February 2018 Trading & Investment Strategy By: | January 25, 2018 | Email | Print

1/24/2018: Dow 26252.12 | S&P 2837.54 | NASDAQ 7415.06 | Russell 2K 1599.61 | NYSE 13507.66 | Value Line Arith 6372.77

 

Psychological: Frothy. Yes, the record is broken. Bullish sentiment is still running near multi-decade highs according to Investor’s Intelligence Advisors Sentiment survey. Extreme levels of bullish sentiment are generally considered not good. However, as long as the market continues to rise (and valid reasons do exist for it to do so) a significant change in sentiment is unlikely.

 

Fundamental: Accelerating. Fourth quarter U.S. GDP is currently forecast at 3.4% by the Atlanta Fed’s GDPNow model and the labor market remains firm with 148,000 net new jobs added in December. Corporate taxes have been cut and many companies are paying out bonuses, increasing pay, announcing intentions to invest in the U.S. and expand hiring. Earnings season is underway and already there is some confirmation that growth has accelerated.

 

Technical: Overbought. Stochastic, relative strength and MACD indicators applied to DJIA, S&P 500, NASDAQ and Russell 2000 are at or near overbought levels. Recently, similar situations were followed by brief periods of sideways (to slightly lower) trading before the next leg higher occurred. Considering the underlying momentum in the market, this will likely be the case this time around; any weakness could be considered an opportunity to add to existing long positions or to establish new positions.

 

Monetary: 1.25-1.50%. As of today, CME Group’s FedWatch Tool is showing just a 4.6% probability of another rate increase being announced at the end of next week’s FOMC meeting. This will be Janet Yellen’s final meeting as Fed Chair. Jerome Powell will become the 16th chairman on February 3. Considering he has served on the Fed’s board since 2012 and has voted in favor of every action taken since then, the transition will most likely be smooth and the path of rate increases will likely remain slow and steady. 

 

Seasonal: Bullish. Even though February’s long-term record has been spotty, DJIA has advanced for eight straight February’s while S&P 500 have been up in seven of the last eight. In midterm years, February’s performance has been above average, DJIA and NASDAQ +1.0%, S&P 500 +0.7%. However, February’s following big January’s (+4% or more) have declined or finished with a less than 1% gain 65% of the time. 

 

Incoming economic and corporate data readings along with the positive reception to the new tax law on Wall Street and in boardrooms across the country have conspired to keep our more bullish 2018 forecast scenarios from last month on track. Positive readings from the first two legs of our January Indicator Trifecta lend further support to our positive outlook for 2018. However, many have latched onto the notion that due to the fact that the market is off to its best start since 1987, something ominous is on the horizon – this is not 1987.

 

Since December 21 when our forecast best-case scenario put DJIA 29,000 in the cards, DJIA is up 6.6% in just five weeks and now just 9.0% away from 29K. But we are still a far cry from the 13+% gains we had at this time in 1987 and for the full month of January 1987. In fact, as we detailed in yesterday’s blog post, the vast majority of big January gains were followed by great years. So as we sit here in the midst of the Best Six Months following the positive vibrations of great Worst Six Months, improving fundamental data, upbeat corporate guidance, and technical market momentum gives us further conviction that our bullish outlook remains prudent for this year. 

 

Midterm Februarys are more bullish than then usual and March remains strong in midterm years as well. April, May and June are weaker in midterm years, so we suspect this rally to continue higher for a bit more before we run into any meaningful pullback. While we are always on the lookout for cracks in the market’s bullish veneer and prepared to make adjustments to our outlook should any breakdowns in the date suggest the party is over, we don’t expect anything unfavorable until the end of the Best Six Months.

 

Comments and actions from CEOs have been optimistic, constructive and bullish on how the new tax legislation will fall nicely to their bottom lines. They have already been putting more money in the pockets of their employees and upping earnings outlooks. Some of the praise from bigtime, mainstream business moguls has been unexpectedly lavish. 

 

Spending is up, earnings are forecasted to rise and the economy is gathering momentum. Most impressively the economy is growing more on its own two feet now, healthily digesting the interest rate tightening and the reduction in the Fed’s massive balance sheet. Workers are coming back to the labor force, yet unemployment remains in check and historically low. A bit of healthy inflation is starting to perk up as well. 

