April 2016 Trading & Investment Strategy
March 31, 2016
Market at a Glance - 3/31/2016
By: Christopher Mistal
March 31, 2016
3/30/2016: Dow 17716.66 | S&P 2063.95 | NASDAQ 4869.29 | Russell 2K 1110.44 | NYSE 10236.95 | Value Line Arith 4534.62
Psychological: Neutral. According to the most recent Investor’s Intelligence Advisor Sentiment survey, bearish advisors have declined to 28.9%. Correction advisors stand at 27.8% and Bullish advisors are 43.3%. This blend is nether excessively bullish or bearish and leaves room for the market’s current trend (higher) to continue. CBOE Weekly Put/Call is perhaps more bullish with an elevated reading of 0.82 last week. 
Fundamental: Resilient. The U.S. labor market continues to make gains even as the global macro picture is tepid. The U.S. Unemployment Rate remained at 4.9% in February as 242k new jobs were added. This is a solid showing considering the Federal Reserve Bank of Atlanta GDPNow model is forecasting Q1 GDP of just 0.6%. Firming crude oil and a softening dollar could provide modest tailwinds to corporate profits in Q2 and beyond should current trends persist.
Technical: Nearing Resistance. DJIA and S&P 500 have reclaimed their respective 50- and 200-day moving averages, but are likely to run into resistance at the highs from Q4 of last year. NASDAQ and Russell 2000 have yet to return to the green in 2016. Technology and small-caps will need to catch up then there would be a reasonably solid chance that the rally continues. Q4 closing highs for DJIA and S&P 500 were 17918.15 and 2109.79. NASDAQ and Russell 2000 breakeven in 2016 is 5007.41 and 1135.89.  
Monetary: 0.25-0.50%. As broadly expected, there was no rate hike at the Fed’s latest meeting and depending on data, it could be months before the next. Expectations currently stand at two rate increases in 2016, down from four. These expectations were essentially confirmed earlier this week by Fed Chair Yellen as she promoted “greater gradualism” and the Fed’s ability to provide “considerable scope” for stimulus if needed.
Seasonal: Bullish. April is DJIA’s best performing month since 1950, third best for S&P and fourth best for NASDAQ (since 1971). However, April also marks the end of our “Best Six Months” for DJIA and the S&P 500. On April 1, we will begin looking for our seasonal MACD sell signal and corresponding early signs of seasonal weakness and will issue an Alert when it triggers.
April Outlook: Rally Continues, But End of the Best Six Months
By: Jeffrey Hirsch & Christopher Mistal
March 31, 2016
Despite a little end-of-Q1 profit taking today – very little – stocks have been on an upward tear throughout March, bucking the pattern of late month weakness. The week after triple-witching did display its usual weakness. We expected a strong March and April rally on the heels of the nasty down January and February. But the usual end-of-March respite has been mollified by the sweet, dovish and measured words of Fed Chair Yellen.
We expect the market rally to continue into and through April, but to fall short of new highs and then begin to retreat later in the spring into the summer lull and the Worst Six Months (“Sell in May”), stabilizing after the conventions, rallying again into yearend, but falling short of new highs yet again.
But for now the path appears to be higher and the first trading day of April has been a boon to traders – up 76.2% of the time on the DJIA and S&P 500 over the last 21 years with average gains on the day of about 0.5% NASDAQ has been a bit less strong, two-thirds of the time and Russell 2000 is up 61.9% of the time.
[First Trading Day of April]
Most importantly, April 1st is when begin looking for our seasonal MACD sell signal and corresponding early signs of seasonal weakness. While market strength should continue, look for it to stall near resistance around S&P 2075-2100, NASDAQ 4950-5000 and DJIA 17875-18000. As the Chair’s dovish remarks become a thing of the past and earnings season comes to a close toward the end of April we will be poised to shed underperforming positions and take a more cautious and defensive stance for Worst Six Months May-October.
Any time on or after April 1 when both DJIA and S&P 500 MACD Sell indicators trigger a sell signal, we will issue an Almanac Investor Alert. We will either outright sell specific positions or implement tight trailing stop losses. Bearish/defensive positions in: iShares Barclays 7-10 Year Treasury (IEF), iShares Barclays 20+ Year Treasury (TLT), AdvisorShares Ranger Equity Bear (HDGE) and/or other protective strategies will also be considered. All stock and ETF holdings will be evaluated at that time. ETFs providing exposure to sector seasonalities ending in April and May along with underperforming stocks in the Almanac Investor Stock Portfolio may be sold at that time as well.
Pulse of the Market
The rally that began in mid-February continued through March. DJIA and S&P 500 are now modestly positive for 2016. NASDAQ and Russell 2000 are lagging and have not yet eclipsed their respective 2015 closes. Due to the pace of the rally, both the faster and slower moving MACD indicators spent most of March positive however; last week’s mild decline has turned DJIA’s faster-moving MACD indicator negative (1). DJIA has also bullishly remained above its 50- and 200-day moving averages (2).
