When our
Best Six Months (BSM) MACD Seasonal Sell Signal triggered on April 2, we thought it might be a bit early. But in hindsight, so far it appears to have turned out to be rather timely. After five solid up months in a row and BSM gains that were double the historic average we expected a
rally respite was imminent. With S&P 500 down -5.5% from the March 28 closing high to the April 19 closing low the pullback in the 3-6% range we were expecting has transpired. We suspect the pullback is not over and at a bare minimum we could see more chop over the next several months fueled by headlines, higher rates, inflation data and technicals.
We have refined the Election Year Seasonality Pattern with just the Top Q1 Election Years and All Election Years compared to 2024 in the chart below. The chart underscores the market’s tendency to be weaker in April and May after big Q1 gains in election years. S&P has rallied about 2% off the lows the past 3 sessions, NASDAQ has rallied a little more. If you look closely at the green line on the chart there is some late-April strength that succumbs to more weakness in May before the market gets its election year footing for the bullish last seven months of election years.
Down April Concerns
With only a few days left in April 2024, it seems apparent it will be a down month, the first one in 6 months. Almanac readers know April is the best Dow month by average percent change and #2 for S&P. It’s ranked fourth for average percent change on NASDAQ and Russell 2000. In general, April is a solidly bullish market month overall with a high average percent and plurality of gains across the board. So a negative April is cause for concern. When the #1 Dow month is down that could be significant.
Digging into the data in the tables below of all down Aprils since 1950 there is a plethora of red in May and through Q2 and Q3. There are several steep drops scattered throughout these 21 down April years. May, Q2 and Q3 show consistent and average losses. Q4 however delivered solid gains except for three years: 1973 (Watergate, Vietnam, Oil Embargo), 1987 (Crash) and 2000 (Undecided Election). You can see why we expect the market to struggle for the next several months.
Considering the banner Q1 we had in 2024 we broke the stats down by down Aprils after a positive Q1 in the next table. There is a marked improvement, but weakness during the Worst Six Months remains prevalent and last-8-month losses loom large in 1956 (Ike Recession), 1981 (Double-Dip Recession), 1987 (Crash) and 2000 (Dotcom Bubble).
Lastly, since 2024 is an election year we trimmed the list to only election years with down Aprils. Stocks still struggle through Q2 and Q3 in these years. Q4 and the last 8 months are stronger overall but not without significant damage in 1956, 1960, 2000 and 2012. Sitting presidents were running for reelection in 1956 and 2012 whereas 1960 and 2000 were open fields. No matter how we slice it after the big 5-month and Q1 gains we’ve had and the looming April loss, the market is going to be hard pressed to deliver much upside until Q4.
Technical Support
As the correction gathers some momentum here let’s turn to one of our longer-term technical charts back to 2022. We’ve left the legacy support and resistance lines and notations that have been on this chart over the past two years. Pink circles and a new note have been added to highlight the old 4800 resistance level at the January 2022 high, which we broke through in January 2024. This old 4800 resistance level now serves as support. A move to this level would be an 8.6% pullback from the closing high and 8.8% from the intraday high. Below 4800 there is support around 4700 near the 200-day moving average (blue line) and the January low which would be a 10% correction. Then there’s 4600 at last summer’s highs which would constitute a 12.5% correction.
Considering how far the market has come since the October 2023 lows and even the 2022 bear market lows, a correction of these magnitudes should not come as a surprise. Today’s selling on the worse than expected GDP, inflation data, and Magnificent Seven weak guidance may look dire at first blush, but it’s not as severe as the fear mongers want you to believe. The market and these high-flying stocks clearly got ahead of themselves, and this is a retreat to more reasonable levels.
