April 2018 Trading & Investment Strategy
March 29, 2018
Market at a Glance - 3/29/2018
By: Christopher Mistal
March 29, 2018
3/28/2018: Dow 223848.42 | S&P 2605.00 | NASDAQ 6949.23 | Russell 2K 1513.03 | NYSE 12308.90 | Value Line Arith 5919.24
Psychological: Disbelief. For all the volatility the market has exhibited over the past two months, bullish sentiment is still elevated. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 49.5% and correction advisors stand at 33%. Bearish advisors remain scarce at 17.5%. Further declines in bullish sentiment would be a welcome sign as negative sentiment is usually strongest near bottoms.
Fundamental: Firm. Unemployment remains low and corporate earnings forecasts remain firm. Q1 GDP estimates have cooled and the Atlanta Fed GDPNow model is currently forecasting 2.4% for the quarter. Tariffs have the potential to dampen global activity, but thus far it looks more like a negotiating tactic rather than an actual major shift in policy. Numerous exceptions have already been given for the steel and aluminum tariffs mitigating their full impact and likely setting the precedent for any future tariffs.
Technical: Bouncing. March’s second-half selloff appears to have found support around 200-day moving averages. S&P 500 was closest to its 200-day average. DJIA and NASDAQ declines paused just above their respective 200-day averages. Stochastic, relative strength and MACD indicators are in or very near oversold territory. If headline news risk abates, the stage is set for a near-term bounce. Whether or not the bounce becomes a sustainable rally will largely depend upon early Q1 earning results and accompanying Q2 and beyond guidance.
Monetary: 1.50-1.75%. The Fed did exactly what was widely anticipated when its March meeting ended, they raised rates 0.25%. Rates are still expected to go higher later this year, but the Fed remains data dependent. The pace of future increases will largely depend upon inflation and growth data and expectations. In the meantime, longer-term rates are still low within a historical context.  
Seasonal: Bullish. April is the best DJIA month since 1950, third best for S&P and fourth best for NASDAQ (since 1971). However, typical midterm-election year woes do temper April’s performance. April is also the last month of the “Best Six Months.” Starting on April 2 we will begin watching for the seasonal MACD sell signal in concert with early signs of seasonal weakness and will issue an email alert with trading ideas for weathering the “Worst Six Months,” May to October.
April Outlook: Brief Respite Before Worst Six Months & Midterm Bottom Pickers Paradise
By: Jeffrey A. Hirsch & Christopher Mistal
March 29, 2018
Holiday inspired trading before the Good Friday holiday market closing tomorrow helped trim losses for the month of March and Q1 2018. There are however two bright spots in the market’s performance this March and first quarter. The Russel 2000 index of small cap stocks posted a gain of 1.1% for the month of March and the NASDAQ Composite is up 2.3% for Q1 2018. So while there is much negativity on the news and in market action this year, we wanted to point out some positives and encourage patience through what promises to be a tumultuous ride over the next several months as the market and economy search for support for the next leg higher.
The volatility this March was actually not all that unusual. Last month we summoned the famous warning Julius Caesar failed to heed as a reminder to beware The Ides of March. As it did this year the market tends to come into March strong, but then after mid-month is prone to weakness and big end-of-Q1 hits. Most of the damage occurred the week after the Ides, which is also the week after March Triple Witching (when stock options, index options and index futures contracts all expire on the third Friday) as it does most years.
Much like the weather surrounding the vernal equinox, March market action has been rather volatile and turbulent in recent years with wild fluctuations and large gains and losses. This is precisely what we witnessed in 2018.
This is also typical midterm election year market behavior. In fact, the timing of President Trump’s policy successes and more unsettling agenda initiatives like the tariff and trade machinations have been similar to the timing of a democratic president, who usually don’t ramp up their less savory policy pushes until the midterm year. This is what generally makes post-election years worse for republicans and midterm years worse for democrats. The policies are not “democratic” in nature, but the timing is and this is setting up a typically more pronounced midterm year Worst Six Months (May-October) for 2018.
Midterm Aprils are historically a bit softer, but since we’ve come down so much ahead of April, we expect a bit of a respite this April. Then we expect the weakest two quarters of the 4-year cycle and the worst six months to suffer from sideways action at a minimum to a slightly deeper correction and maybe even a mini Ned Davis Research defined bear of -13-19.99% that finds bottom in Q2-Q3. Since 1949 the second and third quarters of midterm years have averaged losses of -1.8% for DJIA, -2.2% for S&P 500 and -6.7% since 1971 for NASDAQ. And remember since 1961, 9 of the last 17 bear markets bottomed in the midterm year.
