March 2016 Trading & Investment Strategy By: | February 25, 2016 | Email | Print

2/24/2016: Dow 16484.99 | S&P 1929.80 | NASDAQ 4542.61 | Russell 2K 1022.08 | NYSE 9506.07 | Value Line Arith 4105.64

 

Psychological: Bearish. According to the most recent Investor’s Intelligence Advisor Sentiment survey, bearish advisors are still the majority even though their number declined slightly from 39.8% last week to 35.7% this week. Bearish sentiment had nearly reached the level from the fall of 2011 in mid-February. At that extreme then a bounce seemed likely and that is what has transpired. Further market follow through is likely needed for bulls to regain their lost confidence. 

 

Fundamental: Resilient. The U.S. labor market continues to make gains even as the global macro picture is tepid. The U.S. Unemployment Rate slipped to 4.9% in January as 151k new jobs were added. Corporate earnings could see some relief from the strong U.S. dollar headwind in Q2 and beyond, provided the dollar remains range bound. Commodity and energy prices are still a drag for suppliers, but not so much for consumers. If oil can find stability, which it looks like it is trying to do, the outlook for commodity and energy suppliers would also improve.

 

Technical: At Resistance. DJIA and S&P 500 have managed to poke through resistance around their respective early February highs however; NASDAQ and Russell 2000 have not. Today DJIA and S&P 500 are fighting to reclaim their 50-day moving averages. Until NASDAQ and Russell 2000 can catch up and take the lead, any meaningful move higher from current levels is less likely. The current bounce has also pulled Stochastic, relative strength and MACD indicators near overbought levels. Absent tech and small-cap support, a pause and/or retest of February’s lows is likely.  

 

Monetary: 0.25-0.50%. Next Fed meeting is March 15-16 and it includes the Summary of Economic Projections and a press conference by the Chair. Based upon CME Group’s FedWatch Tool, there is currently just a 6% probability of a rate hike at this meeting. Interest rates are still historically low, just not as low as they are in other places or even the recent past. Overall, policy is still highly accommodative; it just does not “feel” like it.

 

Seasonal: Bullish. Normally a decent performing market month, March is just average in election years with advances 62.5% of the time with a 0.6% average DJIA gain since 1952. S&P 500 has also advanced 62.5% of the time since 1952, but gains have been slightly better at 0.8%, on average. However, March is NASDAQ’s second worst month of the election year (since 1972). It is also the Russell 1000 and Russell 2000 second worst month by average performance in election years (since 1980).

 

The Dow Jones Industrials satisfied the Ned Davis Research (NDR) bear market definition that we subscribe to on the close of 2/11/2016. We first discussed the history of those bear markets on our blog last month and further clarified the nuance of bull and bear markets after a call from the folks at NDR. The majority of NDR bear market did not last much longer or decline much further. But, it is not an overwhelming majority, so danger still lurks ahead in the market.  Here is the updated table.

 

 

Now that the bear is here and nearly half of the average cyclical bear market decline has transpired already, we are presented with a bit of a paradox between our long-term and near-term outlooks. 

 

Our longer term outlook, one that we have been sharing for some time, has called for a bear market or an overall decline from the highs of about 20-30% during the 2016-2018 timeframe. This is the typical move of the last cyclical bear market at the end of the secular bear market. 

 

We have contented and still do that the secular bear that began around the year 2000 is still in play and will end with a downturn similar in nature as we experienced from 1980-1982. This is what we believe has a high probability of being underway currently. 

 

We have examined previous secular bear markets and how they ended. The final cyclical bear of past secular bear markets tended to be milder and somewhat dragged out. So we expect approximately a 30% overall decline, from the May 2015 highs to perhaps an ultimate bottom in 2017 or 2018.

 

Short-term, however, the market reached heavily oversold levels in mid-February. Sentiment was roughly bearish enough to be somewhat of a contrary bullish indicator, so we are looking for a modest rally to close out the remainder of the Best Six Months – now through April/May – though we do not expect new highs this year. Beyond April/May we expect more weakness over the summer, especially as the elections really begin to heat up. 