Dow Jones Industrials & MACD Chart
Even though February ended with the fourth Down Friday/Down Monday (DF/DM) of 2016 (3), the rally continued. DJIA (4), S&P 500 (5) and NASDAQ (6) racked up five straight weeks of gains before typical week-after-March-option-expiration weakness took its toll resulting in a minor weekly loss last week. With kind and reassuring words from Fed Chairwoman Yellen, the market avoided post-Easter blues and has now fended off typical end-of-Q1 weakness this week.
Aside from last week, NYSE Weekly Advancers easily outnumbered NYSE Weekly Decliners (7) by a healthy margin during the market’s five-week winning streak. The sustained streak we were looking for last month was delivered.
Throughout the market’s run, New Highs also began to increase and New Lows shrank to just 27 (8). This was the fewest number of New Lows since January 2013. Should the market sustain its move higher into and throughout April, New Highs should begin to expand especially if the market encroaches on its previous all-time highs from last May.
Weekly CBOE Put/Call remains elevated at 0.82 last week (9). This suggests that there is plenty skepticism about the current rally which leaves room for it to continue at least in the near-term. Recent readings near 0.60 or less have coincided with interim tops.
Click for larger graphic…
Pulse of the Market Table
April Almanac, Vital Stats & Strategy Calendar: Best DJIA Month Since 1950
By: Jeffrey A. Hirsch & Christopher Mistal
March 28, 2016
April 1999 was the first month to gain 1000 DJIA points. However, from 2000 to 2005, “Tax” month was hit hard, declining in four of six years. Since 2006, April has been up ten years in a row with an average gain of 2.8% to reclaim its position as the best DJIA month since 1950. April is third best for S&P and fourth best for NASDAQ (since 1971). 
April marks the end of our “Best Six Months” for DJIA and the S&P 500. On April 1, we will begin looking for our seasonal MACD sell signal and corresponding early signs of seasonal weakness. Even in presidential election years, the second best year of the four-year cycle, the “Worst Six Months” have experienced some nasty selloffs.
The first half of April used to outperform the second half, but since 1994 that has no longer been the case. The effect of April 15 Tax Deadline appears to be diminished. (For 2016, the deadline to file is Monday April 18. The normal date falls on Emancipation Day this year. This date is a holiday in the District of Columbia and is observed in the same manner as all other federal holidays.) The market is clearly focused on first quarter earnings during April. Exceptional Q1 earnings and positive surprises tend to be anticipated with stocks and the market moving up in advance of the announcements and consolidating or correcting afterwards.
Normally bullish election-year influences (the second best year of the four-year presidential election cycle) have the exact opposite effect on April. Average gains since 1952 are approximately half of the average gain of all years since 1950 for DJIA and S&P 500. Largely due to a 15.6% loss in 2000, NASDAQ’s typical strength in all Aprils since 1971 is transformed into an average loss in election years.
[April Election Year Stats Table]
Options expiration week frequently impacts the market positively in April and DJIA has the best track record since 1990, with an average gain of 1.3% for the week. The first trading day of expiration week has roughly the same record as expiration day, but expiration day has a softer average performance. The week as a whole is generally marked by respectable gains across the board and the week after exhibits similar track record just with lesser average gains.
April (1950-2015)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank 1 3 4 2 4
# Up 44 46 29 25 22
# Down 22 20 16 12 15
Average % 1.9   1.5   1.4   1.6   1.5
4-Year Presidential Election Cycle Performance by %
Post-Election 1.9   1.6   2.4   2.5   2.2
Mid-Term 0.8 0.2 -0.1 -0.1 0.7
Pre-Election 4.0 3.5 3.5 2.8 2.8
Election 0.9 0.7 -0.2 0.9 0.01
Best & Worst April by %
Best 1978 10.6 2009 9.4 2001 15.0 2009 10.0 2009 15.3
Worst 1970 -6.3 1970 -9.0 2000 -15.6 2002 -5.8 2000 -6.1
April Weeks by %
Best 4/11/75 5.7 4/20/00 5.8 4/12/01 14.0 4/20/00 5.9 4/3/09 6.3
Worst 4/14/00 -7.3 4/14/00 -10.5 4/14/00 -25.3 4/14/00 -11.2 4/14/00 -16.4
April Days by %
Best 4/5/01 4.2 4/5/01 4.4 4/5/01 8.9 4/5/01 4.6 4/9/09 5.9
Worst 4/14/00 -5.7 4/14/00 -5.8 4/14/00 -9.7 4/14/00 -6.0 4/14/00 -7.3
First Trading Day of Expiration Week: 1990-2015
#Up-#Down   17-9   15-11   14-12   14-12   11-15
Streak   D1   D1   D1   D1   U2
Avg %   0.3   0.3   0.2   0.2   0.001
Options Expiration Day: 1990-2015
#Up-#Down   17-9   16-10   12-14   16-10   15-11
Streak   D2   D1   D1   D1   D1
Avg %   0.2   0.1   -0.2   0.1   0.1
Options Expiration Week: 1990-2015
#Up-#Down   20-6   17-9   15-11   17-9   18-8
Streak   D1   D1   D1   D1   D1
Avg %   1.3   1.1   1.0   1.1   0.9
Week After Options Expiration: 1990-2015
#Up-#Down   16-10   16-10   17-9   16-10   16-10