 

There has been some concern expressed about high price-earnings (PE) valuations and excessive bullish sentiment. PEs can come down in one of two ways. Stock prices can come down or earnings can rise. From what we have been hearing from CEOs it sounds like they are expecting an increase in earnings. As for contrary bullish sentiment indicators, history has taught us that high bullish sentiment can stay high for quite a while and longer than most bears can stay short and it’s only indicative when it takes a sharp turn lower.

 

There is also a great deal of cash on the sidelines. BlackRock CEO Larry Fink relates in his recent Davos interview (jump to the minute 4:30-5:30 mark), that as this large amount of cash comes back into this bull market it will provide more momentum. Finally, let’s not forget that the eighth year of decades boasts the second best record next to 5th years in the past thirteen decades with an average 14.5% gain for DJIA, 2008 notwithstanding. So, while we remain rather bullish for the near term and 2018 as a whole, we do expect some mild pullback in the Worst Six Months and remain prudent and ready to make our regular adjustments based on our calendar rules and tactical market signals.

 

 

Although there are four more trading days remaining in the month, January 2018 has already solidified itself in history. DJIA has closed above 25000 and 26000 (1), was up 6.2% and gained 1532.90 points as of its January 24 close. Even if DJIA were to gain no further, January 2018 would rank as the best monthly point gain on record. Based upon percent gain, DJIA’s January performance is solid, but well short of the 14.4% it gained in January 1976.

 

Since issuing our Seasonal MACD Buy signal in November, DJIA’s faster and slower MACD indicators briefly turned negative in late December, but they are once again stretched (2). Should DJIA’s momentum falter for any extended period of time, MACD indicators would likely turn negative again. Any such weakness would likely be an opportunity to add to existing positions as half of the “Best Months” still remains.

 

 

DJIA (3) and S&P 500 (4) have had just one declining week since the last week of November. The single declining week was the last week of 2017 and the only reason the week was a loser was because of losses on the last trading day of the year. NASDAQ (5) was weaker over the same time period, recording three weekly losses. Tech was not spared from last-trading-day of 2017 bearishness nor did it avoid December’s first half weakness. Following three straight weeks of gains to start 2018, market momentum is beginning to wane. DJIA, S&P 500 and NASDAQ are currently on course for a flat finish this week.

 

NYSE Weekly Advancers and Decliners data has also softened (6). The robust advantage held by Advancers at the start of the year has faded to Decliners outnumbering Advancers last week. This suggests fewer and fewer stocks are participating in the rally and another brief period of consolidation will be the market’s next move. 

 

New Highs and New Lows (7) are also giving mixed signals. New Highs may have peaked during the second week of January while New Lows have been expanding the entire month. This could simply be traders and investors dumping lagging positions in interest rate and defensive sectors in favor of those most likely to benefit from accelerating growth and tax reform or confirmation that participation in the rally is fading. Most likely it is a little bit of both. Ideally, look for an increasing number of New Highs and a declining number of New Lows.

 

Short-term interest rates (8) continue to march higher in anticipation that the Fed will be raising rates again. Longer-term rates have begun to move modestly higher, but the 30-year Treasury bond remains under 3%. Interest rates may no longer be at record lows, but they still remain low based upon historical ranges.

 

 

 

Since 1950, February is up only slightly more than half the time and up marginally on average. However, small cap stocks, benefiting from “January Effect” carry over; tend to outpace large cap stocks in February. The Russell 2000 index of small cap stocks turns in an average gain of 1.2% in February since 1979—just the seventh best month for that benchmark. 

 

In midterm years, February’s performance generally improves with average returns all increasing. Here again it is the Russell 2000 small-cap index that shines brightest gaining 1.9% on average since 1982. Russell 1000 is second best, averaging gains of 1.3% since 1982. DJIA and S&P 500 average gains of 1.0% (since 1950) while NASDAQ lags with average advance of 0.7% (since 1974).

