February 2023 Trading and Investment Strategy
January 26, 2023
Market at a Glance - 1/26/2023
By: Christopher Mistal
January 26, 2023
Please take a moment and register for our member’s only webinar, 2023 January Indicator Trifecta & Annual Forecast Update on Wednesday February 1, 2023, at 1:00 PM EDT here:
Please join us for an Almanac Investor Member’s Only discussion of recent market action with time for Q & A at the end. Jeff and Chris will cover the January Indicator Trifecta, our Annual Forecast, review the Tactical Seasonal Switching Strategy ETF, Sector Rotation ETF, and Stock Portfolio holdings and trades. We will also share our assessments of the Fed, inflation, recession prospects, as well as relevant updates to seasonals now in play.
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Market at a Glance
1/26/2023: Dow 33949.41 | S&P 4060.43 | NASDAQ 11512.41 | Russell 2K 1903.06 | NYSE 15985.87 | Value Line Arith 9296.10
Seasonal: Bullish. Normally the “weak link” of the Best Months, February has been stronger in pre-election years, #5 for DJIA, NASDAQ and Russell 1000; #6 for S&P 500 and #4 for Russell 2000. Average gains range from 1.2% by S&P 500 to 2.8% from NASDAQ. Benefitting from January Effect spillover, Russell 2000 averages 2.7% in pre-election Februarys.
Fundamental: Improving. Q4 GDP was better than anticipated at 2.9%. According to S&P Capital IQ estimates, corporate earnings are expected to hit their trough in the first half of this year. Inflation metrics are trending lower with headline CPI down to 6.5% in December from its peak of 9.1% last June. Weekly jobless claims are low and steady with a better than expected reading this week of just 186,000. Government spending continues to support economic growth.
Technical: Near Resistance. NASDAQ is currently challenging resistance at its still descending 200-day moving average which happens to be right around the 11,500 level that NASDAQ failed to break through in November and December. S&P 500 is nearing resistance at 4,100 while DJIA’s struggle with 34,000 stretches back to last August. DJIA’s chart is the only one where its 50-day moving average is above the 200-day moving average. S&P 500 will likely need to break through 4100 to produce a golden cross on its chart. NASDAQ has even more ground to recover. Resistance will fall, but it may not happen until the market gets a clear signal from the Fed.
Monetary: 4.25 – 4.50%. According to CME Group’s FedWatch Tool, as of today, there is a 100% chance of another Fed rate increase next week. Odds are nearly as high for the March Fed meeting. March is widely expected to be the last increase for the current hike cycle. Higher rates have bitten into housing and auto markets and may have aided in turning the trajectory of inflation. We do not expect the rate increases or quantitative tightening to tip the U.S. into recession.
Sentiment: Neutral. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 45.1%. Correction advisors are at 26.7% while Bearish advisors numbered 28.2% as of their January 25 release. This year’s strong start has expanded the number of bullish advisors, but not to the point that would warrant caution. The lack of an elevated number of bulls suggests there is still ample cash on the sidelines waiting to be put back to work. As NASDAQ continues to surge higher, it will likely become harder and harder to hold that cash.
February Outlook: Bullish January Indicator Trifecta On Track, Best Case Scenario In Play
By: Jeffrey A. Hirsch & Christopher Mistal
January 26, 2023
[Members Only Webinar: Please take a moment and register for our member’s only webinar, 2023 January Indicator Trifecta & Annual Forecast Update on Wednesday February 1, 2023, at 1:00 PM EST here: https://attendee.gotowebinar.com/register/4296556519043600223]
Markets continue to climb the “wall of worry” as the indexes encroach on resistance and new recovery highs. The battle to break the long downtrend line from the January 2022 highs rages on. DJIA was the first to breakthrough last November. Tested it during the early December pullback. The rebound put DJIA firmly above its 200-day moving average and, in the process, generated a golden cross with its 50 DMA crossing above the 200 DMA.
