highs as well as the pink 50-day moving average line and around 4-5% below current levels. For NASDAQ Comp support appears around 15500 or approximately 3-4% lower. Below these levels and around 6-8% lower S&P 500 4650-4700 is minor support and NASDAQ Comp at 15000.
Beyond some potential seasonal weakness, we remain bullish for the remainder of the year and our bullish base case scenario of full-year gains in the 8-15% range is still in play. Timing and magnitude of rate cuts, elections and geopolitics are likely to contribute to some choppiness along the way. In anticipation of a market dip, most of the positions in the Stock and ETF portfolios can be considered on dips or near current levels.