 

 

The first trading day is bullish and it has traded higher in 19 of the past 26 years with an average S&P 500 gain of 0.43%. The Russell 1000 is even stronger, up 21 of the last 26 with an average gain near 0.45%.  Strength then tends to fade after that until the stronger eighth, ninth and eleventh trading days. Expiration week has a spotty longer-term record, but the week after has a clear negative bias with average losses across the board over the past 28 years.

 

Presidents’ Day is the lone holiday that exhibits weakness the day before and after (Stock Trader’s Almanac 2018, page 88). The Friday before this mid-winter three-day break is exceptionally treacherous and average declines persist for three trading days after the holiday going back to 1980. More recently, since 2011, the day before and the day after Presidents’ Day has been improving. S&P 500 has advanced six times in seven years on the day before and has been up on the day after for six straight years.

 

Recent market gains have been accompanied by a “spike” in the CBOE Volatility Index (VIX). In percentage terms, the increase in VIX would appear to be quite significant, but in absolute terms and within the context of history (even recent six month history), there likely is little cause for concern. For starters, VIX was near all-time lows on January 4 with an intra-day low of 8.92. VIX’s all-time intra-day low was 8.56 on November 24, 2017. So based upon VIX the market was rather dull. This dull assessment can be confirmed by the narrow daily trading range observed on numerous occasions throughout 2017. Now that the market has awoken and daily moves have approached 1%, VIX has picked up.

 

Then there is the VIX’s nickname, the “fear” index. It gets its nickname from the fact that it tends to rise when the market is in decline. However, the VIX is actually quoted in percentage terms and represents the expected range of the S&P 500 over the next year at a 68% confidence level. VIX is directionless. A reading of 12 today means a range of plus/minus 12%. Because panic selling is far more common than panic buying, elevated levels of VIX are far more common during declines hence the nickname “fear” index. Let’s not overlook the possibility that 12% over the next 12 months is also in play now.

 

Lastly, VIX has a historical tendency to move higher in January. In the following chart weekly open, high, low, close values of VIX are plotted in the upper portion and VIX’s seasonal trend (using data since 1990) is plotted in the lower section. Beginning in January, VIX does tend to climb higher and peak around mid-February. From there VIX then resumes course lower until mid-July and the start of the often low-volume summer doldrums. At which time VIX begins moves steadily higher into mid-October, around the same time that the stock market tends to post a seasonal low, and the typical yearend stock rally begins pushing VIX lower once again.

 

 

Absent confirmation from other technical and fundamental data sources, the recent rise in VIX from near historic lows to the 12-13 range is not as significant as some headlines may suggest. Economic data is firm and trending in a positive direction and daily Advance/Decline lines are also bullish further lending support to continued stock market gains in the near-term.

 

 

 

Based upon the NYSE ARCA Natural Gas Index (XNG) there is a seasonal tendency for natural gas companies to enjoy gains from the end of February through the beginning of June. Detailed in the Stock Trader’s Almanac 2018 on page 92, this trade has returned 14.5%, 16.6%, and 14.9% on average over the past 15, 10, and 5 years respectively.

 

One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the cold weather northern areas in the United States. In particular, when December and January are colder than normal, we see drawdowns in inventories through late March and occasionally into early April. This has a tendency to cause price spikes lasting through mid-April and beyond.

 

This winter got off to a slow start in the Northeast with relatively mild temperatures lasting until around Christmas, but that quickly changed. The Times Square New Year’s Eve celebrations were a perfect example as temperatures plunged into the single digits. As a result of widespread, below average temperatures, natural gas inventories are near the lowest they have been in five years for this time of the year and are 13% below levels from one-year ago. Natural gas prices have rebounded from their early-December lows in response to surging demand and currently trade around $3.20/mmBtu. The situation appears to be setting up well for continued strength in natural gas and the stocks of companies that supply it.

 

 

First Trust Natural Gas (FCG) is an excellent choice to gain exposure to the company side of the natural gas sector. FCG could be bought on dips below $23.95. Once purchased, consider using an initial stop loss of $22.10 and take profits at the auto sell, $30.17. Top five holdings by weighting as of yesterday’s close are: Anadarko Petroleum, Devon Energy, Concho Resources, Noble Energy and Continental Resources. The net expense ratio is reasonable at 0.6% and the fund has approximately $190 million in assets.