 

Our current short-term view now is based upon current economic data, technical indicators and seasonal factors and influences. 

 

 

February opened on a mildly positive note that proved short-lived as the market quickly sank to new lows on the eleventh. At which point, the market had become over-sold, sentiment was sufficiently bearish to be bullish and the market has bounced back. Full-month February is now flirting with positive territory. 

 

After briefly turning negative mid-month, the faster moving MACD indicator (1) has joined the slower moving MACD indicator in confirming the shift in market momentum. However, momentum has begun to wane as DJIA appears to be running into resistance at it rapidly falling 50-moving average (2). A break out above this level would likely secure a full-month gain, the fourth gain in a row following the last four down Januarys.

 

 

Early-February weakness was foreshadowed by the second Down Friday/Down Monday (DF/DM) of 2016 on the eighth day of the month (3). This DF/DM was followed by further weakness immediately. Including the losses on Friday and Monday, DJIA was down five days straight ending on the eleventh. It then bounced nearly 794 points higher in the next three trading sessions, bucking typical President’ Day weakness. 

 

During the shortened trading week after Presidents’ Day, DJIA (4), S&P 500 (5) and NASDAQ (6) posted their best weekly gain of 2016 thus far, but have been struggling with resistance since. NASDAQ and the Russell 2000 have suffered the most in 2016. If they can find footing and move higher, then DJIA and S&P 500 will likely overcome resistance.

 

Last week’s rally was fairly broad based as Weekly Advancers outnumbered Weekly Decliners by over 5 to 1 (7). The prior week was nearly the exact opposite. It will take a few weeks of sustained Advancers outnumbering Decliners for the market to sustain its move higher.

 

New Weekly Highs remain subdued as the broad market is still well off its highs (8). Somewhat encouraging, at least in the shorter term, is the fact that the major indices touched new lows in the week ending February 12, but New Weekly Lows did not exceed the levels reached in January. This could indicate that broad selling has abated. Instead of just hitting the sell button, traders and investors appear to be more selective. 

 

Weekly CBOE Put/Call remains elevated at 0.78 (9). This implies that there is plenty skepticism about the current rally leaving room for it to continue at least in the near-term. Recent readings around 0.60 have coincided with tops.

 

 

 

March packs a rather busy docket. It is the end of the first quarter, which brings with it Triple Witching and an abundance of portfolio maneuvers from The Street. March Triple-Witching Weeks have been quite bullish in recent years. But the week after is the exact opposite, DJIA down 17 of the last 28 years—and frequently down sharply for an average drop of 0.3%. Notable gains during the week after for Dow of 4.9% in 2000, 3.1% in 2007, 6.8% in 2009, and 3.1% in 2011 are the rare exceptions to this historically poor performing timeframe.

 

Normally a decent performing market month, March is just average in election years with advances 62.5% of the time with a 0.6% average DJIA gain since 1952. S&P 500 has also advanced 62.5% of the time since 1952, but gains have been slightly better at 0.8%, on average. NASDAQ has not fared well in March in election years since 1972. Due to a 17.1% loss in 1980, March is NASDAQ’s second worst month of the election year. Similarly, March 1980’s steep losses adversely affect Russell 1000 and Russell 2000 indices, sending the month to second worst in election years.

 

 

Saint Patrick’s Day is March’s sole recurring cultural event. Saint Patrick’s Day occurs on the same day in March every year. There is no official stock market closing or bank holiday but the festivities do hit close to Wall Street when the days falls within the regular work week. Parades are held worldwide and one of the largest runs right up the center of Manhattan.

 

Gains the day before Saint Patrick’s Day have proved to be greater than the day itself and the day after. Perhaps it’s the anticipation of the patron saint’s holiday that boosts the market and the distraction from the parade down Fifth Avenue that causes equity markets to languish. Or maybe it’s the fact that Saint Pat’s usually falls in Triple-Witching Week. Whatever the case, since 1950, the S&P 500 posts an average gain of 0.21% on Saint Patrick’s Day, a gain of 0.0.13% the day after, but the day before averages a 0.24% advance.