Streak   U1   U1   U1   U1   U1
Avg %   0.1   0.2   0.7   0.3   0.7
April 2016 Bullish Days: Data 1995-2015
  1, 4, 6, 12, 14, 15 1, 4, 15, 18-21 1, 4, 5, 8, 12, 20 1, 4, 5, 15, 18-21 1, 4, 15, 19-21
  18, 20, 21, 27, 28 28 21, 28, 29 27, 28 27-29
April 2016 Bearish Days: Data 1995-2015
  29 None 7 None 7
April 2016 Strategy Calendar
By: Christopher Mistal
March 28, 2016
April 2016 Strategy Calendar
Seasonal Switching Strategy Update: Worst Six Months Preparation
By: Christopher Mistal
March 24, 2016
From our Seasonal MACD Buy Signal on October 5, 2015 through yesterday’s close, DJIA gained 4.3%, S&P 500 climbed 2.5% while NASDAQ was off 0.3%. Although this performance is well below average for the “Best Six Months” (NASDAQ’s “Best Eight Months” end in June), the market had several major headwinds to overcome. 
First and perhaps most significant, was the first interest rate hike in nearly a decade last December. The fractional increase itself was not all that substantial. However; it did mark the end of zero interest rate policy and a shift in monetary policy from broadly accommodative towards tightening. The anticipation of the shift in policy resulted in a stronger U.S. dollar that pressured commodity prices and our exports. Corporate profits were hit and global growth forecasts declined and the market briskly corrected in January and February. 
Since then, the Fed has taken a much more dovish tone. Further rate hike expectations have fallen from four to just two for the remainder of the year. This shift has softened the U.S. dollar and given commodities a minor boost. The U.S. labor market has also remained resilient, lifting expectations for a quick recovery in growth and corporate profits. The market has managed to climb into positive territory for 2016, but new highs remain distant and unlikely.
The long-term track record of our Seasonal Switching Strategy, which is based upon the “Best Six Months”, has a solid track record of outperformance with potentially less risk compared to a buy and hold approach. Since 1950, DJIA’s average annual gain has been 8.2%. Over the same time period, DJIA has lost an average 1.2% during the “Worst Six Months,” May through October, and gained an average 9.3% during the “Best Six Months,” November through April.
Detractors are quick to point out that there have been positive “bad” months and negative “good” months. This is absolutely true as there is no trading or investment strategy that works 100% of the time (even the best will report a trading loss every once and a while). Even in election years, the second best performing year of the four-year cycle, there have been some nasty selloffs. Most recently in 2008 when DJIA fell 24.7%, S&P 500 dropped 25.8% and NASDAQ declined 29.0% during the worst months during the height of the Financial Crisis.
[DJIA, S&P 500 and NASDAQ Seasonal Switching Strategy during Election Years]
This year, more so than in recent years, Edson Gould’s (Findings & Forecasts, 1902-1987) famous quote, “If the market does not rally, as it should during bullish seasonal periods, it is a sign that other forces are stronger and that when the seasonal period ends those forces will really have their say,” seems appropriate.
Applying Our Seasonal Switching Strategy Recap
Use of the words buy and sell has created some confusion when used in conjunction with our Seasonal Switching Strategy. They are often interpreted literally, but this is not necessarily the situation. Exactly what action an individual investor or trader takes when we issue our official fall buy or spring sell signal depends upon that individual’s goals and, most importantly, risk tolerance. 
A conservative way to execute our switching strategy, the in-or-out approach as we like to refer to it entails simply switching capital between stocks and cash or bonds. During the “Best Months” an investor or trader is fully invested in stocks. Index tracking ETFs and mutual funds are an easy and inexpensive way to gain stock exposure. During the “Worst Months” capital would be taken out of stocks and could be left in cash or used to purchase a bond ETF or bond mutual fund. 
This approach works very well for retirement accounts where the goal is to build wealth over time. It comes with the added advantage of potentially less risk of pure “buy and hold”. Of further benefit, you may find summertime vacations and activities more enjoyable because you will not be concerned with stock market gyrations while your nest egg is parked in the relative safety of cash or bonds.
The approach that we use in the Almanac Investor Stock and ETF Portfolios involves making adjustments to your portfolio in a more calculated, tactical manner. During the “Best Months” additional risk can be taken as market gains are most likely, but during the “Worst Months” risk needs to be reduced, but not necessarily entirely eliminated. There have been several strong “Worst Months” periods such as 2003 and 2009. Taking this approach is similar to the in-or-out approach. However, instead of exiting all long stock positions a defensive posture is taken. 