 

 

United States Natural Gas (UNG) could be considered to trade the commodity’s seasonality as its assets consist of natural gas futures contracts and is highly liquid with assets of over $400 million and trades millions of shares per day. Its total expense ratio is 1.27%. UNG could be bought on dips below $24.50. If purchased, set an initial stop loss at $22.00. 

 

 

 

Since the last update earlier this month, the market and the ETF Portfolio have flourished. Average open position performance is now 7.4% versus 4.3% on January 3. Strength and gains have been broad stretching across all sectors represented in the portfolio except real estate. Vanguard REIT (VNQ) is the sole losing position held. Its decline is most likely the result of rising interest rates and not because of any meaningful weakness in real estate. VNQ is on Hold.

 

iShares NASDAQ Biotech (IBB) is currently positive, but has remained on the sidelines recently with a meager 0.5% gain. The longer-term prospects for the industry remain bright and IBB will likely begin to “catch up” with the rest of the market in the near-term.

 

Our core four ETFs traded by our Tactical Seasonal Switching Strategy, DIA, IWM, QQQ and SPY, currently average gains of 6.3%. SPDR DJIA (DIA) is leading the bunch, up 9.1% since our Seasonal Buy Signal was issued. DIA, IWM, QQQ and SPY are on Hold.

 

Aside from today’s new trade ideas and previously mentioned ETFs, all other positions are currently on Hold. Please note most stop losses have been updated.

 

 

 

Over the four weeks since last update, S&P 500 climbed 3.2% higher while Russell 2000 climbed 2.3% as of yesterday’s close. The Almanac Investor Stock Portfolio’s blend of cash and long positions climbed 4.2% over the same time period excluding dividends and any trading costs. Our Mid-Cap portfolio performed best, up 8.4% followed by Large-Caps up 6.1%. Small-Caps were essentially in line with the Russell 2000, up 2.1%.

 

Existing Mid-Cap positions performed well as SMG, ABCB, WAL, BLDR and IIVI all logged solid gains. The addition of four mid-cap stocks from our December 16, 2017 Free Lunch basket also contributed nicely. Crescent Point Energy (CPG) is the top performing position from the basket, up 34.5%. 

 

All Free Lunch stocks appear in the portfolio table below shaded in light grey. All Free Lunch stocks except Mountain Province Diamonds (MPVD) traded within their suggested buy limit range of -2% to +2% based on their December 15, 2017 closing price and were added to the portfolio. A standard initial investment of $2000 was used for each Free Lunch stock. MPVD trade is cancelled. All other remaining Free Lunch positions are on Hold. We will continue to employ an 8% trailing stop, using daily closing prices, on remaining Free Lunch positions. Today’s 1.7% gain by the Russell 2000 was more than double the gain by Russell 1000. Small-cap outperformance appears to be resuming.

 

Per standard portfolio policy (located at the bottom of the table below), half the original position in Southern Cooper (SCCO) was sold today at $50. The remaining position in SCCO is on Hold.

 

Cohu Inc (COHU) traded below its revised buy limit on December 15 and was finally added to the Small-Cap section of the portfolio. Shares of COHU are now up 5.5% and the position is on Hold.

 

In the Large-Cap section of the portfolio, First American Financial (FAF), Huntington Ingalls (HII) and Synnex Corp (SNX) also traded below their revised buy limits. FAF is the standout in this trio, up 7.3%. FAF, HII and SNX are on Hold.

 

Absent any substantial in the major indexes over the past four weeks, there are still eight open positions in the portfolio, KBH, LGIH, MTH, ORBK, PATK, G, LII and TOL. All eight of these positions can be considered at current levels up to their respective buy limit. For tracking purposes, all eight will be added to the portfolio using their average trading price on January 12.

 

All other positions in the Stock Portfolio are on hold. Please see following table for current advice, buy limits and stop losses.