 

Good Friday and Easter land in the month from time to time like this year. NASDAQ has been up for 15 straight years on the Thursday before Good Friday however, the day after Easer is the second worst post-holiday (page 88 STA2016).

 

Earlier today in our webinar, “Stock Trader’s Almanac 2016 Update: Plotting a course of action in uncertain times,” [Editor’s note: A link to the video archive will be sent to everyone that registered for the webinar tomorrow, regardless if you attended or not.] Jeff recapped the markets action thus far in 2016 and offered a near-term outlook as well as a longer-term forecast that keeps the market on track to its next major Super Boom. In the short-term, a rally to close out the “Best Six Months” is likely underway. But new all-times highs are not expected. Once the “Best Months” conclude more weakness is expected over the summer ahead of Election Day in November. From there another mild rally to finish up the year, again new highs are still not expected.

 

Last year in mid-December, we presented two possible scenarios for 2016: “If the Fed is right and the energy and commodities price decline proves transitory and prices stabilize, we expect average election year gains in the mid-single digits. If the Fed is wrong and oil and commodities suffer further declines and the junk bond scenario unravels we may begin a mild bear market next year.” The second scenario here appears to have mostly played out already. Oil did indeed continue to slide to start the year, further exasperating all the concerns associated with lower prices. Namely, yields on debt tied to the energy sector and not just the companies that issued it but also the banks that financed it.

 

Now it appears the first scenario may be setting up to play out. For starters, the Fed has acknowledged the market’s fears and is likely to slow the pace of rate hikes. Second, oil looks like it is trying to stabilize as OPEC, led by Saudi Arabia, and Russia have come to agreement to cap production. Qatar and Venezuela are also on board while Iran was open to the plan, but not formally committed to it. Oil’s historic crash from over $100 per barrel in 2014 to under $30 this year can be seen in the next chart. Other than a brief period early last year, oil’s trajectory had been consistently lower. Over the past few weeks, the plunge has abated. This represents the first step towards possibly firmer prices.

 

 

Another source of market angst, the stronger U.S. dollar also appears to be finding a trading range. Provided it remains in the range or breaks lower, then the higher dollar headwind to corporate revenues and U.S. exports should dissipate. After failing to hold its breakout above 100 on more than one occasion, the U.S. Dollar Index has been bouncing around in a range from around 94 to 100. Year-over-year corporate comparisons should begin to ease in Q2 and beyond as the rocket ride higher for the Dollar appears over.

 

 

This Tuesday’s Alert, looked at the markets recent technical improvement. Stochastic, relative strength and MACD indicators had all turned the corner confirming the shift in momentum. And as expected DJIA and S&P 500 did run into resistance around 16440 and 1930 respectively yesterday and are taking a breather today. Considering the size and pace of the recent move off the lows of last Thursday, it is not surprising to see a pause. Provided the market can hold the bulk of the move over the past three trading sessions, it will likely punch through resistance and continue higher at least until it runs into the next level of resistance roughly around the 50-day moving average.

 

During the market’s recent 3-day rally, typical safe havens like Treasury bonds fell briskly. In the following chart of iShares 20+ Year Treasury Bond (TLT), you can see its explosive move from around $120 at the end of December to around $135 last week, roughly matching its peak from the end of January 2015. The spike looks like it was largely panic driven and could easily be the high for 2016.  

 

To be clear, we remain cautious and concerned however, we do see an opportunity on the long side developing. Headwinds to the market and the global economy still abound and are likely to take a lengthy period of time to completely fade. Concerns of a repeat of 2008 or even 2000 are also likely overblown. A lack of regulation and proper oversite was the primary reason for the financial crisis in 2008. It has not been entirely fixed, but the banks are being much more closely monitored today than they were back then. As far as another tech crash goes, valuations today are still a far cry from what they were in 1999 or early 2000.

 

There are also two months remaining to DJIA’s and S&P 500’s “Best Six Months” and four for “NASDAQ’s Best Eight Months.” Combining usually favorable seasonality with the modestly improved technical and fundamental picture suggests considering reestablishing positions in previously stopped out “Best Months” ETFs, DIA, SPY, QQQ and IWM. These will not be full positions as volatility is still elevated and we want to preserve some cash for other opportunities. Please refer to updated ETF portfolio below for buy limits and stop losses. 

