April 2018 Trading & Investment Strategy By: | March 29, 2018 | Email | Print

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 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.

 

 

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.

 

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. 

 

 

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. 

 

 

 

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.

 

 

 

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. 

 

 

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. 

 

 

 

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.

 

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.

 

 

 

 

 

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.

 

 

 

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%.

 

 

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.

 

 

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.

 

 

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).

 

 

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.

 

 

 

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.