3/28/2019: Dow 25717.46 | S&P 2815.44 | NASDAQ 7669.17 | Russell 2K 1535.10 | NYSE 12632.62 | Value Line Arith 6092.93

 

Psychological: Uneasy. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 52.0%. Correction advisors are at 27.4% and Bearish advisors are 20.6%. Bullish advisors have exceeded 50% of the total for six weeks straight. There have been much, much longer streaks most notably during the “Best Months.” Bullish sentiment is elevated which suggests the majority of those that want to own stocks, likely do. Absent new demand markets could slip into a range while traders and investors await the next catalyst to push them higher.

 

Fundamental: Reasonably firm. Atlanta Fed GDPNow estimate is trending higher and currently stands at 1.5% with a new update due on Friday. This is a well below the current administrations goal of 3% or better, but it is still positive. Unemployment is just 3.8%. Inflation is under control. Tax cuts are still in effect and regulation has been easing. Trade issues with China remain an issue, but negotiations are in progress. There appears to be a fair foundation in place for future growth once trade is addressed and when Brexit finishes.

 

Technical: Mixed. Up until the end of February DJIA, S&P 500, NASDAQ and Russell 2000 were all charging higher. Since then DJIA and Russell 2000 have been trending lower while S&P 500 and NASDAQ climbed to new recovery highs in mid-March. NASDAQ and S&P 500 took a crack at breaking through resistance but failed to move any higher as DJIA and Russell 2000 were no shows. Until these divergences are rectified, each index is likely to be stuck dealing with its own issues and resistance levels.

 

Monetary: 2.25-2.50%. Surprise, the Fed just went full-blown dovish. Unfortunately the market was not really expecting such an abrupt change in course. The result was further inversion of the Treasury yield curve as bond traders reacted to the announcement and subsequent press conference. The tightening cycle is likely over. Another hike, even much later this year, risks fully inverting the Treasury yield curve. A fully inverted curve has proceeded every recession since 1960 with few exceptions.

 

Seasonal: Bullish. April is the best DJIA month since 1950, third best for S&P and fourth best for NASDAQ (since 1971). April is also the last month of the “Best Six Months.” Starting on April 1 we will begin watching for the seasonal MACD sell signal and will issue an email Alert.

 

April is the last month of DJIA’s and S&P 500’s “Best Six Months” of the year. Our Tactical Seasonal Switching Strategy MACD Sell Signal can trigger any time after April 1. Our October 31 MACD Buy signal avoided some of the decline last fall, but by no means all of it. 

 

Many of our stock and ETF positions were stopped out as the market tested and then broke support in November and December. Remaining defensive positions in the portfolio minimized the damage. Our Tactical Seasonal Switching Strategy ETF positions were held without a stop loss, avoiding getting whipsawed out of those positions. Then in early January we added to DIA, IWM, QQQ and SPY positions. As of today’s close they are up 5.5% on average with QQQ leading, up 7.8%, and IWM lagging, up 3.6%.

 

Our Free Lunch Stocks selected from the list of stocks making new 52-week lows on December 21 were the heroes this past quarter, netting a gain of 24.9% on average from our entry prices on December 24 until the last few were stopped out in late-February and early-March. A nasty selloff like we had this December was a quintessential setup for this strategy featured on page 112 of the 2019 Almanac.

 

As you can see in the accompanying chart of the “Pre-Election Year Seasonal Patterns” the major U.S. stock market indices have historically rallied quite sharply through April. Then DJIA in black and S&P 500 in green historically begin to move sideways at the beginning of the “Worst Six Months” (Sell in May) in May and June while NASDAQ in blue continues to run higher through June. This is a clear illustration of NASDAQ’s “Best 8 Months.”

 

 

It is during the “Worst 4 Months” July-October where the market is most prone to bumps, pullbacks and corrections with August and October standing out on the chart in Pre-Election Years. However, with our January Indicator Trifecta coming in 3-for-3 positive our 2019 Annual Forecast Best Case scenario looks to be playing out:

 

“Best Case – Everything resolves quickly. Fed becomes accommodative. Trade deals are worked out expeditiously. Trump tacks towards the center and works with congress and does not get “Muellered.” Typical pre-election year gains of 10-15% for Dow and S&P 500 and 20-30% for NASDAQ.”

 

We would not be sold bold as to say everything has resolved, but the Fed has surely become accommodative. President Trump has tacked to the center a bit and avoided being “Muellered.” It would help if Congress and the President would work more together, but you can’t expect everything. There is no trade deal with China yet, but it sure seems imminent. Then there is Brexit risk. The latest watercooler polls have even money on which comes first, a China trade deal or a resolution to Brexit. In-house handicapping is laying odds on China at the moment.

