June Outlook: More Chop Ahead, NASDAQ Best 8 Months Ending By: Jeffrey A. Hirsch & Christopher Mistal | May 30, 2024 | Email | Print

Our cautious stance since our April 2 Best Six Months (BSM) MACD Seasonal Sell Signal continues to appear prudent. While we have logged new all-time highs in the major averages, we have not gained much net ground since the late-March highs. Selling over the past several days underscores the market’s potential for weakness this time of year and vulnerability to disappointment from leading stocks, weak guidance as well as Fed uncertainty, elevated interest rates and sticky inflation.

 

NASDAQ’s April-May rally is a testament to our seasonal work and the propensity for NASDAQ tech stocks to exhibit a Best 8 Months from November-June vs. DJIA’s and S&P’s Best Six Months from November-April. This rally has provided us ample time to reposition our portfolio for the Worst 4 months of the year July-October. In fact, most of the stocks remaining in our portfolio were up today. All our Sector ETFs, except the technology positions, were also up today, as was the iShares Russell 2000 (IWM).

 

NASDAQ’s Best 8 Months MACD Seasonal Sell Signal can occur anytime on or after June 1. Subscribers will of course be emailed when it triggers. Today’s decline has put the NASDAQ MACD Sell indicator on the brink of triggering a Sell Signal but remember that we need to see a new crossover on or after June 1 for the Sell Signal to trigger, so stay tuned.

 

 

Despite the recent weakness over the past week, S&P 500 is still up 4.0% for May as of today’s close, gaining back all it lost in April. If the market holds its ground tomorrow, this will be the 10th best May for the S&P since 1950. Impressive in and of itself, it is even more so for a notoriously weak market month. We have tabulated all the Mays since 1950 with gains greater than 3% here and it’s clearly supportive of our bullish outlook for 2024. 

 

As you can see in the table below only two years ended up in the red: 1957 during Eisenhower’s second term post-election year bear market and in midterm year 1990 when Iraq invaded Kuwait. Only two were election years (highlighted in yellow): 1980 after the Hunt Brother’s attempt to corner the silver market in Q1 with the last 7 months up 22.0% and a full year gain of 25.8% and 2020 after the Covid bear market with the last 7 months up 23.4% and a full year gain of 16.3%.

 

There are a few other weak spots, but overall, a strong May is indicative of a continuing bull market with a strong last 7 months of the year, up 70% of the time with an average gain of 8.6% and a median gain of 10.3%. Our Annual Forecast Base Case Scenario for gains of 8-15% remains on track with our Best Case Scenario for gains of 15-25% potentially in play.

 

 

As noted on page 26 of the 2024 Stock Trader’s Almanac “2024 Presidential Election Year Perspectives” the first five months of the year are better when the party in power retains the White House. Politics aside, also noted on this pertinent page (among other things) is the fact that the market tends to be stronger when the incumbent party in power stays in power. DJIA is up 1.1% for the first five months of 2024 with one day to go while S&P is up 9.8% and NASDAQ is up 11.5%. 

 

But this year is unique. For only the second time in our history we have former president who lost his bid for reelection to a second term running against a sitting president both running for second terms. Putting aside the unprecedented legal situation, which will likely be appealed and remain pending until after the November election – and longshot third party candidates, we have two candidates who have served one term running for a second term. Both are known entities, and the market has a pretty good idea of how to handicap their potential policies and agendas. Thus, reducing the uncertainty factor across the board for election year 2024. This is likely a factor contributing to the market’s outsized gains so far this year. 

 

Looking at our two updated election year seasonal charts for NASDAQ and S&P 500 the market has likely gotten ahead of itself and has the potential to revert to the mean, at least partially. With five less election years in the data, NASDAQ exhibits more choppy sideways action during June and July in election years. But in both charts once we get through the conventions and the candidates are “official,” bullish election year forces tend to mount, pushing the market higher as we approach getting a decision on the next president and even higher into yearend. 