 

As an additional hedge to taking on these partial long positions, AdvisorShares Ranger Equity Bear (HDGE) also appears as an open trade idea in the portfolio. Should the market break down to new closing lows, we will exit DIA, SPY, QQQ and IWM and simultaneously establish a position in HDGE.

 

 

 

Last Thursday, by six points, DJIA satisfied the freshly clarified Ned Davis Research bear market definition. From peak to trough DJIA was down greater than 13.0% after 145 calendar days. The very next day, last Friday, DJIA had its second best day of 2016, gaining 2%. S&P 500 was also up 2%. NASDAQ and the Russell 2000 also enjoyed solid moves higher, just not as strong. Bucking the longer-term track record of weakness before and after Presidents Day, DJIA, S&P 500, NASDAQ and Russell 2000 continued to rally today (even with oil declining). Unlike last Friday, the Russell 2000 and NASDAQ provided the leadership today. This is one small encouraging sign. However, a great deal of damage has been done on the charts.

 

 

 

This year’s market rout pulled S&P 500, NASDAQ and Russell 2000 below their respective lows from last August by meaningful amounts. DJIA violated its August closing low on just one day, last Thursday. And on that day, the major indices were all exhibiting signs of being oversold. Stochastic, relative strength and MACD indicators were all negative. Following two days of gains these indicators have improved, confirming the shift in momentum and there are now MACD and Stochastic buy signals across the board. Should the nascent rally persist, the first area of resistance is likely to be early February’s highs, right around the monthly pivot point (blue dashed line) in each chart above. Key levels to watch are around: DJIA 16440, S&P 500 1930, NASDAQ 4610 and Russell 2000 1040.

 

 

High levels of uncertainty and volatility have frayed many nerves already this year. Some indices and commodities are in bear markets, all of our January indicators were negative, the Fed has initiated the first rate tightening cycle in nearly a decade, global growth is tepid, and on and on. One possible bright spot is the last seven months of election years have historically been positive (see page 32 of Stock Trader’s Almanac 2016 for more).

 

 

In the above table 2016 has been added with the S&P 500’s performance through February 12. Like many recent election years, 2016 is off to a rough start. However, the only two losses in the last seven months of the last 16 election years were the direct result of bubbles bursting. In 2000, it was the tech bubble and in 2008 it was the credit bubble. A repeat of either of those years is not highly probable. Valuations are not as high now as they were in early 2000 and the financial industry is being watched much more closely now than back in 2007 and 2008.

 

Even though history does suggest some strength later this year, we do expect volatility to remain elevated. The Fed appears to be staying the course with rate hikes although, most likely at a slower pace. Oil still looks like it is trying to find support and stabilize. Today’s rather weak agreement among Saudi Arabia and Russia to cap production is a step along the path to stability, but a long way remains. Global growth and corporate earnings also appear fragile. Caution is still the prudent course as downside risk remains elevated and the likelihood of new highs in the near-term is low.

 

The market battled honorable today but finally lost and reached the official Ned Davis Research defined bear market level. As we helped clarify last month in order for NDR and us (since we have always preferred and subscribed to NDR’s definition) to declare an official bear market DJIA had to close below its August 2015 low. This would put DJIA down, peak to trough, greater than 13.0% after 145 calendar days.

 

Whatever the bearish case may be, it sure looks grim out there on The Street. Our Almanac Investor portfolios have been trimmed rather substantially over the past month, but at considerably higher prices as we had employed our usual prudent stop loss policy of selling any stock or ETF that closes below our stop loss the following day. Several longer term holdings were stopped out with gains, of course after giving some back, and some recent selections logged losses. 