 

 

 

Even though today turned out to be a mixed day for the market (DJIA down, S&P 500 and NASDAQ up), S&P 500 is still positive year-to-date (2.8%) and thus our First Five Day (FFD) early warning system is also positive. Combined with last week’s positive Santa Claus Rally (SCR), our January Trifecta is now two for two. The January Trifecta would be satisfied with a positive reading from our January Barometer (JB) at month’s end.

 

 

The best case, most bullish scenario is when all three indicators, SCR, FFD and JB, are positive (in table above). In 29 previous Trifecta occurrences since 1950, S&P 500 advanced 89.7% of the time during the subsequent eleven months and 93.1% of the time for the full year. However, a January Indicator Trifecta does not guarantee the year will be bear free. The three losing “Last 11 Mon” years, shaded in grey, experienced short duration bear markets (2011, S&P 500 –19.4% peak to trough).

 

Even if S&P 500 was to suddenly reverse course and finish the full month in the red, the prospects for the next eleven months and the full year remain quite high. Of the last 39 years since 1950 that the SCR and FFD were both positive, the next eleven months and full year advanced 87.2% of the time with gains of 11.5% and 14.0% respectively.

 

A positive SCR and FFD are encouraging and further clarity will be gained when the January Barometer (page 16, STA 2018) reports at month’s end. A positive January Barometer would further boost prospects for full-year 2018. The December Low Indicator (2018 STA, page 38) should also be watched with the line in the sand at DJIA’s December Closing Low of 24140.91 on 12/6/17.

 

Devised by Yale Hirsch in 1972, the January Barometer (JB) has registered nine major errors since 1950 for an 86.8% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the nine major errors Vietnam affected 1966 and 1968. 1982 saw the start of a major bull market in August. Two January rate cuts and 9/11 affected 2001.The market in January 2003 was held down by the anticipation of military action in Iraq. The second worst bear market since 1900 ended in March of 2009 and Federal Reserve intervention influenced 2010 and 2014. In 2016, DJIA slipped into an official Ned Davis bear market in January. Including the eight flat years yields a .750 batting average.

 

As the opening of the New Year, January is host to many important events, indicators and recurring market patterns. U.S. Presidents are inaugurated and present State of the Union Addresses. New Congresses convene. Financial analysts release annual forecasts. Residents of earth return to work and school en mass after holiday celebrations. On January’s second trading day, the results of the official Santa Claus Rally are known and on the fifth trading day the First Five Days early warning system sounds off, but it is the whole-month gain or loss of the S&P 500 that triggers our January Barometer.

 

And yet for some reason, every February or sooner if January starts off poorly our January Barometer gets raked over the coals and every attempt at disparaging this faithful indicator comes up lame. It never ceases to amaze us how our intelligent and insightful colleagues, that we have the utmost professional respect for and many of whom we consider friends, completely and utterly miss the point and argue the shortcomings of the January Barometer. However, this year we are not waiting until this happens again. Instead, here is why the January Barometer is still relevant and important.

 

 

Many detractors refuse to accept the fact the January Barometer exists for one reason and for one reason only: the Twentieth “Lame Duck” Amendment to the Constitution. Passage of the Twentieth Amendment in 1933 created the January Barometer. Since then it has essentially been “As January goes, so goes the year.” January’s direction has correctly forecasted the major trend for the market in many of the subsequent years.

 

Prior to 1934, newly elected Senators and Representatives did not take office until December of the following year, 13 months later (except when new Presidents were inaugurated). Defeated Congressmen stayed in Congress for all of the following session. They were known as “lame ducks.”

 

Since 1934, Congress convenes in the first week of January and includes those members newly elected the previous November. Inauguration Day was also moved up from March 4 to January 20. 

 

January’s prognostic power is attributed to the host of important events transpiring during the month: new Congresses convene; the President gives the State of the Union message, presents the annual budget and sets national goals and priorities. 

 

These events clearly affect our economy and Wall Street and much of the world. Add to that January’s increased cash inflows, portfolio adjustments and market strategizing and it becomes apparent how prophetic January can be. Switch these events to any other month and chances are the January Barometer would become a memory.