 

Technically speaking we are still dancing around the formidable resistance we discussed last month at the 2815 level on the S&P 500. It would not be surprising if we left 2815 behind for a while and made a run at new highs. We could easily test 2815 as support during a correction later this year. New highs are likely again in Q4. We are more concerned about a bear market next year when bare-knuckle election-year politics is likely to get nastier and global economic woes could take their toll.

 

 

Finally, let’s address all the hysteria around the latest yield curve inversion. Yes, an inverted yield curve is not a great sign, but our research finds that it really isn’t until the Effective Fed Funds Rate is higher than the entire yield curve, including the long end, that you get an indication that a recession is imminent. Note the red arrows in the accompanying chart where the complete yield curve inversions, with Fed Funds higher than the entire curve, precede the grey shaded recession areas. 

 

 

Even still the two complete inversions back in December 1985 and December 1986 were years before the Gulf War 1 fueled the July 1990 to March 1991 recession. Point being these short-middle end yield curve inversion are not especially indicative of an impending recession anytime soon.

 

So following the typically soft end of Q1, expect an April-June rally to test the highs, followed by a potential August-October hit, with a strong finish for 2019 before we have to contend with another contentious battle for control in Washington in 2020.

 

 

DJIA’s rally from its December low stalled in early March however the rally was enough to lift DJIA’s 50-day moving average back above its 200-day moving average to form a bullish “golden cross” (1). Historically golden crosses have been largely indicative of further gains. On average DJIA has been up 17.7% over the following nine months after some short-term consolidation.

 

DJIA’s fading momentum in late February into March was confirmed by both the faster and slower moving MACD indicators (2) turning negative on February 28. Both MACD indicators were still negative as of the market’s close on March 27. Beginning on April 1 we will be monitoring the slower moving “MACD Sell 12-26-9” indicator for a new sell crossover for DJIA and S&P 500. Until that occurs, the “Best Six Months” for DJIA and S&P 500 continue.

 

 

DJIA’s nine consecutive week winning streak came to an end in the first week in March (3). S&P 500 and NASDAQ faired better. NASDAQ (5) extended its weekly winning streak to ten and S&P 500 (4) also added one additional gain. Here again our research into past weekly winning streaks found that when past streaks came to an end there was usually a period of consolidation followed by a resumption of the rally. The see-saw weekly performance in March appears to be at least some portion of the consolidation phase.

 

Market breath measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has followed the same pattern as performance in March. In weeks with gains Advancers have outnumbered Decliners and in weeks with losses the opposite has held. For now this also looks like typical action during a market consolidation phase.

 

After declining briefly in the first half of March, Weekly New Highs have expanded to their largest amount since early in the fourth quarter of last year (7). Weekly New Lows have also ticked modestly higher but remain subdued with their total per week remaining below 100. New Weekly Lows making a move lower, first, could be an early sign that the rally is restarting. 

 

As a result of the Fed’s surprisingly dovish comments at its last meeting, 30-year Treasuries have slipped below 3% to 2.97%. At 2.97% (8) this is still higher than the 10-year Treasury which means the Treasury yield curve is not fully inverted. Lower rates could also breathe some life back into the housing sector.

 

 

 

From our Seasonal MACD Buy Signal on October 31, 2018 through yesterday’s close, DJIA gained 2.51%, S&P 500 climbed 4.15% while NASDAQ was up 5.79%. Today’s solid gains will boost these numbers further, but they are still below average for the strategy. Our signal did miss part of last year’s fourth quarter swoon, but not all of it.

 

The long-term track record of our Seasonal Switching Strategy, which is based upon the “Best Six Months” in conjunction with our MACD Technical Buy and Sell Signal Triggers, 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 0.8% during the “Worst Six Months,” May through October, and gained an average 9.1% 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). In pre-election years, the best performing year of the four-year cycle (page 130, STA19), there have been selloffs. The “Worst Months” in 1987 hosted the largest decline. More recently, during 2011 and 2015, the “Worst Months” were also negative. Each of the last 17 Pre-Election Year “Worst Months” can be seen in the following table. DJIA and S&P 500 Worst Six Months are May through the end of October. NASDAQ’s “Worst Four Months” are June through October.