But this would be a textbook set up for the sweet spot of the 4-year cycle and the “Midterm Year Bottom Picker’s Paradise.” The “sweet spot” of the 4-year cycle is the 3-quarter span from Q4 midterm year to Q2 pre-election year. Since 1949, market gains from the fourth quarter of midterm year to the second quarter of the pre-election year have averaged +20.4% for DJIA, +21.1% for S&P 500 and +32.0% since 1971 for NASDAQ. Also the gain from the midterm low to pre-election year high has averaged +47.4 since 1914 for DJIA and +70.2% NASDAQ since 1971.
So while we are less sanguine after April for the worst six months, our Base Case Annual Forecast scenario is still on track for above average midterm year gains in the range of 8-15%, with a mild worst six months correction or pullback. This is further supported by the Positive January Indicator Trifecta we registered with the Santa Claus Rally, the First Five Days and the full-month January Barometer all up this year. 
We will be looking at first quarter corporate earnings announcements in April to shed some light on the health and growth prospects of corporate America and companies around the world and the 30-Year Treasury Bond for signs of overall economic strength as the recent softness in 30-Year Treasury yields was driven by a cooling of growth and inflation expectations. On the risk side, we will be keeping an eye out for more state tax increases like what’s going on in Utah and a technical breakdown in all the major averages below the February lows for signs of weakness. So far we have once again found support around the 200-day moving averages.
Best Six Months MACD Sell Signal Update
Since April is the last month of the Best Six Months, we begin tracking the MACD indicators for new crossover Sell Signals after April 1. We enter April 2018 with most of our technical indicators way oversold and finding solid support. All MACD indicators are deep in “sell” territory and have been there since the Ides of March. We will issue our Seasonal MACD Sell signal when corresponding MACD “sell” indicators applied to DJIA and S&P 500 both crossover and issue a new sell signals. At this juncture the market is poised for a bounce and rally, so for now continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.”
Pulse of the Market
Two months after peaking above 26,000, DJIA continues to struggle. Typical week after March options expiration weakness was much more prominent, but DJIA did find support just above its 200-day moving average (1). The brisk pace of declines last week quickly squashed the modest improvement in both the faster and slower moving MACD indicators applied to DJIA. The slower moving MACD Sell indicator was positive in mid-March, but is now negative (2) even after today’s gain.
Last week’s 1413.31 DJIA point loss (3) was the second worst weekly point decline ever. The worst ever was in October 2008. On a percent basis, DJIA shed 5.7% last week which was its worst decline since January 2016. S&P 500 (4) and NASDAQ (5) suffered even larger weekly declines of 6.0% and 6.5% respectively.
NYSE Weekly Decliners outnumbered Weekly Advancers (6) by 5.4 to 1. Clearly a negative reading, but it was not as bad as the nearly 10 to 1 reading that occurred during the week ending February 2, 2018. This could be an early indication or possible sign that selling pressures are diminishing. 
New Highs and New Lows (7) were also at better levels last week than at the start of February. This could also be an early positive sign that will likely be backed up by this week’s data. The three week trend of expanding lows and shrinking highs likely came to an end this week.
After peaking in the second half of February (8), the yield on the 30-year Treasury bond has meandered lower. If the initial spike in rates was due to inflation expectations rapidly rising then the recent pullback in rates could be an indication that longer-term inflation fears cooled. Some inflation is good, but too much is not.
Click image to view full size…
[Pulse of the Market Table]
April Almanac: Up Twelve Straight, But Weaker in Midterm Years
By: Jeffrey A. Hirsch & Christopher Mistal
March 29, 2018
The first trading day of April and the second quarter, has enjoyed exceptional strength over the past 23 years, advancing 17 times with an average gain of 0.49% in all 23 years for S&P 500. Declines occurred in 2001, 2002, 2005, 2013, 2015 and 2017. The worst, or largest decline, was 1.25% in 2001. This year, April 2 is also the day after Easter which has been the S&P 500’s worst post-holiday trading session. From 1984 to 2003, S&P 500 declined 16 times. In the fourteen years since, S&P has been up ten times.