 

It is during volatile times like these that keeping emotions in check is paramount. Having a predetermined exit strategy such as our stop loss policy is essential. It is at times like these that we turn to page 191 of the Stock Trader’s Almanac 2016 and reread G. M. Loeb’s “Battle Plan” for Investment Survival. Towards the bottom of the page under the paragraph heading “Closing Out a Commitment,” Loeb’s wisdom is: 

 

“If you have a loss, the solution is automatic, provided you decide what to do at the time you buy. Otherwise, the question divides itself into two parts. Are we in a bull or bear market? Few of us really know until it is too late. For the sake of the record, if you think it is a bear market, just put that consideration first and sell as much as your conviction suggests and your nature allows.

 

There is much more on that page so please do yourself a favor and review page 191 and page 192 with Loeb’s Investment Survival Checklist. So the question remains. Are we in a bull or bear market? And if we are in a bear, where is the bottom? In order to help ourselves reach a verdict let’s review market sentiment first, specifically, our two go-to contrary market sentiment indicators: Put/Call and Investors Intelligence Bullish and Bearish Advisors %. 

 

Sentiment indicators are contrary by nature. Extreme investor and trader negativity is most prevalent at market lows and is bullish, while excessive optimism is seen near tops when the market is running high. But it is the extreme negativity that has been more indicative of major low points and much closer in proximity on the calendar to the actual low point. 

 

To illustrate we have lined up below charts of the DJIA, S&P 500 and NASDAQ Composite since 2001 with the weekly readings of the CBOE Equity Only Put/Call Ratio and the II’s Bullish and Bearish Advisors & as well as the difference between the Bulls and the Bears.

 

Most obvious on the charts is the 2009 bottom with Put/Call at 1.04 indicating more bearish put buying volume than call volume and the Bull-Bear differential at -32.2. You can see other recent major lows in 2001, 2002 and 2011 and how we are at a similar level currently with the Bull-Bear differential at -14.5. But Put/Call has not reached extremes yet and so far has peaked at 0.93. This is potentially creating an oversold bounce situation, but when compare to the average bear we are only partially there.

 

 

Using the tables of DJIA, S&P 500 and NASDAQ Bull & Bear markets, found on pages 131 and 132 STA 2016, we see the average DJIA bear market since 1901 has lasted 402 calendar days and resulted in an average decline of 31.1%. S&P 500 since 1930 has similar averages, 30.2% decline in 379 calendar days. In NASDAQ’s relatively shorter life span its average bear has lasted 280 calendar days, but losses are typically larger at 36.3%.

 

With the Ned Davis bear market definition officially satisfied today, DJIA’s current bear market is 268 calendar days old and its loss stands at 14.5%. S&P 500’s peak was 266 calendar days ago (May 21, 2015) and it is down 14.2%. NASDAQ peaked 206 days ago (July 20, 2015) and its loss since then is now 18.2%. Compared to the average bear market duration and loss, the market is currently more than half way through duration wise, but less than half way based upon average losses.

 

Numerous indices overseas and domestically have satisfied the typical 20% decline definition of a bear market however, DJIA, S&P 500 and NASDAQ have not. Historically, there have been other times where numerous indices (or a commodity) was in a bear market (>20% decline), but other indices stopped short of the threshold. 2011 is a recent example of one such occurrence. Europe and emerging markets were struggling, DJIA slipped into a Ned Davis defined bear market, but DJIA found bottom down 16.8%. Just because one or more than one index falls into a bear market, this does not guarantee across the board bear markets.

 

An excellent example of this is the following comparison of S&P 500 20% bear markets with Russell 2000 20% bear markets. Since 1979, Russell 2000 has slipped into a bear market 12 times however, S&P 500 followed suit on only 5 occasions (shaded grey in following table). 

 

 

Many indices, sub-indices and commodities have certainly satisfied the 20% down definition of a bear market, yet many others have not. U.S. economic data is tepid, but clear signs of a recession here have not materialized. We anticipate digger further into the anatomy of a bear market over the next several days with the goal of providing further clarification on where the market is likely headed next and trading ideas to make the next move a profitable one.

 

Before rehashing the following S&P 500 Corrections During Bull Market table, I’d like to take a moment and send a hat tip to our colleague Joe Childrey, head honcho at Probabilities Fund Management LLC, for bringing it to the attention of the investment committee we sit on as this spurred me to update the table. It also reinforced my opinion about the current market rout. This seemingly full-blown market panic has not even reached the average S&P 500 correction since 1949 yet.