Stagflation Fears
This morning’s GDP report has whipped up stagflation fears on The Street. GDP came in at 1.6% for Q1, well below expectations of 2.4%. But remember this is the “advance” reading and will be revised two more times. Also contained in this report is a quarterly measure of personal consumption expenditures (PCE). This is NOT the Fed’s “
preferred measure of inflation," which comes out tomorrow. This is a quarterly measure, the “
implicit price deflator,” that has also been annualized. When it was softer everyone was raving about inflation coming down and the Fed cutting early and often. So, today’s reaction to GDP and inflation is likely kneejerk and overdone. Though it has stoked the stagflation fears and spooked the market.
Solid Seasonal Sell Signal
While the market is clearly in a corrective phase let’s remember that we have already shifted to a cautious stance following our April 2 Best Six Months Seasonal MACD Sell Signal. We have taken some profits, shifted neutral, tightened up stops and are limiting new longs. Our NASDAQ Best 8 Months Seasonal MACD Sell Signal that can occur on/after June 3 (first trading day of June this year) will be the next “scheduled” portfolio adjustment. However, if current volatility is testing your nerves, it is acceptable to consider taking additional profits by lightening up on remaining long positions.
In the meantime, keep an eye on the 10-yr Treasury yield. If it continues to trend higher, pushing mortgage rates higher, it could test the highs of last year which could push the market into correction (down 10%+). This will all depend on incoming inflation and economic data. Although one can never be certain, it sure looks like we will have a presidential election rematch of Trump v. Biden. Both are known entities and the last 7 or 8 months of election years have historically been bullish.
Pulse of the Market
Three days after issuing our Seasonal Sell Signal for DJIA and S&P 500, DJIA fell below its 50-day moving average for the first time since last November (1). DJIA’s rally earlier this week brought DJIA back near its 50-day moving average, but that rally has proved short-lived. DJIA is now trading in the wide gap between its 50- and 200-day moving averages. Some support could be found around DJIA 37,700 right around last year’s highs and April’s lows set last week. Should this support break, then the next key level is the 200-day moving average currently around 36,300.
After hastily retreating throughout most of April, both the faster and slower moving MACD indicators applied to DJIA made a quick turn higher earlier this week (2). The faster moving “buy” indicator did turn positive on Tuesday, but the slower moving indicator remains negative with its April 2, sell signal still holding.
Since the first full week of trading in March (week ending on the 8th), DJIA has declined five times in eight weeks (3) and suffered two Down Friday/Down Monday (DF/DM) occurrences. March’s DF/DM will initially quickly shrugged off by DJIA as it soon rallied to new all-time highs. April’s DF/DM was also followed by some DJIA strength, but S&P 500 and NASDAQ recorded significant weekly losses. S&P 500 (4) was down in five of the last seven weeks while NASDAQ (5) has fallen in six of the last seven weeks. Last week’s 5.5% NASDAQ loss was its worst weekly decline since early November 2022.
Market breadth over the last three weeks has been decisively negative. NYSE Weekly Decliners (6) have outnumbered Weekly Advancers by over 2 to 1 in each of the last three weeks. Selling has been widespread and weekly stats do not currently show any indication that the pullback is over. At a minimum a relatively quiet week with mixed breadth could be an early sign that selling pressure could be waning.
Weekly New Highs and New Lows have been similarly dreary as market breadth over the past few weeks. Weekly new highs have collapsed from a high of 590 in the second half of March to just 45 last week (7) while Weekly New Lows have ballooned from 49 during the final week of March to 173 last week. Look for a plateau and/or a decline in New Weekly Lows as a possible sign the pullback has run its course.
Inflation and federal deficit spending have continued to weigh on longer-term Treasury yields. In addition to the 10-year Treasury bond yield, the 30-year Treasury bond yield (8) has moved higher and is closing in on 5% again. The last run toward 5% occurred when stocks last corrected during August to October 2023. Last year’s high yields could be tested, but likely will not be broken. Inflation has been warmer than expected as its pace of retreat has slowed, but it is also not surging higher like it did in 2021 and the first half of 2022.