April marks the end of our “Best Six Months” for DJIA and the S&P 500. On April 2, we will begin looking for our seasonal MACD sell signal and corresponding early signs of seasonal weakness. The “Worst Months” have been more pronounced in past midterm years.
April 1999 was the first month to gain 1000 DJIA points. However, from 2000 to 2005, “Tax” month was hit, declining in four of six years. Since 2006, April has been up twelve years in a row with an average gain of 2.5% to reclaim its position as the best DJIA month since 1950. April is third best for S&P (since 1950) and fourth best for NASDAQ (since 1971).
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. Traders and investors are 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.
Typical midterm-election year woes do temper April’s performance since 1950. April is DJIA’s and S&P 500’s seventh best month in midterm-election years, up 11 of the last 17. For NASDAQ, Russell 1000 and Russell 2000, April is the sixth best month in midterm years.
[Midterm April Performance 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 with just six declines in 28 years. The first trading day of expiration week has a slightly better record than expiration day and the week as a whole is generally marked by respectable gains across the board. The week after has a softer long term-record; however since 1994 gains have become the norm. Over the past 21 years, NASDAQ and Russell 2000 have finished April better than DJIA and S&P 500. See Bullish and Bearish days in Vital Statistics table below.
April (1950-2017)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank 1 3 4 3 3
# Up 46 48 30 27 24
# Down 22 20 17 12 15
Average % 1.9   1.5   1.4   1.5   1.5
4-Year Presidential Election Cycle Performance by %
Post-Election 1.9   1.5   2.4   2.4   2.1
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 0.6 -0.4 0.9 0.2
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: 1990-2017
#Up-#Down   18-10   16-12   15-13   15-13   12-16
Streak   U1   U1   U1   U1   U1
Avg %   0.3   0.2   0.2   0.2   0.04
Options Expiration Day: 1990-2017
#Up-#Down   17-11   16-12   12-16   16-12   16-12
Streak   D4   D3   D3   D3   D1
Avg %   0.1   0.1   -0.2   0.06   0.1
Options Expiration Week: 1990-2017
#Up-#Down   22-6   19-9   17-11   19-9   20-8
Streak   U2   U2   U2   U2   U2
Avg %   1.3   1.1   1.1   1.1   1.0
Week After Options Expiration: 1990-2017
#Up-#Down   18-10   18-10   18-10   18-10   18-10
Streak   U3   U3   U1   U3   U3
Avg %   0.2   0.3   0.7   0.3   0.8
April 2018 Bullish Days: Data 1997-2017
  2, 3, 5, 13, 16, 17 2, 3, 5, 9,13 2-4, 9, 11 2, 3, 5, 9, 17 3, 16-20,26
  19, 20, 26, 27 17, 18, 20, 27 17, 20, 27 18, 20, 27  
April 2018 Bearish Days: Data 1997-2017
  4, 30 30 9, 12, 25 30 None
April 2018 Strategy Calendar
By: Christopher Mistal
March 29, 2018
Seasonal Switching Strategy Update & Prep: Midterm Worst Months More Pronounced
By: Jeffrey A. Hirsch & Christopher Mistal
March 22, 2018
Market volatility continues to run hotter than last year, but that’s not saying much as 2017 was a rather docile bull market year. Historically speaking, year-to-date market action is not out of the ordinary for midterm election years. While March has usually performed better in midterm years, we did warn to “beware the Ides of March” and that “stock prices have a propensity to decline, sometimes rather precipitously, during the latter days of” March. Additionally, this week after March Triple Witching is rather treacherous with “DJIA down 20 of the last 30 years—and frequently down sharply.”
So as we approach the end of the Best Six Months with five and half weeks to go stocks are struggling to hold the February 8 lows, especially Dow and S&P 500. Today’s precipitous decline cut the gains for the Best Six Months from October 31, 2017 down to about 2.5% for the Dow and 2.7% for the S&P 500. NASDAQ is holding up better with 6.5% gain.
The January-February 10% correction and the current March selloff naturally have traders and investors concerned. We are always concerned about the market and that’s why we employ our hybrid market analysis discipline that incorporates: seasonality and cycles, fundamentals, technical analysis, monetary and government policy, as well as psychology and sentiment readings. 