 

 

Considering the paltry historical average gains, even in pre-election years, during the “Worst Months” a cautious approach is worth consideration. Tariffs and trade are still an ongoing issue. Slowing growth due to the fading effects of tax cuts and tougher year-over-year earnings comparisons are also a concern. Alone each has the potential to sour investor and trader appetites for stocks.

 

 

Because of the elevated level of risk that has been historically observed during the “Worst Six Months” of the year and its historically tepid returns, reducing long exposure and developing a defensive strategy is the approach we take in the Almanac Investor Stock and ETF Portfolios. 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 adding new long exposure to positions from sectors that have a demonstrated record of outperforming during the period.

 

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, no short positions in individual stocks or sectors, or positions in bear market funds. But, beginning April 1, 2019 we will begin looking for our seasonal MACD sell signal. When it triggers we will transition to a less aggressive stance in the portfolios.

 

When both the DJIA and S&P 500 MACD Sell indicators trigger a new sell signal after April 1, 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 traders and investors employing the “Best 6 + 4-Year Cycle” as detailed on page 62 of the Stock Trader’s Almanac 2019, this year’s upcoming Seasonal MACD Sell signal could be ignored as the multi-year hold period is underway. It may still be prudent to use the signal as a reminder to review all holdings and objectives.

 

The first trading day of April and the second quarter, has enjoyed notable strength over the past 24 years, advancing 17 times with an average gain of 0.37% in all 24 years for S&P 500. However, four of the seven declines have occurred in the last six years. Other declines were in 2001, 2002 and 2005. DJIA’s record on April’s first trading day matches the S&P 500, 17 advances in 24 years. NASDAQ recent performance is slightly weaker than DJIA and S&P 500, but the day is still bullish for technology stocks in general. 

 

April marks the end of our “Best Six Months” for DJIA and the S&P 500. On April 1st, we will begin looking for our seasonal MACD sell signal and corresponding early signs of seasonal weakness. Even in historically strong pre-election years the “Worst Six Months” have been lackluster on average.  

 

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 thirteen years in a row with an average gain of 2.3% 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).

 

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 with numerous bullish days present on either side of the day. Traders and investors are clearly focused on first quarter earnings and guidance 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 pre-election year strength does bolster April’s performance since 1950. April is DJIA’s best month in pre-election years (+4.0%), second best for S&P 500 (+3.5%) and third best for NASDAQ (+3.5%). Small caps measured by the Russell 2000 also perform well with gains (+2.8%) in seven of ten pre-election year April’s since 1979.

 

 

Options expiration week frequently impacts the market positively in April and DJIA has the best track record since 1990, with an average gain of 1.4% for the week with just five declines in 25 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, but still has a bullish leaning record.

 

Good Friday (Passover and Easter) lands in April’s option expiration week this year. Historically the longer-term track record of Good Friday (page 88 of STA 2019) is bullish with notable average gains by DJIA, S&P 500, NASDAQ and Russell 2000 on the trading day before. NASDAQ has advanced 17 of the last 18 days before Good Friday. Monday, the day after Easter has exactly the opposite record and is in the running for the worst day after of any holiday. Since 2004 the day after has improved.

 

 

Here we go again. After a brief bout of weakness in early March, S&P 500 and NASDAQ have rebounded to strong resistance levels. Were it not for Boeing (BA) dragging down DJIA it would also likely be at resistance. This will mark the second time in March that resistance has stalled the rally. We have had our eye on S&P 500 2800/2815 since mid-January. Aside from resistance at previous support levels, S&P 500 and NASDAQ are also contending with monthly resistance right around the same levels (red-dashed lines in charts below). Perhaps typical mid-month March strength can propel indexes higher and through resistance soon. If not, then another mild retreat in the second half of March is more likely.

 

 

There is some encouraging technical evidence building that suggests a breakout in the near-term is probable. Advance/decline lines for NYSE, NASDAQ, Russell 2000 and S&P 500 are all positive and pointed higher after dipping in early March. NYSE and S&P 500 advance/decline lines have recovered and exceeded their old highs from last year. NASDAQ and Russell 2000 have not yet done so. If all four advance/decline lines maintain their trends higher then resistance could soon to be overcome. Such a breakout would likely result in further gains and the eventual formation of bullish golden crosses (50-day moving average crosses above the 200-day moving average) on the charts. Then the next major level of resistance will be the old all-time highs.

 

 

 

Over the last four weeks since last update, S&P 500 climbed 2.1% through yesterday’s close while Russell 2000 added 0.8% over the same time frame. Overall, the entire Stock Portfolio rose 0.5% excluding any dividends or trading fees. Large-Caps performed best, up 5.4% as defensive positions continued to perform and Southern Copper (SCCO) surged over 20%. Mid-caps also had a respectable four weeks, up 2.3% on average. Small-caps however, were a drag slipping 1.3% lower overall. All the Small-cap weakness was due to the last five remaining Free Lunch stocks that were all closed out.