Weak or underperforming positions can be closed out, stop losses can be tightened, new buying can be limited, and a hedging plan can be implemented. Purchasing out-of-the-money index puts, adding bond market exposure, and/or taking a position in a bear market fund could mitigate portfolio losses in the event a summer pullback manifests into something more severe such as a full blown bear market. 
Worst Months Defense
We are not issuing the signal at this time. We are only prepping for when it arrives.
Currently, the Almanac Investor Stock Portfolio and ETF Portfolio are positioned for the “Best Months” with no exposure to bonds or bear market funds with a long-only bias. But, beginning April 1, 2016 we will begin looking for our seasonal MACD sell signal accompanied by signs of seasonal weakness. Our recent Official Seasonal MACD Sell Signal Alerts proved rather timely as the market topped shortly thereafter.
When both the DJIA and S&P 500 MACD Sell indicators trigger a sell signal, we will issue an Almanac Investor Alert. We will either outright sell specific positions or implement tight trailing stop losses. Bearish/defensive positions in: iShares Barclays 7-10 Year Treasury (IEF), iShares Barclays 20+ Year Treasury (TLT), AdvisorShares Ranger Equity Bear (HDGE) and/or other protective strategies will also be considered. All stock and ETF holdings will be evaluated at that time. ETFs providing exposure to sector seasonalities ending in April and May along with underperforming stocks in the Almanac Investor Stock Portfolio may be sold at that time as well.
For traders and investors employing the “Best 6 + 4-Year Cycle” as detailed on page 62 of the Stock Trader’s Almanac 2016, this year’s upcoming Seasonal MACD Sell signal could be overlooked. Again, individual risk appetite will determine which of the above paths are preferred.
Stock Portfolio Updates: Buying Back Into Strength
By: Christopher Mistal
March 22, 2016
We cannot express enough our sorrow and outrage at today’s atrocious attacks in Brussels, Belgium. As a testament to the resolve of peace and freedom loving people around the world, the market overcame early weakness to finish the day mixed. NASDAQ finished the day up 0.27% while S&P 500 and DJIA were modestly lower at the close, but still off the early session lows.
Looking back at some past crises and market shocks may lend some guidance. In the table below note how the past several events have all been terror related. But also notice the difference in market reaction. When the market was in decline or weak, the terror attack merely seemed to accelerate the process. But, beginning with the Bali bombing, after the 2002 bottom, the market has essentially shrugged off these horrific events that are becoming alarmingly all too frequent. 
[Impact of Terror & Crisis on the Market]
Portfolio Updates & New (Old) Buy Ideas
Over the past six weeks since last update, S&P 500 has rallied 10.7% and Russell 2000 jumped 13.3% as of yesterday’s close. As a result of the market’s January/February rout, the Almanac Investor Stock Portfolio was largely in cash which is the primary reason for its lagging performance over the same six weeks. The Large-Cap segment of the portfolio had the most exposure to equites and was our best performer, up 8.2%. The Mid-Cap portfolio, consisting of just Scotts Miracle-Gro (SMG), added 1.3% and Small-Caps edged 0.9% higher.
Per last month’s advice, Virnetx Holding (VHC) was sold and closed out of the Small-Cap portfolio using its closing price from February 9. As anticipated, the euphoria of victory, and its sizable settlement in favor of VHC, proved brief and shares have since retreated back into the $4 range. VHC was closed out for a total gain of 207.7%.
Another Small-Cap portfolio bright spot is Global Brass and Copper Holdings (BRSS). Half of the original position in BRSS was sold on March 9 at $24.66, double the original price. This sale was in accordance with standard trading policy detailed at the bottom of the portfolio table below. Remaining shares of BRSS are on Hold
After a thorough review of stopped out positions and our expectations from the remainder of 2016 and beyond, we have selected seven previously stopped out stocks for a second go-around in the stock portfolio. There are three small-cap (NEWT, LDL & SXI), two mid-cap (UHAL & SUN) and two large-cap (DHI & HBI) stocks that could be considered on dips at this time. New buy limits and stop losses for each can be found in the portfolio table below. Also note stop losses for most of the previously held positions have also been updated. With the exception of these seven stocks, remaining positions in the portfolio are on Hold.
[Almanac Investor Stock Portfolio – March 21, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in CNC, CVS, HBI and TSCO. 
Super Boom Update: Not Much Upside Expected Next Couple Years
By: Jeffrey A. Hirsch & Christopher Mistal
March 17, 2016
Céad Míle Fáilte! Happy Saint Patrick’s Day to you all! In honor of the patron saint and since we cannot deliver corned beef and Guinness to you digitally yet, our gift to you today is an update of our Super Boom Forecast that we first released in May 2010 for the market to make a 500+% move by the year 2025, or DJIA 38,820, which is a six-fold gain from the intraday low on March 6, 2009 of 6470.