Russell 2000 was next, finally clearing the downtrend earlier this month along with its 50 and 200 DMAs as the January Effect of small caps outperforming large caps in January materialized. On pages 112 and 114 of the 2023 Stock Trader’s Almanac we detail how this January Effect really begins in mid-December and often runs through March. Tech heavy NASDAQ and the S&P 500 are just now poking through their downtrend lines with S&P surpassing its 200 DMA. NASDAQ is still below its 200 DMA but it’s on a tear this year, leading the averages with a 10% gain for the year so far. 
Some of the sentiment readings we track like Investors Intelligence US Advisors’ Sentiment Report have shown an uptick in bullish sentiment with more bulls than bears since mid-November. But there are still countless retail investors, traders, Wall Street analysts and pundits that remain adamant bears. We continue to receive bearish retorts to our bullish outlook and commentary. 
Most expect a recession this year, inflation not to ease, earnings to continue declining and the Fed to over reach on rates. We contend that there was an “official” recession last year with two consecutive quarters of negative GDP in Q1 and Q2. Earnings are forecasted to bottom in 2023 Q2 and the Fed is nearing the end of rate increases. 
In the words of our late founder Yale Hirsch, the market is barometer, not a thermometer. It is a forecasting mechanism that looks past the valley of economic despair to the bright future 6-8, even 12 months down the road. Our contrary antennae continue to purr, and we are considering ordering a batch of DOW 38820 T-Shirts. 
So now we are upping the ante and tilting our 2023 forecast towards our Best Case Scenario for above average pre-election-year gains of 15-20%, perhaps more, especially for NASDAQ as the tech wreck appears to be over with several big tech names cleaning house and bouncing back. 
It doesn’t look like there is any end is sight for the Ukraine/Russia conflict, but China has loosened its Covid-19 protocols, supply chains are recovering, inflation continues to retreat, the Fed is nearing the end of tightening, unemployment remains low, and growth is showing signs of picking up. 
S&P is now up 5.75% year-to-date, which is ahead of all the various pre-election year scenarios in play this year in the familiar chart below. Early year market chop may bring 2023 back in line with history, but no matter how we slice it the year is off to a bullish start.
[Pre-Election Year Chart]
January Trifecta More Bullish After Bear
We invented our January Indicator Trifecta in 2013 by combining our Santa Claus Rally and January Barometer, both invented by our late-founder Yale Hirsch in 1972 published in the 1973 Almanac, with the age-old First Five Days Early Warning System.
Our analysis dictates that the bear market bottomed in October 2022. NASDAQ did have a lower closing low on December 28, 2022, but it made its intraday low on October 13 along with DJIA, S&P 500 and Russell 2000. DJIA made a closing low on September 30, S&P on October 12 and R2K back on June 16. Bottom line 2022 was a bear market year.
Our January Indicator Trifecta January is off to a great start this year with the Trifecta 2-for-2 so far. Our Santa Claus Rally (2023 STA, page 118) and the First 5 Days (2023 STA, page 16) logged S&P 500 gains earlier this month. With three days left it appears our January Barometer (2023 STA, page 18) will be positive and the Trifecta will be 3-for-3, which as you may remember is rather bullish. When there is a bear market low the prior year it’s even more bullish for the year.
Trifecta after bear table
Using the Ned Davis Research bull and bear market definitions there were thirteen years since 1949 with bear market bottoms preceding a positive January Indicator Trifecta. S&P 500 was positive in all 13 years with double-digit gains every year, up 22.1% on average. The next 11 months have also never been down, up 16.8% on average.
When you take a look at the aggregate cycle charts of these 13 year (7 for NASDAQ) in the chart below of DJIA, S&P and NASDAQ it may be hard to contain yourself. NASDAQ and the techs may have been in the doghouse in 2022, but if this Trifecta after a bear market cycle follows the average course NAS could be up over 30% in 2023.
[Trifecta after bear Chart]
The bears may be grabbing all the headlines and soundbites, but we have history and a host of data points that support our bullish outlook. History teaches us that all indexes do not bottom out at the same time when bear markets end, take 1974 for example. Market turns are not always accompanied by some Eureka moment or a blatantly obvious capitulation V-bottom. We expect the bull market we have forecasted to continue to be choppy through Q1, but it is unfolding. 