So despite the recent uptick in market volatility and the decline in stocks our 2018 bullish annual forecast remains on track. Our best case scenario for Dow 29000 is becoming less likely, while our base case scenario seems more likely for gains in the 8-15% range for the full year. That does not preclude us from a midyear, Worst Six Months selloff  that would culminate in a ~15% correction or even a mini bear like the mini bears we had in 2011 and 2015-2016 of 19.4% and 14.2% respectively on the S&P 500.
However, this would set us up for a quintessential midterm year bottom picker’s paradise and what we call the sweet spot of the 4-year – the last quarter of the midterm year and the first two quarters of the pre-election. This three-quarter stretch, highlighted in the table below taken from page 102 in the 2018 Almanac, shows average gains during the sweet spot from October this year to June next year at 20.4% for the Dow, 21.1% for the S&P 500 and 32.0% for NASDAQ! The weak spot of the 4-year cycle is Q2-3 in the midterm year or April-September of this year and has produced losses on average. 
[Sweet spot Table]
As you can see in the charts below the worst six months are most pronounced in the midterm year. The amplitude of the trend this year in the purple line is much greater but the trend is still similar to typical midterm year patterns. The January break visible in the red midterm year line came a little later and steeper this year and recent action, including a late-March selloff is in line with history, which is setting us up for an April-May high, followed by a more prominent worst six months. 
[S&P 4-year seasonal Pattern]
[NASDAQ 4-year seasonal Pattern]
The two tables below show the average 47.4% gain on the Dow and the 70.2% average gain on the NASDAQ from the midterm low to the pre-election year high. Note the highlighted concentration of six (6) January and four (4) October Midterm lows and nine (9) December Pre-Election Year highs for the Dow and the four (4) October Midterm lows and four (4) December Pre-Election Year highs for NASDAQ.
[Dow 50%gain]
[NASDAQ 70% gain]
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 8.3%. Over the same time period, DJIA has lost an average 1.1% 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. 
Applying Our Seasonal Switching Strategy Recap
Because of the heightened level of risk of a pullback or correction that has been historically observed during the “Worst Six Months” of the year, May through October, and its historically tepid returns, reducing long exposure and developing a defensive strategy is the approach we take in Almanac Investor. We do not merely “sell in May and go away.” Instead we take some profits, trim or outright sell underperforming stock and ETF positions, tighten stop losses and limit new long exposure.
For those with a lower risk tolerance or a desire to take a break from trading, the “Worst Months” are a great opportunity to unwind longs and move into the relative safety of cash, Treasury bonds, gold and/or some combination of. Preservation of capital may be more important than growth and with historical averages and frequency of gains reduced; the “Worst Six Months” are a good time to simply step aside if you prefer. August, September and/or October have provided some excellent buying opportunities in recent years and could do the same again this year. 
Worst Months Defense
We are not issuing the signal at this time. We are only preparing you for when it does arrive.
Currently, the Almanac Investor Stock Portfolio and ETF Portfolio are positioned with a long-only bias for the “Best Months” with no long exposure to bonds, individual stock or sector shorts, or positions in bear market funds. But, beginning April 2, 2018 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 7-10 Year Treasury (IEF), iShares 20+ Year Treasury (TLT), SPDR Gold (GLD), ProShares Short Dow 30 (DOG), ProShares Short S&P 500 (SH) and/or other protective strategies may 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 now, try to keep your emotion at bay and resist making any rash changes to your portfolio. Stick to your long term strategy and get prepared to implement some Worst Six Months Defense so you are ready for the sweet spot of the four-year cycle later this year.
Stock Portfolio Updates: Volatility Trims Positions
By: Christopher Mistal
March 22, 2018
Over the last five weeks, S&P 500 was up 0.5% and Russell 2000 was higher by 3.8% as of yesterday’s close. The Almanac Investor Stock Portfolio’s blend of cash and long positions climbed 0.8% over the same time period excluding dividends and any trading costs. Our Mid-Cap portfolio was the best performer and responsible for the majority of the overall increase. Small-Caps also contributed a 0.8% gain while Large-Caps declined 0.8%.
Volatility’s return to the market has had a negative impact on the portfolio. Five positions have been stopped out. Lantheus Holdings (LNTH) was stopped out on February 27 and closed out of the Small-Cap portfolio on February 28. Both days were challenging for the market and tepid guidance released after the close on the 26th was apparently all that was needed to trigger a 23% one-day decline.
In the Mid-Cap portfolio, home builders KB Homes (KBH) and Meritage Homes (MTH) were also stopped out at the end of February. Sluggish housing data in December and January combined with increasing mortgage rates are two concerns that knocked housing stocks down.