The main reason to update this pattern and outlook, other than it’s that time of year and we like to reevaluate this on an annual basis, is that the market is tracking eerily close to our forecast. This also plays into our outlook for this year, which has been “less than sanguine” since we completed our first 2016 outlook on page 6 of the Stock Trader’s Almanac 2016 on June 2, 2015. 
Upon further review in our December 17, 2016 Annual Forecast, we reaffirmed our expectation for “tepid gains” this year and that, “The next bear market may begin in 2016 and could take the market 20-30% lower into 2017-2018 in the last cyclical, garden-variety bear market that finally puts an end to this secular bear that began in early 2000. We do not expect much upside over the next few years in the market. But after the next bear market our Super Boom forecast should kick in.
Well, we have had that bear market, at least by our and Ned Davis Research’s standards and will likely be in store for more downside action over the next couple of years before reaching significant new highs on the major U.S. market indices. In the short term we expect some typical end-of-March, end-of-Q1 weakness. Then the market should to rally into the end of the “Best Six Months” to just shy of the 2015 all-time highs in April/May, followed by weakness into the summer around the presidential conventions.
Once we have only two candidates and a final winner, some uncertainty will be removed and the market will likely rally into yearend as the last seven months of election year have suffered only two losses since 1952 (STA 2016, page 32), however, once again falling short of new highs and leaving 2016 basically flat. For 2017-2018 we expect some rather rough market action with a retreat to the area of the 2007 highs on the DJIA and S&P and 3500-4000 NASDAQ.
That’s right; we are one of the few who believe that we are still in a secular bear market. People seem to forget that secular bull and bear markets do not begin and end at their highest and lowest points. Most agree that August 1982 was the end of the last secular bear market, not October or December 1974.
Back in 2011 when my book Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It (Wiley) hit the stores I drafted a bold 15-year DJIA projection chart. This forecast does not anticipate DJIA reaching 38,820 until around the year 2025 – and for the current secular bear market that began in 2000 to drag on until 2017 or 2018 before the next boom and secular bull commences. 
[500% Moves Follow Inflation]
As DJIA has pushed substantially above the high range of that chart (not because of a massive global economic boom or peace, but because of unprecedented easy monetary policy), I raised the floor on my initial forecast a few times. The end game still is in play and the means to the end has only been elevated to account for this new easy money world. 
When I first made my super boom forecast in May 2010 in this space DJIA was around 10,000, unemployment was quite high, the great recession was barely in the rearview, and global debt was a new and growing concern. So my prediction that the Dow would reach 38820 by 2025 seemed absurd to many when we announced it. That came as no surprise—all bold predictions are first lambasted before proven true. This super boom is not only plausible, but mathematically and historically within reason. Now that DJIA has exceeded 18,000 it looks even more credulous.
As for the next Super Boom already being underway, we are not convinced just yet. The low point of the economy and the bottom of the stock market now clearly appears to be behind us. But other factors have yet to align. The war on terror is still raging, a paradigm shifting technology has yet to emerge and inflation is subdued. Sorry, but 3D Printing and Fracking are not likely to change the world for the individual consumer like the car or the PC did. CPI has risen just 34% since 2001 and has not budged in the last several years. We are still plagued by political dysfunction and the next administration is likely to have a rather tough go of it before we can get back to some real bipartisan leadership and policy initiatives.
This projection is based upon 50 years of research and analysis into stock market cycles, patterns and seasonality. When I drew it in March 2011, I anticipated that the market would at least challenge its previous all-time highs before failing and falling to a low in midterm election year 2014 and another low in 2017-2018 before the next super boom truly began. That was based upon a projected high of 14,000 and an above-average bear market loss approaching -40%. 
I used the final cyclical bear markets of the last secular bears ending in 1921, 1949, and 1982 along with the long-term support level around 8,000 from the post-9/11 lows, through the 2002 and 2008-2009 bear markets as the basis for the potential magnitude of this decline. Now that DJIA has exceeded the high end of my range, the 2018 midterm low is likely to be higher, likely in the DJIA 14,000-15,000 range or a 20-30% decline from expected high point levels. The orange line in the chart below illustrates the updated forecast. (Click here for the previous projections https://www.stocktradersalmanac.com/Alert/20150305.aspx)
While we are projecting a garden variety bear market of -20-30% to bottom sometime in the 2016-2018 timeframe, early signs of the end of the secular bear and coming Super Boom have begun to materialize presently. The commodity secular bull market since 2000 has waned and the 30-year bull market in bonds that began near the end of the last secular bear for stocks in 1980-82 looks to be finally fading. 
In addition, new market leaders are rising to the top and we may get our next paradigm shifting culturally enabling technology from Biotech, Healthcare or perhaps robotics or alternative energy. But that remains to be seen. Either way, continue to let your winners ride and enjoy the rally while it lasts, Just be prepared for gains to be less easy to come by over the next few years while the stage is set for the Next Super Boom and secular bull market.