It was a tech boom during Covid-19 and 2022 was the tech recession. It is not apparent to us that tech will sink the rest of the economy into recession. Q4 GDP was solid and employment data remains robust – even with the recent big tech layoffs. Big tech is returning to more appropriate staff sizing. They had ramped up for 30-50% growth, but now it’s more like 0-10%. They are trimming the fat. 
The market continues to confirm our bullish outlook. S&P is heading towards important resistance at the December high around 4100 after that it’s the August high around 4300. We will be keeping an eye on the December Low Indicator (2023 STA, page 36) with the line in the sand at the Dow’s December Closing Low of 32757.54 on 12/19/2022. But we want to be clear we are shifting our outlook to our Best-Case Scenario for above average pre-election-year gains of at least 15-20%.
Pulse of the Market
Looking at a chart of only DJIA does not show the full picture of the strength the market has exhibited thus far in January. As of the close on January 26, DJIA was up 2.42% compared to 5.75% by S&P 500 and 9.99% for NASDAQ. DJIA’s laggard performance this year is likely due to being the least down index last year and its leading Q4 performance last year. S&P 500 and NASDAQ simply appear to be catching up. 
DJIA has slipped into a trading range after breaking out above last summer’s high. Bullishly DJIA is back above both its 50- and 200-day moving averages (1) and has been building a series of higher lows since mid-December. DJIA’s lack of momentum in either direction is confirmed by both the faster and slower moving MACD indicators (2). MACD indicators have been oscillating around the zero line since late-December.
Dow Jones Industrials & MACD Chart
As 2022 ended, DJIA recorded the first half of a Down Friday/Down Monday (DF/DM) (3) with mild declines on the last trading day and the first trading day of 2023. Bullishly DJIA quickly recovered from the DF/DM. Historically a quick recovery has staved off additional and often substantial declines sometime during the following 90 calendar days. Fewer DF/DM occurrences would be positive for 2023.
After four straight down weeks in December, NASDAQ has been up three weeks in a row to start the year (5). DJIA and S&P 500 (4) have advanced in two of the last three weeks. All three indexes are on course to finish this week positive. A five-week winning streak from NASDAQ would enhance the odds that the market is in a new bull market.
NYSE Weekly Advancers and Weekly Decliners (6) have remained consistent with the market’s overall moves. Weekly Advancers easily outnumbered Weekly Decliners during up weeks while the opposite was true in declining weeks. Bullishly, Weekly Advancers outnumbered Weekly Decliners last week even as DJIA and S&P 500 slipped slightly lower for the week. This suggests recent strength is broad based and not limited to just the big, familiar names that comprise the indexes.
Weekly New Highs (7) have also been bullishly increasing since mid-December while Weekly New Lows briskly retreated. 28 New Weekly Lows is the smallest number since late-February 2021. Here again we see indications of broad buying interest at levels consistent with past bull markets. We look for New Highs to continue to slowly expand while New Lows stay subdued.
Weekly CBOE Put/Call ratio (8) spiked to 1.37 during the final week of 2022. This is the highest number in our records going back to May 2001. Digging into the daily data that makes up the weekly value, the weekly spike was due to a daily spike on December 28. The rising popularity of zero days to expiration (0DTE) options is clearly impacting this once reasonably reliable indicator. Single-day options trades most likely reflect the sentiment on that day and only that day. 
The 90-day Treasury yield has continued to move higher in anticipation of another Fed interest rate increase on February 1 while the 30-year yield has retreated (9) considerably from its high of 4.24 in November to 3.60 last week. Not shown is the 10-year yield, which has also declined substantially. The retreat in longer-term rates is giving the housing market a modest boost. This suggests to us the odds of a soft economic landing and the continuation of the current bull market are increasing.