Arista Networks (ANET) and Owens Corning (OC) also stopped out. ANET closed below its stop loss on February 16 after dropping over $60 per share from its previous close. Earnings were released on February 15. ANET has since bounced back suggesting the initial reaction to its fourth quarter earnings was not the correct one. OC appears to be caught in the malaise that has stricken home builders and other major industrial companies.
On a positive note, Global Brass and Copper Holdings (BRSS) and Southern Cooper Copper (SCCO) have rebounded nicely over the past month. SCCO was up 9.4% at yesterday’s close while BRSS was up 14.4%. Additionally, Orbotech (ORBK) is being bought by KLA-Tencor (KLAC) in a deal that values ORBK shares at approximately $69.02. The deal was just announced and will need regulatory approval.
With the “Best Six Months” end on the horizon, all positions in the Stock Portfolio are on hold. Please see following table for current advice, buy limits and stop losses.
[Almanac Investor Stock Portfolio – March 21, 2018 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in, ANET, BUSE, FAF, G, HII, LII, MHO, OC, ORBK and SNX. They did not hold any positions in the other stocks mentioned in this Alert, but may buy or sell at any time.
Super Boom Update: Maybe Ahead of Schedule for Dow 38820
By: Jeffrey A. Hirsch
March 15, 2018
When we first released this forecast in our newsletter in May 2010 and published it in the Stock Trader’s Almanac 2011 with the Dow around 10,000 it was received with a great deal of incredulity. Since then the market has tracked it in principle yet outpaced our initial expectations. This extraordinary forecast was and is based upon the seminal research and reports our founder Yale Hirsch undertook and published back in the mid-seventies when he discovered this iconic market cycle, which led him to the greatest market call in history for a 500% move in the market from the 1974 low to 1990.
This pattern as illustrated in the updated chart below shows how the market failed to make any sustained advance while the world was embroiled in a significant conflagration. Once the war ended, inflation caused by government spending kicked in and the stock market made 500+% moves between all of the major wars the U.S. has been involved in. All three previous secular bear markets associated with the three major wars of the 20th Century were also affected by crises that required a great deal of non-war-related spending.
[500% Moves Chart]
As we developed this forecast further we discovered other components of the Boom Equation. In addition to war and inflation several factors came into alignment that ignited prior Super Booms and Secular Bull Markets, including a properly functioning government that is in synch with the private sector, stimulating innovation and robust economic growth. The final factor is what we call a culturally enabling paradigm shifting technology—something that changes the world by touching and impacting the lives of humans individually across the planet: the next breakthrough technologies that will drive humanity to the new frontier. 
When global military entanglements are at bay and political functionality fosters increased business and economic activity, healthy inflation quickens innovations. This opens the floodgates for new inventions and creations that will fuel decades if not centuries of growth and the expansion of civilization. When these new technologies, methodologies and contraptions explode on the scene they push the overall market up 500% or more with new industries that spawn future mega-cap companies that rule the world.
We believe that the final tactical bear of the next Super Boom has occurred. The outcome of the recent U.S. presidential election may be the start of a shift in political stagnation. Sure the market has tripled since the 2009 low, but we think the next big move is around the corner. Back in 1983 when folks started to realize the last boom was underway the market had already more than doubled. We appear to be on a similar path with the February 2016 bear market low equating to the August 1982 bear market low.
After a stampeding bull market year in 2017, and a death-defying rally in January, market volatility has returned. But as we reaffirmed on February 8 in this space our bullish forecast for 2018 remains on track, though we expect another bump or two during the worst six months May-October. 
Last March when we updated this Super Boom Forecast the market was suffering from a typical end-of-Q1 retreat. President Trump’s approval rating, his health care reform agenda was on the rocks and there was much speculation that other Administration policy initiatives such as tax cuts and an infrastructure projects would not happen. We cautioned that “It seems like a stretch at this point to jump to the conclusion that the Trump Administration is not going to have any success. We believe the market is still on track for double-digit full year gains and DJIA could reach 23,000 to 24,000 by yearend.” The infrastructure buildout has yet to materialize, but the tax cuts went through and the Dow surpassed our projection of 24,000 by yearend.