 

 

At yesterday’s close of 1853.44, S&P 500 was 13.0% off its May 21, 2015 closing high of 2130.82 (shaded slightly darker grey in table above). The average of the prior 22 corrections since 1949 is a 14.2% decline. The only metric the current correction has satisfied is the average duration in calendar days. The current correction will be 263 calendar days old at today’s close compared to an average of 140 days. However, there have been two corrections that lasted even longer than the current one, back in August 1959 to October 1960 and September 1976 to March 1978.

 

Since every bear market in history began as a correction (using either current standard of 20% or Ned Davis definition), a bear market remains on the table. To officially end the current cycle the S&P 500 would need to eclipse its previous high which is also still a possibility no matter how unlikely it may seem. 

 

In the near-term we continue to expect market volatility to remain elevated as the market wrestles with economic data and the Fed. Fundamentals are still mixed and the technical picture is bleak, but DJIA, S&P 500 and NASDAQ have not all violated their respective October 2014 lows.

 

 

Over the past four weeks since last update, S&P 500 has dropped another 3.7% and Russell 2000 is off a further 7.0% as of yesterday’s close. Mid- and Large-cap portfolios declined 2.4% and 3.7% respectively over the same period. One of the few remaining positions from December’s Free Lunch Stocks, Virnetx Holding (VHC), was solely responsible for a modest 0.6% gain in the Small-Cap Portfolio. 

 

VHC was awarded $625.6 million in a patent case win against Apple triggering the leap from under $4 per share to nearly $10. Victory euphoria has already begun to wear off and VHC is currently trading just above $7. Sell VHC. For tracking purposes, VHC will be closed out of the portfolio using today’s closing price.

 

Within the context of the market’s miserable trading thus far in 2016, VHC is the sole bright spot this month. In total, 22 positions closed below their stop losses over the past four weeks. Some bounced, some sank lower, but the majority was lower at yesterday’s close than when they were stopped out. Excluding VHC, there are just eight open positions remaining and are on Hold; BRSS, SMRT, SMG, UNH, CNC, CVS, TSCO and SCCO. The largest position in the portfolio is cash at 81.9% of total value. We will maintain this level of cash for the next opportunity whether it is on the long or short side. In the meantime, continue to heed all stop losses. It is always easier to sell a position and decide when to get back in than it is to continue watching a position sink and losses mount.

 

 

Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in CNC, CVS, DHI, HBI, NTRS, PLOW, SUN, TMH, TSCO and VSR. 

 

Over the years silver has peaked in February, most notably so in 1980 when the Hunt Brothers’ plot to corner the silver market was foiled. Our seasonal analysis shows that going short on or about February 17 and holding until about April 25 has worked 33 times in the last 43 years for a win probability of 76.7%. As you can see in the short silver table, the usual February silver break was trumped by the overarching precious metal bull market of 2002–2011 just four times in ten years.

 

 

After suffering losses for two years in a row in 2010 and 2011, this trade returned to success with its second best performance in 2012 as precious metals in general fell out of favor. This trade was then highly successful in 2013, 2014 and 2015.

 

 

In the above chart, silver’s weekly price bars appear in the top half of the chart and silver’s seasonal trend since 1972 appears in the bottom half. Typical seasonal weakness is highlighted in yellow. Historically, silver has declined from late-February/early-March until the end of June. This year, typical seasonal weakness has yet to materialize, but silver is beginning to look toppy.

 

 

ProShares UltraShort Silver (ZSL) is an inverse (bearish) ETF that seeks to return two times the inverse of the daily performance of silver bullion priced in U.S. dollars for delivery in London and is the top choice to trade this seasonality in the Almanac Investor ETF Portfolio. Average daily trading volume can be light, but when silver declines in earnest, trading activity in ZSL does expand quickly. ZSL can be bought on dips below $52.50. If purchased, employ a stop loss of $44.63.