Mid-Month Update: End-of-Q1 Weakness Ahead
By: Christopher Mistal
March 15, 2016
From our Seasonal MACD Buy Signal on the close on October 5, 2015 through yesterday’s close, DJIA has advanced a modest 2.7% and S&P 500 was up 1.6%. However, NASDAQ was down 0.6%. These returns are well below average, but are a vast improvement since early-February. The rally since the February lows has been robust. DJIA, S&P 500 and NASDAQ have all reclaimed their respective 50-day moving averages, but are now struggling.  
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
All three indices paused at monthly resistance (red dashed line) last week. DJIA and S&P 500 have since broken through and are currently contending with their 200-day moving averages. NASDAQ is still stuck at monthly resistance. Stochastic, relative strength and MACD indicators are still all positive, but stretched toward overbought. If NASDAQ can break through resistance, it could provide the leadership for DJIA and S&P 500 to clear their 2000-day moving averages. Without NASDAQ moving higher, DJIA and S&P 500 are likely to stall and fade lower into the end-of-Q1.
Week After Triple Witching Option Expiration Week & Good Friday
In a post on our blog last week, we looked at the history of March’s Triple Witching options expiration week and the week after. Historically, this week has a bullish bias while next week has a bearish bias. Next week is also a shortened trading week due to Good Friday and Easter. From page 88 of Stock Trader’s Almanac 2016, the days before Good Friday are generally positive and in the table below you can see that the shortened week also has a bullish slant.
[Easter Week Stats Table]
This creates a conflict. Which tendency is more likely next week? Since 1983, the first year that Triple Witching options expiration occurred in March, this scenario has occurred just four times. In 2005, S&P 500 was up 0.13%, in 1997 it was down 2.06%, in 1989 up 2.04% and 1986 it dropped 4.30%. Based upon these occurrences, the S&P 500 leans bearish even when the week after March option expiration is also the week Good Friday lands in.  
Last Three or Four Trading Days
Further compounding the pain during the week after March options expiration in most years is end-of-quarter weakness. Over the past 26 years the DJIA and S&P 500 have declined 17 times and advanced 9 with an average loss approaching 1.0% near the end of March. Excluding advancing years, the average decline is right around 1.6% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in any gains and establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third.
[Last Three or Four DJIA Trading Days in March]
[Last Three or Four S&P 500 Trading Days in March]
ETF Portfolio Update: Natural Gas Trades Added
By: Christopher Mistal
March 10, 2016
Earlier today the European Central Bank (ECB) took further action to foster inflation and spur growth in the Euro zone. The ECB cut its main interest rate to 0% and lowered the bank deposit rate to negative 0.4%. It also expanded its quantitative easing (QE) program by a sizable 33%, from €60 billion to €80 billion per month. As part of the expansion of the program, investment-grade corporate debt will now be eligible for purchase. The ECB expects its QE program will run until at least the end of March 2017.
The ECB’s actions and course are in line with numerous other central banks around the globe, except one major one. Our central bank, the Fed, is heading in the opposite direction with monetary policy and could, although expectations are low, raise interest rates again next week. The current tightening cycle is the sixth major cycle going back to 1973.
Click to view full-size…
[DJIA and Major Fed Rate Hike Cycles]
From our research, DJIA was generally positive ahead of the first hike and then weak afterwards. The above table is updated through yesterday’s close and it shows DJIA’s initial response to the first increase (“1 Month After column) was worse this time than during any of the previous five tightening cycles. The 3 Months Later mark arrives March 16 and assuming the market does not make a major move in either direction between now and then, DJIA’s performance will be on par with past cycles at that point. Looking ahead to 6-Months and 1-Year After, more weakness is suggested. The exact timing of which will highly depend upon the pace that the Fed ultimately takes while increasing rates.
ETF Portfolio Updates
Earlier this month in our ETF Trades Alert, we presented a new trade idea which was aimed at taking advantage of seasonal strength in Computer Tech that usually begins in April and runs through July. iShares US Technology (IYW) has not traded under its buy limit yet. As a result of recent strength, IYW’s buy limit is being bumped up to $100.00
This month’s Seasonal Sector Trades, connected to natural gas, have both been added to the ETF Portfolio. First Trust ISE-Revere Natural Gas (FCG) was added on March 8 at $4.30. FCG first closed above $4.22 on March 4, but did not trade under its buy limit until two trading days later. United States Natural Gas (UNG) was also added on the eighth. This was the day after its MACD indicator turned positive. UNG was added to the portfolio at $6.05, its opening price on March 8. FCG could still be considered at current prices with a buy limit of $4.30. UNG could also still be considered on dips below $6.25. New and/or updated stop losses for FCG and UNG appear in the table below.
Precious metals, gold and silver, have not succumbed to typical seasonal weakness yet this year. Gold and silver are likely responding to deflation fears and negative interest rates. DB Gold Double Short (DZZ) was stopped out on March 3, when it closed below $6.04. ProShares UltraShort Silver (ZSL) has not been stopped out and is on Hold.