Once again we are revising our 15-Year Projection chart. When this was first drawn in 2011 when our book Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It (Wiley) hit the stores, the projection was based upon, drawn from, years of historical patterns and data. In the years to follow numerous unprecedented events occurred, the Fed held its key lending rate in a range of 0 to 0.25% for an incredible seven years, under took multiple rounds of quantitative easing (QE) and essentially pledged unwavering support for the market. Many other nations and central banks around the world were taking similar or even more aggressive steps to support their own economies and markets. Negative interest rates and negative yields on 10 year bonds are not what we consider normal.
Up until 2017 monetary policy had been the real market driver. But now the economy has been standing more on its own two feet, digesting the series of Fed rate hikes and gradual reduction of QE that began in December 2015. In the near-term we anticipate the market rally up to and stall just below its January closing highs before retreating to test and possible violate its February lows sometime during the Worst Six Months (May to October) which would then create the perennial midterm buying opportunity.
As we noted in yesterday’s blog post the Worst of Midterm Year 2018 Could Already Be Over. Over the last 17 midterm years, S&P 500 has declined an average 16.90% sometime during the year. 14 of the 17 midterm year corrections bottomed in the Worst Six Months. Although midterm years have a history of declines, as you can see in the chart below, this year’s positive January Indicator Trifecta may stave off the worst of those as it has in prior midterm years.
[Midterm Trifecta Chart]
Then as we hit the sweet spot of the 4-year cycle from Q4 midterm year through Q2 pre-election year we look for a yearend rally that runs up near Dow 29,000 and then a bit higher, around 30,000 by the end of 2019. Political clashing as the Democrats try to oust President Trump is likely to send the market lower in election year 2020. Then the boom should resume with the potential for another sizeable pullback or mild bear market before we hit Dow 38,820 by the year 2025.
[15 year projection chart]
Seasonal Sector Trades: Cocoa and British Pound
By: Jeffrey A. Hirsch & Christopher Mistal
March 08, 2018
Cocoa tends to begin a seasonal decline in early to mid-March through the end of May (shaded in yellow below), instituting a short position in our seasonal best-trade category. Selling on or about March 14, right before St. Patrick’s Day and holding until on or about April 17, for an average holding period of 23 trading days, has been a winner in 34 of the past 45 years. Even in the face of the 2008 great commodity bull-run, this seasonal trade worked with a potential profit of $1,730 per contract. Since 1997, this trade has only posted three losses. 
[March Short Cocoa (July) Trade History]
[Cocoa (CC) Weekly Bars (Pit Plus Electronic) and 1-Yr Seasonal Pattern]
Cocoa has two main crop seasons. The main crop from the Ivory Coast and Ghana in Africa accounts for approximately 70% of the world production and runs from January through March. As inventories are placed on the market, this has a tendency to depress prices, especially when demand starts to fall for hot chocolate drinks and chocolate candy in the spring and summer time. For most of last year, cocoa was essentially stuck in a trading range from around $1800 to $2200. 
Cocoa broke out of this range, in dramatic fashion, just last week. Cocoa’s current run began in late December near the bottom end of its range and is now near $2500. A strong factor for the brisk run up has been unfavorable weather conditions in major growing areas in Ivory Coast (Côte d'Ivoire) and Ghana. Cocoa is now heavily overbought and sentiment is heavily bullish. These two conditions can result in a pullback or correction for cocoa in the near-term.
Futures traders could consider an outright short position or bearish option strategy using the July contract to take advantage of this setup. Stock and ETF traders could try to short iPath Pure Beta Cocoa ETN (CHOC) or iPath Bloomberg Cocoa ETN (NIB) however; they are not all that liquid. CHOC traded just over three thousand shares, on average, over the past three months and NIB was around 100,000. 
Another possibility, with plenty of liquidity is Hershey Foods (HSY). When cocoa prices rise, Hershey’s price tends to decline and the opposite often holds true as well. HSY is also a familiar household name for many. HSY has sold off this year. HSY was near $115 per share in late-December, traded as low as $95.21 in February and is currently trading right around $99 per share. HSY could be considered on dips below $98.75. If purchased a stop loss of $94.50 is suggested. HSY will be tracked in the Almanac Investor Large-Cap Portfolio.
[Hershey Foods (HSY) Daily Bar Chart]
British Pound Rally
The British pound has a distinct pattern of doing the opposite of the Euro and Swiss Franc. It has a strong tendency to move up against the U.S. dollar from mid-March through the latter part of April (shaded in yellow below). In fact, in the 42-year history of this futures-based trade, it has been positive 30 times for a success rate of 71.4%.