Click for larger graphic…
Pulse of the Market Table
February Almanac: Above Average in Pre-Election Years
By: Jeffrey A. Hirsch & Christopher Mistal
January 19, 2023
Even though February is right in the middle of the Best Six Months, its long-term track record, since 1950, is rather tepid. February ranks no better than sixth and has posted meager average gains except for the Russell 2000. Small cap stocks, benefiting from “January Effect” carry over; historically tend to outpace large cap stocks in February. The Russell 2000 index of small cap stocks turns in an average gain of 1.1% in February since 1979—just the sixth best month for that benchmark. Even with the market retreating the past few trading sessions Russell 2000 has maintained a performance lead this January. This does bode well for the continued outperformance in February by small-cap stocks.
[Pre-Election Year February Performance Mini Table]
In pre-election years, February’s performance generally improves with average returns all turning positive. NASDAQ performs best, gaining an average 2.8% in pre-election-year Februarys since 1971. Russell 2000 is second best, averaging gains of 2.7% since 1979. DJIA, S&P 500 and Russell 1000, the large-cap indices, tend to lag with average advances ranging from 1.2% to 1.7%. 
[February 2023 Seasonal Pattern Chart]
The first trading day of February is bullish for DJIA, S&P 500, NASDAQ, Russell 1000 and 2000. Average gains on the first day over the most recent 21-year period range from 0.39% by DJIA to 0.65% by Russell 2000. However, after a strong opening day, strength has tended to fade until around the fourth trading day. From there until around the 12-trading day all five indexes have historically enjoyed gains. But those gains have not held through the end of February. Pre-election-year Februarys going back to 1950 for DJIA and S&P 500, 1971 for NASDAQ and 1979 for Russell 1000 & 2000, exhibit a similar pattern, but the gains have held through the end of the month.
Expiration week had a spotty longer-term record and was improving prior to the arrival of Covid-19 in 2020. Russell 1000 and Russell 2000 have advanced 10 of the last 13 years during options expiration week. Declines occurred in 2020, 2021, and 2022. The week after also had a clear negative bias that appears to be fading even though average losses remain across the board for the past 33 years.
Presidents’ Day is the lone holiday that exhibits weakness the day before and after (Stock Trader’s Almanac 2023, page 100). The Friday before this mid-winter three-day break can be treacherous and average declines persist for three trading days after the holiday going back to 1980. In recent years, trading before and after the holiday has been more bullish. S&P 500 has been up 10 of the last 12 years on the day before and NASDAQ has been up 7 of the last 10 years on the day after.
[February 2023 Vital Stats Table]
February 2023 Strategy Calendar
By: Christopher Mistal
January 19, 2023
Stock Portfolio Update: Free Lunch Fizzles, But Market Gaining Momentum
By: Christopher Mistal
January 12, 2023
Following choppy, but positive readings from our Santa Claus Rally and the First Five Days, the market appears to be gaining additional positive momentum. Today’s inline CPI report which was the sixth consecutive report to show declines is a positive. In stark contrast to the beginning of last year, S&P 500 is up 3.74% as of today’s close. NASDAQ, last year’s biggest decliner is now up 5.11%. Should the market build on these gains, or at a minimum, hold them through the end of January, our January Barometer will be positive and thus our January Indicator Trifecta positive too.
[S&P 500 Pre-Election Seasonal Patterns Chart]
Looking at the familiar chart above of various pre-election year scenarios that are all in play this year compared to the S&P 500 year-to-date as of today’s close, we can see that the market is already exceeding historical averages. The top bullish scenario, Pre-Election After Midterm Bear, historically averaged 4.65% at the end of January. Whether this scenario plays out for the full year will depend largely on the trajectory of inflation and the Fed. It does appear that the current trend in inflation could allow the Fed to at least pause rate hikes.