 

 

Seasonally, there is also a weak price period for gold from mid-February until mid to late June. Entering a short position on or about February 17 and holding until March 15 has been a successful trade 25 times in the past 41 years for a success rate of 61.0% with a cumulative profit of $43,860 per futures contract. However, in recent years holding onto the short position established in February longer has been more profitable.

 

 

The chart below is a weekly chart of the price of gold with the exchange-traded note (ETN) known as DB Gold Double Short (DZZ) overlaid to show the inverse price correlation between the two trading vehicles. The line on the bottom section is the 41-year average seasonal tendency showing the market’s directional price trend with seasonal weakness highlighted in yellow. DZZ trades 2x the inverse of the daily price change of a single gold futures contract.

 

 

As you can see in this next chart, DZZ is still declining as gold is still climbing. Gold’s rally is likely to stall at resistance around $1190 per ounce, or about 3% higher than its current price. DZZ could be bought on dips below $7.10. If purchased a stop loss of $6.04 is suggested. If DZZ is purchased, the existing long position in SPDR Gold (GLD) will be closed out on the same day.

 

 

Both of today’s new trade ideas will be tracked in the Almanac Investor ETF Portfolio.

 

 

After closing out an otherwise miserable January on a positive note, the market appears to have run out of gas again here in February. Our January Indicator Trifecta combined with DJIA violating its December closing low does suggest more weakness and volatility are likely. 

 

To gain a better perspective, the following One-Year Seasonal pattern charts were constructed from the other seven years since 1950 that our January Indicator Trifecta was negative across the board and DJIA’s December low was breeched. Seven years is not a large data set, but it is significant enough. Average election year and 2016, through today’s close are also plotted for reference. Should the market trade in similar fashion to the previous negative Trifecta years, it could be early March before the market reaches an interim bottom and makes a tradable, multi-month trek higher.

 

 

 

From the Stock Trader’s Almanac 2016, page 94, Sector Seasonality, there are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. Some tech exposure remains in the Almanac Investor ETF Portfolio. Last year, the Utilities sector started off the year on a near chart-perfect bullish climb from the bottom left to the top right. That trend however, only lasted until the end of January.

 

So far this year, Utilities have been a bright spot with a solid year-to-date gain while many other sectors are currently in the red. Perhaps Utilities could be rallying because interest rates are falling and their dividends are attractive or perhaps they are advancing because global growth and deflation concerns are making the sectors’ highly regulated and stable revenues look like a safe place to park capital. Most likely, Utilities’ success thus far is a combination of these reasons and others. 

 

As can be seen in the following chart of the Utility Sector Index (UTY), seasonal strength typically begins following an early March bottom and usually lasts through mid-October although the bulk of the move is typically done by early May. Seasonal factors combined with the current trend suggest the Utilities still has room to run.

 

 

With a little more than $7 billion in assets and average daily trading volumes in excess of 13 million shares per day over the last three months, SPDR Utilities (XLU) is the top choice to hold during Utilities seasonally favorable period. It has a gross expense ratio of just 0.14% and comes with the added kicker of a 3.48% dividend yield. XLU could be bought on dips below $45.50. This is just above its monthly pivot (blue-dashed line in chart below). Based upon its 15-year average return of 9.9% during its favorable period mid-March to the beginning of October, an auto-sell price of $55.00 is set. If purchased an initial stop loss of $40.95 is suggested.

 

 

Portfolio Updates

 

January’s market rout resulted in the majority of seasonal ETF positions being stopped out. Most of the positions were closed out with low to mid-single digit losses. A few positions like SPDR Materials (XLB) and iShares NASDAQ Biotech (IBB) were closed out for slight gains. It is disappointing to realize these losses, especially during the “Best Months,” but it is always better to get out early and preserve capital for the next buying (or shorting) opportunity.

 

Sifting through the ashes we find five remaining positions in the ETF Portfolio; XLK, VNQ, GLD, JJC and USO. Of these only USO could be considered at current price levels with a buy limit of $9.00. The others are on hold.

 

The market is still on shaky ground and February’s historical track record is rather tepid, even more so following a down January. We will sit tight for now and await further evidence that the market has found support before jumping back in.