[Almanac Investor ETF Portfolio – March 9, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in QQQ, USO and VNQ.
Tepid Best Six Months Elevates Odds of Worst Six Months Trouble
By: Christopher Mistal
March 08, 2016
Since the closing lows of February 11, DJIA rallied 9.0% through yesterday’s close. S&P 500 was up 9.4% over the same timeframe. NASDAQ peaked last Friday and was up 10.6%. That was an impressive rally for these broad indices considering it took just three weeks. However, the rally also caused the appearance of overbought signals. Stochastic, relative strength and MACD indicators were all stretched and have begun to roll over confirming the recent shift in momentum. See charts below.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
Given the magnitude and duration of the recent rally, a pause and period of consolidation is not unquestionable. After blasting through their respective 50-day moving averages, DJIA, S&P 500 and NASDAQ all paused right around projected monthly resistance (red dashed line). If 50-day moving averages hold during the consolidation, then the next move will likely be higher towards the 200-day moving average and perhaps beyond. A breakdown below the 50-day moving average would likely signal lower.
Down Best Six Months
From the Stock Trader’s Almanac, it is known that the “Best Six Months” (BSM) for DJIA and S&P 500 are November through April. These are the months where DJIA and S&P 500 log the majority of their gains, time and time again. Since October 1949, DJIA has racked up a BSM gain 52 times in 66 years with an average advance of 7.6%. S&P 500 has an identical record with a modestly lower average gain of 7.2%. 52 gains in 66 periods works out to a 78.8% success rate, a solid result.
Unfortunately, there is no guarantee that this will happen every time. This BSM period is turning out to be one of those exceptions going back to November 1949. As of yesterday’s close, DJIA was off 3.3% and S&P 500 was down 3.7% for the current BSM. We could pin this weakness on the Fed raising interest rates, slowing global growth, the plunge in energy and other commodities and shrinking corporate profits. Given the relatively few examples of negative BSM periods to compare to we decided to look at two different scenarios to determine what if any impact a weak or negative BSM period has on the subsequent “Worst Six Months” (WSM), May through October.
Although the WSM period is rightfully named, it is not always negative. Instead, there are generally less frequent gains and of lower magnitude. Looking back over the past 66 years, DJIA has advanced 39 times in the WSM and S&P 500 has 41 advances. However, average gains are significantly lower at 0.4% and 1.4% respectively.
[DJIA Below Average Best Months Table]
[S&P 500 Below Average Best Months Table]
In the above two tables, all below average BSM periods for DJIA and S&P 500 appear with the subsequent WSM lined up in the right side of the table. Any BSW that was less than 7.6% for DJIA and 7.2% for S&P 500 was included. This resulted in 33 occurrences for each. For DJIA, the subsequent WSM period in this scenario differed little when compared to all 66 years. Its average gain at 0.37% is only fractionally lower and the frequency of losses was also little changed (39.4% compared to 40.9% in all 66 years). S&P 500 however, did see a more substantial deterioration during the WSM. Its average turned to a negative 0.6% and frequency of declines jumped from 37.9% to 48.5%.
[DJIA Down Best Months Table]
[S&P 500 Down Best Months Table]
In these two tables only down BSM periods were examined. In this scenario the subsequent WSM period was considerably worse. The frequency of losses for DJIA and S&P 500 jumped to 57.1% and average performance slipped even further with losses exceeding 4%. Furthermore, double-digit WSM gains only occurred twice. In 2009, the worst bear market since the Great Depression ended during the previous BSM period and in 1982 the market finally exited the last secular bear market that was in place throughout all of the seventies. If the current BSM does indeed finish with a loss, then this summer could prove especially volatile.
Seasonal Sector Trades: Eyeing a Possible Natural Gas Bounce
By: Christopher Mistal & Jeffrey A. Hirsch
March 03, 2016
Our long natural gas trade from late February to late April boasts a 72.0% success rate gaining 18 out of the last 25 years. One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the northern cold weather areas in the United States. In particular, when December and January are colder than normal, we tend to see depletions in inventories through February. This has a tendency to cause price spikes lasting through mid-April and beyond (shaded in yellow in next chart). However, just the opposite of this has happened this winter and natural gas price is trading at an almost unbelievable $1.673 per one million British Thermal Units (Btu). This is its lowest price it has traded going back over 17 years to at least 1999.
[Natural Gas (NG) Daily Bars (Pit Plus Electronic) and Seasonal Pattern]
Our best trade scenario using the July natural gas contract has a holding period of approximately 41 trading days beginning on or about the 16th trading day of February and lasts until about April 23. Ample supply and stagnant demand in recent years has caused this window to move around and/or compress but there have been tradable late-winter or early spring rallies that have been profitable.
[February Long Natural Gas (July) Trade History]
In the short-term, natural gas appears heavily oversold as a relatively mild winter has left inventories well above historical averages for this time of year. If the trend of above average temperatures persists into spring and beyond, electrical demand could rise earlier and sharper than usual which could lead to a spike in natural gas prices. Over the longer-term, the U.S. has begun to export natural gas and analysts expect exports could reach 10% of current output by the end of this decade.