Free Lunch Update
Late 2022 and early 2023 market volatility was not all that kind to the Free Lunch stocks selected in December. Typical small-cap outperformance frequently seen from around mid-December through January and often into February has only really begun to appear the past few trading sessions. As result, only eight of the 38 stocks selected are still active in the Almanac Investor Portfolio, below. All 38 were added to the portfolio using the higher of either their respective average daily prices on December 19 or their minimum buy limit. All suggested guidelines in the Free Lunch Alert were applied to the basket. The suggested 8% trailing stop loss appears to have been too conservative given the level of volatility exhibited by the basket and the market as many of the closed positions are now trading higher.
As a reminder, Free Lunch stocks are not intended to be held for long. Should a sizable profit present itself, do not hesitate to lock it in. Although most positions are doing well while the market is rising now, FATE and PIII had lost over half their value since December 19 through yesterday’s close. We will continue to hold the eight remaining positions with the suggested 8% trailing stop loss based on closing prices.
Stock Portfolio Updates
Over the last five weeks since last update through yesterday’s close (January 11), S&P 500 advanced 1.2% while Russell 2000 climbed 2.1%. Over the same period the entire portfolio slipped 2.0% lower, excluding dividends and any fees. Energy and healthcare related positions were the main drags on performance. Small-cap energy was the weakest as NC and WTI were both stopped out for sizable percentage losses. Other energy-related positions that were stopped out include CEIX in the mid-cap portfolio along with CF and FANG in the large-cap portion of the portfolio.
Energy sector weakness appears to be related to recession expectations and warmer than usual winter weather. We will reevaluate the energy sector soon. Improving prospects of a soft landing, a weakening U.S. dollar and the prospects of refilling the Strategic Petroleum Reserve would suggest that demand and price for crude could increase. 
At the other end of the performance spectrum there are a few standouts in the portfolio (excluding remaining Free Lunch positions). Axcelis Technologies (ACLS) has broken out of its 2022 trading range to new all-time highs and is up over 25% since November. Perion Networks (PERI) traded at a new 52-week high today and is up over 17% since addition. Steel Dynamics (STLD) also recently traded at a new 52-week high and is up over 12%.
All positions in the portfolio are on Hold. Our outlook for the market remains bullish, but we still await confirmation. A positive, full-month S&P 500 gain would make our January Trifecta positive and that would also be encouraging. Please see the table below for updated stop losses and current advice for positions not covered above.
[Almanac Investor Stock Portfolio Table]
Disclosure note: Officers of Hirsch Holdings Inc hold positions in CEIX, EPSN, MUR & PR in personal accounts.
Our January Indicator Trifecta is Now 2-0
By: Jeffrey A. Hirsch & Christopher Mistal
January 09, 2023
Even though S&P 500 finished today with a fractional decline, our First Five Day (FFD) early warning system is positive. Over the first five trading days, S&P 500 gained 1.4%. In pre-presidential-election years, such as this year, our FFD has a respectable record with 13 full years following its direction in the last 18 years.
Last week our Santa Claus Rally was also positive, and with today’s positive FFD reading there are two possible outcomes remaining for our January Indicator Trifecta. Our January Barometer can either be positive or negative. The historical results of both are visible in the following tables. 
[January Trifecta Table – All Positive]
[Up SCR, UP FFD & Down January Barometer Table]
Following the previous twelve occurrences when the SCR and FFD were positive, and our January Barometer was negative, S&P 500 advanced ten times over the remaining eleven months and nine times for the full year with average gains of 9.9% and 6.0% respectively. A positive January Barometer would further boost prospects for the last 11 months and the full year. The December Low Indicator (2023 STA, page 36) should also be watched with the line in the sand at the Dow’s December Closing Low of 32757.54 on 12/19/2022.
At this juncture our outlook for 2023 remains unchanged from our annual forecast. We do acknowledge the numerous headwinds that the market is currently facing, but we still contend that the market will continue to climb the proverbial “wall of worry” with choppy trading likely to persist until typical, pre-election year seasonal forces kick in later this year most likely after the Fed signals it will end increasing rates. This could happen as soon as their next meeting at the end of this month, but it may not happen until the Fed meets in March.