 

 

Over the years there has been much debate regarding the efficacy of our January Barometer. Skeptics never relent and we don’t rest on our laurels. Disbelievers in the January Barometer continue to point to the fact that we include January’s S&P 500 change in the full-year results and that detracts from the January Barometer’s predicative power for the rest of the year. Others attempt to discredit the January Barometer by going further back in time: to 1925 or 1897 or some other arbitrary year. 

 

After the Lame Duck Amendment was ratified in 1934 it took a few years for the Democrat’s heavy congressional margins to even out and for the impact of this tectonic governing shift to take effect. In 1935, 1936 and 1937, the Democrats already had the most lopsided Congressional margins in history, so when these Congresses convened it was anticlimactic. Hence our January Barometer starts in 1938. 

 

In light of all this debate and skepticism we have compared the January Barometer results along with the full year results, the following eleven months results, and the subsequent twelve months results to all other “Monthly Barometers” using the Dow Jones Industrials, the S&P 500 and the NASDAQ Composite.

 

Here’s what we found going back to 1938. There were only 10 major errors. In addition to the nine major errors detailed above: in 1946 the market dropped sharply after the Employment Act was passed by Congress, overriding Truman’s veto, and Congress authorized $12 billion for the Marshall Plan.

 

Including these 10 major errors, the accuracy ratio is 87.5% for the 80-year period. Including the 9 flat year errors (less than +/– 5%) the ratio is 76.3% — still effective. For the benefit of the skeptics, the accuracy ratio calculated on the performance of the following 11 months is still solid. Including all errors — major and flat years — the ratio is still a respectable 68.8%.

 

Now for the even better news: In the 49 up Januarys there were only 3 major errors for a 93.9% accuracy ratio. These years went on to post 16.2% average full-year gains and 11.8% February-to-December gains.

 

 

Let’s compare the January Barometer to all other “Monthly Barometers.” For the accompanying table we went back to 1938 for the S&P 500 and DJIA — the year in which the January Barometer came to life — and back to 1971 for NASDAQ when that index took its current form.

 

The accuracy ratios listed are based on whether or not the given month’s move — up or down — was followed by a move in the same direction for the whole period. For example, in the 80 years of data for the S&P 500 for the January Barometer, 61 years moved in the same direction for 76.3% accuracy.

 

The Calendar Year ratio is based on the month’s percent change and the whole year’s percent change; i.e., we compare December 2015’s percent change to the change for 2015 as a whole. By contrast the 11-month ratio compares the month’s move to the move of the following eleven months. February’s change is compared to the change from March to January. The 12-month change compares the month’s change to the following twelve months. February’s change is compared to the change from March to the next February.

 

Though the January Barometer is based on the S&P 500 we thought it would clear the air to look at the other two major averages as well. You can see for yourself in the table that no other month comes close to January in forecasting prowess over the longer term.

 

There are a few interesting anomalies to point out though. On a calendar year basis DJIA in January is slightly better than the S&P. 2011 is a perfect example of how the DJIA just edges out for the year while the S&P does not. For NASDAQ April, September and November stick out as well on a calendar year basis, but these months are well into the year, and the point is to know how the year might pan out following January, not April, September or November. And no other month has any basis for being a barometer. January is loaded with reasons. 

 

Being the first month of the year it is the time when people readjust their portfolios, rethink their outlook for the coming year and try to make a fresh start. There is also an increase in cash that flows into the market in January, making market direction even more important. Then there is all the information Wall Street has to digest: The State of the Union Address, FOMC meetings, 4th quarter GDP, earnings and the plethora of other economic and market data. 

 

 

In recent years new myths and/or areas of confusion have come to light. One of the biggest errors is the notion that the January Barometer is a stand alone indicator that can be used to base all of your investment decisions for the coming year on. This is simply not true and we have never claimed that the January Barometer should or could be used in this manner. The January Barometer is intended to be used in conjunction with all available data deemed relevant to either confirm or call into question your assessment of the market. No single indicator is 100% accurate so no single indicator should ever be considered in a vacuum. The January Barometer is not an exception to this.