First Trust ISE-Revere Natural Gas (FCG) and United States Natural Gas (UNG) are two popular ETFs that correlate with natural gas. UNG holds natural gas futures and swaps and FCG holds stocks of oil and gas producing companies that are exposed to both crude oil and natural gas prices.
[First Trust ISE-Revere Natural Gas (FCG) Daily Bar Chart]
Similar to the performance of crude oil, shares of FCG have been declining since June of 2014. There has been an occasional rally here and there, nothing sustainable given the price pressures of falling crude and natural gas prices. Recent crude strength has begun to aid FCG. It’s January low held in February and its Stochastic, relative strength and MACD indicators have turned positive confirming the shift in momentum. A break out above $4.22 by FCG would be further evidence that the current bounce is sustainable. FCG could be considered a buy on any close above $4.22 with a buy limit of $4.30. If purchased a stop loss of $4.00 is suggested. For tracking purposes, FCG will be added to the ETF Portfolio when it closes above $4.22 and trades less than $4.30 the following day.
[United States Natural Gas (UNG) Daily Bar Chart]
Unlike FCG, the above chart of UNG is not showing any signs of a bottom yet. UNG’s technical indicators are all negative and are flashing signs of being heavily oversold. Aside from a brief blip at the end of January, MACD has been negative since early January. Stochastic and relative strength indicators are also in the dumps. However, this is the time of the year when natural gas usually finds a tradable bottom. UNG could be considered at the first sign of strength from its MACD, Stochastic or relative strength indicators. For tracking purposes, UNG will be added to the ETF Portfolio using its open price on the day after its MACD indicator turns positive. Our MACD indicator parameters are 8-17-9 and are applied to daily prices.
ETF Trades: New Life for Tech Shares
By: Christopher Mistal
March 01, 2016
Despite the market’s wild ride in February, DJIA closed out the month with a modest 0.3% gain. Were it not for losses on the last day, S&P 500 would have finished in the black as well, instead it finished the month off 0.4%. NASDAQ was the poorest performer of the month, down 1.2%. This February reverted back towards its mean, bucking the nascent trend of robust February gains following a down January
A down S&P 500 January followed by a down S&P 500 February has occurred 19 times going back to 1930 including this year. March’s performance following the previous 18 down January/down Februarys was above historical average, gaining 1.68% with 11 advances and 7 declines. April was even better, up 12 of 18 with an average gain of 1.95%. However, March through December and full-year performance in those years was less than stellar. March through December averaged a gain of 3.95% and the full-year averaged a loss of 3.63%. Five of these eighteen previous years were also election years (shaded in grey). Only 2000 and 2008 failed to post gains during the March to December time period as the tech and credit bubbles burst.
[S&P 500 Down January, Down February & Following Performance since 1930 Table]
April Sector Seasonality
Normally at this time we would be considering new long ideas from the Computer Technology sector as seasonal strength typically begins in April and runs until July. Historically, the Computer Technology has averaged 7.1%, 6.9%, and 4.4% over the last 15-, 10- and 5-year time periods respectively. Because our short-term outlook is looking for a rally to close out the “Best Months” and that is exactly what the market has been doing since mid-February, let’s consider a position in iShares US Technology (IYW). IYW could be considered on dips below $98.00 accompanied by strength in Stochastic, relative strength and MACD indicators. If purchased, employ a stop loss at $92.95.
[IYW Daily Bar Chart]
ETF Portfolio Updates
Slightly less than two weeks ago, with better than two months remaining in the Best Six Months for DJIA and S&P 500 and four months for NASDAQ and Russell 2000, we suggested establishing new positions in DIA, SPY, QQQ and IWM. These four positions were added to the ETF Portfolio on February 19. DIA’s opened below, traded the entire day and closed below it buy limit on the nineteenth as a dividend was paid. As a result, DIA “Presented Price” and the price it was added to the portfolio at are an average of its open and close on the day. IWM, QQQ and SPY were added using their respective buy limit prices.
In addition to IYW above, SPDR Technology (XLK) can also be considered on dips below its buy limit. To be clear, we are not as bullish as we were when we issued our Seasonal Buy Signal last October, but we do anticipate some strength to close out the “Best Months.” Although not listed in the ETF Portfolio, we do want to maintain a cash balance as our longer-term outlook is less than sanguine. We do not want to be fully invested at this time.
The poorest performing position in the portfolio, DB Gold Double Short (DZZ) is off 12.7% since being added. Gold has enjoyed a longer than usual run up this year mostly due to fear and the safe-haven trade, but gold's longer-term trend is still lower and seasonal factors are no longer on its side.
Other remaining positions have improved as the broader market has improved, but excluding today’s new trade idea, XLK and HDGE, all other positions are on Hold.
[Almanac Investor ETF Portfolio – February 29, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in QQQ and VNQ.