Market Update & ETF Trades: Natural Gas Setting Up for Seasonal Rise
By: Jeffrey A. Hirsch & Christopher Mistal
January 05, 2023
Back in January 2013, we combined the Santa Claus Rally with the First Five Days (FFD) Early Warning System (page 16, STA 2023) and our January Barometer to create our “January Indicator Trifecta.” While the SCR gain is constructive, a positive FFD and JB will add more support to our bullish outlook for 2023. As we detailed in yesterday’s Alert, when all three indicators were positive, the full year was positive 28 of 31 times (90.3% of the time) with an average gain of 17.5% in all years. 
As you can see in the table below, two out of three ain’t bad either. Years when SCR is up and one of the other Trifecta indicators are also positive have done much better than when a positive SCR is followed by negative readings for both the FFD and full-month JB. 2022 was a case in point. Of the nine years SCR was up and both FFD and JB were down, only one year was up and the average loss was -10.5%. When SCR is up and one of the others is also up 14 of the 18 full years were also up for an average gain of 7.9%. As you might expect, results are better when the January Barometer is the one that’s up.
[Table: SCR Up FFD JB Up or Down]
As we all continue to plan for 2023, let’s continue to use history as our guide. Last year was a textbook midterm year bear market with a quintessential October bottom. (We discussed this early and often throughout 2022. Check the archives.) True NASDAQ made a new closing low in December, but the October intraday low held. And so far DJIA, S&P 500 and Russell 2000 have held their October lows. In fact, the R2K held its June low, which we find constructive.
As we discussed in our 2023 outlook here last month and in the 2023 STA outlook on pages 10-11 (and page 34), this midterm year bear market decline sets up the “Sweet Spot of the 4-Year Cycle” from Q4 midterm year to Q2 pre-election year. Pre-election years like 2023 are the best year of the 4-Year Cycle. The chart of pre-election years in the STA 2023 and in our outlook last month paints a rather bullish picture with gains ranging from 12.3% for our Aggregate Cycle of the One-Year Seasonal Pattern, the 4-Year Presidential Election Cycle and the Decennial Cycle to 20.3% for Pre-Election Years after a midterm bear market.
Yes, the market still faces several headwinds. While it appears inflation has peaked and is rolling over, it is only just beginning to hit Main Street pocketbooks and prices at the grocery store and elsewhere are not likely to come down quickly. We expect the Fed to be done raising rates in Q1, but expect rates to remain at these levels for some time. Then there is war in Ukraine, which we suspect will drag on into Cold War 2.0. Supply chain issues linger and we are concerned about the covid outbreak in China and how that could further impact supply chains and demand.
But there are tailwinds as well. With so many bears growling recession and meltdowns on The Street, mainstream media and social media our contrary antennae are purring louder and louder. Markets notoriously climb these walls of worry. While rates have risen dramatically over the past year, they remain relatively low when compared to the peak in the early 80s. Prices are up, but inflation is coming down. 
GDP remains robust and the incredibly accurate Atlanta Fed GDPNow estimate is for 3.8% growth in 2022 Q4. While the strong labor market freaked the market out today, a strong labor market is indicative of a healthy economy. Also, our good friend Sam Stovall and his team over at CFRA Research are projecting the earnings recession to end in 2023 Q2. Markets usually bottom six months or so ahead of that. 
Remember, we are not permabulls. Last year at this time we were rather cautious as most others were not, and quickly turned more bearish as our January Trifecta went negative and readings from the other Seasonal, Fundamental, Technical, Monetary and Sentiment indicators we follow continued to deteriorate. We continue to expect choppy market action through the first quarter and then rather typical Pre-Election Year bullish action on the heels of the midterm bear market and the markets losses last year.
New Sector Seasonality
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 2023 on page 94, this trade has returned 16.5%, 13.6%, and 12.4% on average over the past 25, 10, and 5 years respectively. Seasonal strength can be seen in the following chart, highlighted in yellow.
[XNG Weekly Bars (NG) and 1-Year Seasonal Pattern since 1990]
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 can 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. Crude oil also tends to rise during this timeframe in anticipation of the summer driving season.