[March Long British Pound (June) Trade History]
Entering on or about March 21, holding a long position for 22 trading days and exiting on or about April 23 has been even more successful in recent years, collecting 15 wins in 18 years since 2000. Perhaps the fact that Britain’s fiscal year begins in April helps to push the pound’s value up against the U.S. dollar, as money moves back overseas. Cross transactions between the pound versus the euro currency and the pound versus the yen may help influence the rise in the pound’s value relative to the U.S. dollar as well.
[British Pound (BP) Weekly Bars (Pit Plus Electronic) and 1-Yr Seasonal Pattern]
Outside of the Forex markets, CurrencyShares British Pound (FXB) is the top choice to execute a trade as its holdings consist entirely of British pounds. Net assets are a touch over $195 million equivalent U.S., but average daily trading volume could be better than the current 50,000 over the past 30 days. FXB could be considered on dips below $134.00. If purchased a stop loss at $130.00 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio.
[CurrencyShares British pound (FXB) Daily Bar Chart]
ETF Trades: Utility Selloff Creates Opportunity
By: Christopher Mistal
March 01, 2018
From Stock Trader’s Almanac 2018, page 92, Sector Seasonality, there are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. Adequate tech exposure exists in the Almanac Investor ETF Portfolio so we will pass on adding more at this time. However, Utilities appear to be setting up for a new trade.
Last year Utilities had a great year, right up until early December. After reaching a peak in early December, Utilities quickly slide lower as interest rates began to move higher. From their peak in late November to the low in February, the sector shed 16.6%. The sector is generally defensive in nature and does offer a relatively hefty dividend (3.55% as of February 27). This year could prove to be an interesting year for Utilities. If the 10-year Treasury yield does breakout above 3.04% and continue to climb, higher rates could pressure Utility shares. However, if interest rates are rising because economic growth is accelerating, then the sector could benefit from the increased demand that could come from higher growth.
As can be seen in the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early March bottom and usually lasts through early October although the bulk of the move is typically done sometime in May or early June (blue arrow).
[Utility Sector Index (UTY) Weekly Bars and Seasonal Trend Chart]
With nearly $7 billion in assets and ample average daily trading volume, SPDR Utilities (XLU) is a top choice to consider holding during Utilities seasonally favorable period. It has a gross expense ratio of just 0.13%. Top five holdings include: NextEra Energy, Duke Energy, Dominion Resources, Southern Co and Exelon Corp.
XLU could be bought on dips below $49.20. This is just above its projected monthly support (green-dashed line in daily bar chart below). Based upon its 15-year average return of 6.4% (excluding dividends and trading fees) during its favorable period mid-March to the beginning of October, an auto-sell price of $57.58 is set. If purchased an initial stop loss of $47.00 is suggested.
[SPDR Utilities (XLU) Daily Bar Chart]
Portfolio Updates
February came to a close yesterday just as it began, poorly. DJIA finished down 4.3%, S&P 500 was off 3.9% and NASDAQ was down 1.9%. Although the worst February decline since 2009, the major indexes did recover a sizable portion of early-month losses. At their respective lows on February 8, DJIA, S&P 500 and NASDAQ were all down nearly 9%. Technology shares experienced the strongest rebound which helped lift the overall average return of the ETF Portfolio to 4.7% from 3.9% at last update.
As of yesterday’s close, iShares NASDAQ Biotech (IBB) and iShares Russell 2000 (IWM) were the only two positions in the red. After SPDR Healthcare (XLV), the consumer sector was second best with SPDR Consumer Discretionary (XLY) up 8.4%. Technology and financial related ETFs were in a race for third best. PowerShares QQQ (QQQ) was up 7.8% and SPDR Financial (XLF) had a 6% gain.
ProShares UltraShort Silver (ZSL) never traded below its buy limit. Due to the brief duration of the seasonality underlying this trade idea, ZSL trade idea is cancelled.
Other than today’s new trade idea in Utilities, all other positions in the ETF Portfolio are currently on Hold. The sudden and dramatic return of volatility can be emotionally challenging. It is during these times it is best to stick with time-tested and proven strategies that have a demonstrated record of performing over the long-term. 
[Almanac Investor ETF Portfolio – February 28, 2018 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in IWM, QQQ, XLP and XLV.