 

 

 

The Fed’s “preferred measure of inflation,” the Personal Consumption Expenditures Price Index (PCE) report comes out tomorrow morning at 8:30am ET before the market opens. Expectations are for a month-over-month change of 0.3% and a year-over-year change of 2.7%, the same as last month. As highlighted by the light red shaded box in our updated PCE Inflation Projection chart, PCE inflation has upticked the past 2 readings and if it continues at this monthly rate, the annual rate would continue to rise further away from the Fed’s 2% target. 

 

 

Even if PCE comes in below expectations, even down to 0.1% for the month, this will likely not move the needle for the Fed to cut rates. As we have noted, the Fed is in no rush to move. They do not want to appear political, and they also rarely change course quickly unless there is a crisis. Despite geopolitical turmoil there is no apparent crisis in the U.S. economy or stock market. We have just logged new all-time highs and the market is up substantially through the Fed’s aggressive hiking cycle since the Fed began raising rates in 2022. Economic growth remains and the labor market have softened, but are holding up.

 

Barring any black swan or systemic event we may not get any rate cuts until after the election and perhaps only one this year. Until the Fed sees 2-3 PCE readings that indicate inflation is calming further they are not likely to cut rates. Late last year the market was anticipating several rate cuts this year, up to six by some projections – not by us. Now it looks like 1, maybe 2. This has the 10-year yield and the market’s dander up. While we expect full year gains in line with our 8-15% annual forecast, we expect the market to bounce around and gain little ground over the next couple of months or so. Stay cautious and limit new longs and enjoy the safety and 5% rates of the short-term bond positions in our Tactical Switching Strategy ETF Portfolio – SHV and SGOV – and stay tuned for our NASDAQ Best 8 Months MACD Seasonal Sell Signal that can trigger on or after June 1.

 

 

After finding support just above 37,700 and retesting that level in late April, DJIA leapt higher in early May to reclaim its 50-day moving average. DJIA’s charge higher earlier this month ended on May 17 when it closed above 40,000 for the first time (1). Celebrations were brief as DJIA has been in retreat since that day. DJIA is once again below its 50-day moving average and the level it was when we issued our Seasonal MACD Sell signal on April 2. Today’s decline has pushed DJIA deeper into the gap between its 50- and 200-day moving averages. Support near 37,700 appears like it may be tested again.

 

DJIA’s brisk retreat in the second half of May has turned both the faster and slower moving MACD indicators negative (2). With both MACD indicators negative, DJIA’s loss of bullish momentum and reversal is confirmed. Should support around 37,700 break then DJIA’s 200-day moving average currently just above 36,750 would be the next key level to watch.

 

 

Prior to stalling out in mid-May, DJIA had logged five straight weeks of gains (3). S&P 500 (4) and NASDAQ (5) also enjoyed five-week winning streaks. Their streaks started a week after DJIA and continued through last week. Absent a rally on the last day of May, S&P 500 and NASDAQ weekly winning streak will also come to an end. Given the market’s tendency of streaky performance this year, June could prove to be a challenging month as the next weekly streak could be negative.

 

Despite solid market gains in much of May, market breadth (6) has been somewhat lackluster, most notably during the week ending May 24. During that week, NASDAQ logged a solid gain, S&P 500 was essentially unchanged while DJIA dropped 2.3% and NYSE Weekly Decliners outnumber Weekly Advancers by nearly 2.3 to 1. A similar reading for the current week is possible unless tomorrow’s PCE reading comes in significantly better than expected and revives Fed rate cut expectations. 

 

Weekly New Highs and New Lows tracked in line with the market’s performance over the past five weeks. New Highs were steadily expanding while New Lows were in retreat, until last week (7). Despite the major indexes reaching fresh, new all-times in May, the number of Weekly New Highs did not eclipse levels from earlier in the year when the market was also making new all-time highs. This would appear to suggest that participation in May’s rally was lower than it was during the past. Should this be the case, more weakness could be coming.

 

After drifting higher throughout the year, the 30-yield Treasury bond yield (8) may have peaked in late April at 4.77%. The softer than expected Q1 GDP report at the end of April was further confirmed by today’s second estimate with a revision lower from 1.6% to just 1.3%. Should economic data continue to signal slowing growth, long-term interest rates are likely to continue to trend lower. However, this would likely only make the Fed’s job even more challenging as slowing growth has not yet pulled inflation metrics substantially lower.