Last year natural gas surged in response to firm domestic demand and Russia’s invasion of Ukraine. After peaking in late-August/early September, natural gas has been declining and is currently at nearly the same price it was one year ago. Much of the retreat appears to be due to nearly everyone expecting the Fed’s rate hikes to push the U.S. into recession. Perhaps the Fed will, but it just doesn’t look that way now. U.S. GDP is holding up and the labor market is still firm. The tech sector is cutting back, but in all reality many of them probably did get carried away during the peak of “work from home.” If natural gas and crude oil are currently priced for a recession and the recession does not come, prices for both are likely to surge higher as supplies are still broadly restricted.
First Trust Natural Gas (FCG) is an excellent choice to gain exposure to the company side of the natural gas sector. FCG could be considered on dips below a buy limit of $23.00. Once purchased, consider using an initial stop loss of $20.07 and take profits at the auto sell, $32.15. As a reminder the auto sell price is based upon FCG’s buy limit plus the sector’s average price return over the last 25 years with an additional 20% added. Top five holdings by weighting as of yesterday’s close are: DCP Midstream, Hess Midstream, Western Midstream, ConocoPhillips and Pioneer Natural Resources. The net expense ratio is reasonable at 0.6% and the fund has approximately $821.4 million in assets.
[First Trust Natural Gas (FCG) Daily Chart]
Sector Rotation ETF Portfolio Update
Santa Claus did pay a visit to Wall Street this year and our Santa Claus Rally was positive, but the market is still in a Fed induced funk. Typical second half of December market strength did not materialize, instead recessions fears dragged major indexes lower with tech broadly leading the way down. Broad weakness did weigh on the positions in the Sector Rotation portfolio, but many sectors are still holding onto double-digit gains accumulated since our early October Seasonal MACD Buy signal and all open positions are still up 6.2% on average excluding dividends and any trading fees.
SPDR Consumer Discretionary (XLY) was stopped out on December 28. A quick review of XLY’s holdings reveals why. Its top holding is Amazon, and its third largest holding is Tesla. Both Amazon and Tesla suffered sizable declines in December dragging the entire ETF lower. For now, we will move on from XLY.
At the start of December iShares DJ US Telecom (IYZ) was rallying with the rest of the market and we elected to hold the position even though its historically favorable season typically ends in late December. With IYZ up 7.6% as of its close on January 4, which is much better than its recent historical performance, we are going to close out IYZ. Sell IYZ. For tracking purposes IYZ will be closed out of the portfolio using its average price on Friday, January 6.
All other positions in the portfolio are currently on Hold. Many positions have held gains and the broad market is still searching for direction. Please see table for suggested stop losses.
[Almanac Investor Sector Rotation ETF Portfolio – January 4, 2023 Closes]
Tactical Seasonal Switching Strategy Portfolio Update
As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average gain of 2.2% since our Seasonal Buy Signal. Invescos QQQ (QQQ) is once again in the red, down 5%. SPDR DJIA (DIA) is still the best performing position, up 10.2% while iShares Russell 2000 (IWM) SPDR S&P 500 (SPY) were still slightly in the green. All positions in the portfolio are on Hold.
Please note, positions in the Tactical Switching Strategy portfolio are intended to be held until we issue corresponding Seasonal MACD Sell Signals after April 1. As a result, no stop loss is suggested on these positions.
[Almanac Investor Tactical Switching Strategy Portfolio – January 4, 2023 Closes]
Our Incredible January Barometer: Still Highly Relevant After 50 Years
By: Jeffrey A. Hirsch & Christopher Mistal
January 05, 2023
Devised by Yale Hirsch in 1972, the January Barometer (JB) has registered 12 major errors since 1950 for an 83.6% accuracy ratio. This indicator adheres to propensity that as the S&P 500 goes in January, so goes the year. Of the twelve 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. In January 2003, the market 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. 2018 was the tenth major error overall as a hawkish Fed, a trade war and slowing global growth concerns resulted in the worst fourth quarter performance by S&P 500 since 2008. Covid-19 impacted 2020 & 2021. Of the 12 major errors, nine have occurred since 2001. Including the eight flat years yields a .726 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 have historically presented State of the Union Addresses in January. New Congresses convene. Financial analysts release annual forecasts. We return to work and school collectively 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. 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 relentlessly argue the shortcomings of our January Barometer. Again, this year we are not waiting until this happens. Instead, here is why the January Barometer is still highly relevant and why it should not be quickly dismissed.