 

Another myth is that the January Barometer is completely useless. Those that believe this like to point out that simply expecting the market to be higher by the end of the year is just as accurate as the January Barometer. Statistically, they are just about right. In the 80-year history examined in this article, there were only 23 full-year declines. So yes, the S&P 500 has posted annual gains 71.3% of the time since 1938. What is missing from this argument is the fact that when January was positive, the full year was also positive 87.8% of the time and when January was down the year was down 58.1% of the time. These are not the near perfect outcomes that true statisticians prefer, but once again, the January Barometer was not intended to be used in a vacuum.

 

 

Combining our three January indicators, the Santa Claus Rally (SCR), First Five Days (FFD) and January Barometer (JB), into the January Trifecta has proven to be an especially reliable gauge for future market performance. When all three are positive, as was the case in 2017, the next eleven months have been up 89.7% of the time with an average gain of 12.9% and the full year advanced 93.1% of the time with an average S&P 500 gain of 17.9%.

 

Over the last month since last update, the ETF Portfolio has improved nicely. The average open position gain is now 4.3% (using closes prices from January 3) compared to 0.5% at the start of December. iShares DJ Transports (IYT) is the best performing position of recent trade ideas, up 11.9%. The worst performing position is Vanguard REIT (VNQ), down 0.6%. Interest rates have moved modestly higher over the past month and this has put some pressure on VNQ. Both IYT and VNQ are on Hold.

 

Per last month’s update, SPDR Gold (GLD) and iShares Silver (SLV) have been closed out. The timing of these sales was not the best as both GLD and SLV have recovered, but this bounce could be short-lived as both gold and silver have been stuck in trading ranges for more than a year and typical seasonal strength normally ends around now.

 

Just one new sector trade idea begins in January, short Computer-Tech. The recent track record for this trade has been poor and the longer-term record is less than stellar. With major indices closing at record highs yet again, shorting Computer-Tech does not appear to be a good setup at this time.

 

Three sector seasonalities come to an end in January: High-Tech, Computer Tech and Pharmaceutical. However, High-Tech and Computer Tech return to favor in March and April respectively so instead of selling any tech-related positions we will continue to hold SPDR Technology (XLK) and iShares US Technology (IYW). The Pharmaceutical sector is not directly represented in the portfolio; instead it is represented by SPDR Healthcare (XLV) and iShares NASDAQ Biotech (IBB). The sector seasonalities associated with XLV and IBB last until May and March. Continue to Hold XLV and IBB.

 

Last month’s new trade ideas related to seasonal strength in copper, iPath Bloomberg Copper (JJC) and Global X Copper Miners (COPX), have run away. Both have essentially gone straight up since the day after they were presented last month. If you ignored the Buy Limits and bought then you likely have a respectable gain.

 

Although this January has gotten off to a strong start, mid-term Januarys have a spotty history. With this in mind, all positions in the portfolio are on hold.

 

 

 

[Editor’s Note: This is a special Alert for the Santa Claus Rally. Our regular Alert will be sent after the market closes tomorrow, January 4, 2018]

 

As defined in the Stock Trader’s Almanac, the Santa Claus Rally (SCR) is the propensity for the S&P 500 to rally the last five trading days of December and the first two of January an average of 1.3% since 1950.

 

The lack of a rally can be a preliminary indicator of tough times to come. This was certainly the case in 2008 and 2000. A 4.0% decline in 2000 foreshadowed the bursting of the tech bubble and a 2.5% loss in 2008 preceded the second worst bear market in history. 

 

Including this year, Santa has paid Wall Street a visit 54 times since 1950. Of the previous 53 occasions, January’s First Five Days (FFD) and the January Barometer (JB) were both up 29 times. When all three indicators were positive, the full year was positive 27 times (93.1% of the time) with an average gain of 17.9% in all years.

 

A positive SCR is encouraging and further clarity will be gained when January’s First Five Days Early Warning System (page 14, STA 2018) gives its reading next week and when the January Barometer (page 16, STA 2018) reports at month’s end. A positive First Five Days and January Barometer would certainly boost prospects for full-year 2018. The December Low Indicator (2018 STA, page 38) should also be watched with the line in the sand at the Dow’s December Closing Low of 24140.91 on 12/6/17.