1933 “Lame Duck” Amendment—Why JB Works
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 typically gives the State of the Union message, presents an 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 all of these events to any other month and chances are the January Barometer would become a memory.
JB vs. All
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 random 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 13 major errors. In addition to the 12 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.
Using these 13 major errors, the accuracy ratio is 84.7% for the full 85-year period. Including the 9 flat year errors (less than +/– 5%) the ratio is 74.1% — 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 decent 67.1%.
Now for the even better news: In the 51 up Januarys there were only 4 major errors for a 92.2% accuracy ratio. These years went on to post 16.0% average full-year gains and 11.5% February-to-December gains.
[January Barometer vs. All]
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 85 years of data for the S&P 500 for the January Barometer, 63 years moved in the same direction for 74.1% 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 2022’s percent change to the change for full-year 2022. 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. Plus, no other month has a stronger 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 in most years, FOMC meetings, 4th quarter GDP data, earnings, and a plethora of other economic data.
Myths Dispelled
In recent years new myths and/or areas of confusion have come to light. One of the biggest errors is the notion that our January Barometer is a stand-alone indicator that could 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 our January Barometer should or could be used in this manner. Our 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. Our 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 85-year history examined in this article, there were 25 full-year declines. So yes, the S&P 500 has posted annual gains 70.6% of the time since 1938. What is missing from this argument is the fact that when January was positive, the full year was positive 88.2% of the time and when January was down the year was down 57.6% of the time. These are not the outcomes that pure statisticians prefer, but once again, our January Barometer was not intended to be used in a vacuum.
January Indicator Trifecta
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 2019, the next eleven months have been up 87.1% of the time with an average gain of 12.3% and the full year advanced 90.3% of the time with an average S&P 500 gain of 17.5%. The worst full-year decline in a year with a positive January Trifecta was 13.1% by S&P 500 in 1966.
With two days of trading remaining in the First Five Days, S&P 500 will need to gain more than 31.40 points (0.82%) to keep the bullish January Indicator Trifecta alive here in 2023. Today’s market decline was triggered by better than anticipated ADP jobs figures and their potential to keep the Fed going with further interest rate increases. We will withhold final judgement until the results of our January Barometer arrive. Our base case scenario from our 2023 Annual Forecast is still our pick at this juncture.
January Indicator Trifecta on Track with Santa Claus Back in Town
By: Jeffrey A. Hirsch & Christopher Mistal
January 04, 2023
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. This indicator was discovered and first published by Yale Hirsch in the 1973 edition of the Almanac.
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.
It was a choppy ride this time around, but the S&P 500 found some footing today and finished the current seven-day trading span defined by the Santa Claus Rally with a 0.8% gain. Including this year, Santa has paid Wall Street a visit 59 times since 1950. Of the previous 58 occasions, January’s First Five Days (FFD) and the January Barometer (JB) were both up 31 times. When all three indicators were positive, the full year was positive 28 times (90.3% of the time) with an average gain of 17.5% in all years.
A positive SCR is encouraging, and further clarity will be gained when January’s First Five Days Early Warning System (page 16, STA 2023) gives its reading later this week and when the January Barometer (page 18, STA 2023) reports at month’s end. A positive First Five Days and January Barometer would certainly boost prospects for full-year 2023. The December Low Indicator (2023 STA, page 36) should also be watched with the line in the sand at the Dow’s December Closing Low of 32757.54 on 12/19/2022.
[S&P 500 January Early Indicator Trifecta — UP SCR Table]