 

Free Lunch 2018 has officially come to an end. Some potential gains were missed, but overall the strategy employed this year was effective in capturing a significant portion to the basket’s move higher. The final two positions from Free Lunch were closed out on March 1. The entire basket averaged 24.9% from December 24, 2018 through March 1, 2019. Of the 23 stocks selected, just three failed to provide a positive return while the best gain realized was 68.5% from NN, Inc. (NNBR). NYSE listed stocks performed best, averaging 27.0%. NASDAQ positions averaged 24.0%. Both compare favorably to the 15.1% NYSE advance and 19.9% NASDAQ move over the same time period. The bulk of the gains from the Free Lunch stocks were made prior to mid-February, which is consistent with historical trends. This is an encouraging sign as this perennial bargain-stock outperformance from late-December to mid-February and other recurring market patterns and trends have been in line with historical tendencies.. 

 

Defensive positions from last year continue to perform. Major indexes are currently struggling with strong resistance below previous highs, but the Utilities Index has broken out to new highs. Much of the strength in the sector is likely due to interest rates pulling back from recent highs and concerns over slowing growth (domestic and international). Some may view the strength in Utilities as a cautionary warning, but it could also be interpreted as a healthy amount of skepticism exists in the overall market. From a contrarian preceptive this is desirable and suggests the market could break through resistance and continue higher.

 

First quarter earnings season is quickly approaching and so is the window for issuing our Seasonal MACD Sell Signal for DJIA and S&P 500 (signal can occur as early as the close on April 1, 2019). Current expectations are for a retreat in earnings in the first quarter due to recent tepid economic data and some harsh winter weather. That bar seems a bit low considering the streak of earnings beats the market has produced. Plus last year earnings were up double-digits while the market declined. There appears to be room for further gains, but we will also stay on the alert for any additional signs of weakness that could weigh on the market and signal an early end to the Best Six Months.

 

All positions in the portfolio are on Hold. Please see portfolio table below for Current Advice and Stop Losses.

 

 

Featured in the Stock Trader’s Almanac 2019, on 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 Sector Rotation ETF Portfolio, so we will pass on adding more at this time. However, Utilities are at an interesting level worthy of consideration.

 

Last year Utilities had a solid year, right up until mid- December. At that point broad market weakness finally dragged the sector lower. However unlike other sectors and indexes that violated key support levels, Utilities did not take out key, long-term support. The sector has since recovered and broken out to new highs. Declining interest rates and slowing growth concerns are likely fueling the strength the sector is currently enjoying. And should growth cool as forecast, the Fed may need to reconsider additional tightening which could be a positive for Utilities and even the rest of the market.

 

In the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early or mid-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 $9 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% and a relatively attractive yield of 3.08%. Top five holdings include: NextEra Energy, Duke Energy, Dominion Resources, Southern Co and Exelon Corp.

 

XLU could be bought on dips below $56.50. This is just above its projected monthly pivot (green-dashed line in daily bar chart below). Based upon its 15-year average return of 8.3% (excluding dividends and trading fees) during its favorable period mid-March to the beginning of October, set an auto-sell price at $67.31. If purchased an initial stop loss of $52.26 is suggested.

 

 

 

Market momentum from January did spill into and continue throughout the month of February. The pace of gains did slow, however February was well above historical average performance this year. DJIA gained 3.7% in February. S&P 500 was up 3.0% and NASDAQ advanced 3.4%. This broad strength did translate into gains for the Almanac Investor Sector Rotation and Tactical Seasonal Switching ETF Portfolios. The average open position gain in the Sector Rotation Portfolio is now 7.0% while the Tactical Switching Portfolio is up 4.5% on average.

 

Due to broad strength open trade ideas presented in early January remain open as XLF, XLP, XLY, XLV and XLI did not trade below their respective buy limit prices in February. Buy limits for these positions have been adjusted for their recent gains as well as the current market environment. XLF, XLP, XLY, XLV and XLI can still be considered on dips below their updated buy limits.

 

Last month’s trade ideas aimed at taking advantage of seasonal weakness in precious metals, gold and silver, have been partially successful. DB Gold Double Short (DZZ) has been added to the Sector Rotation Portfolio, but ProShares UltraShort Silver (ZSL) has not been added. DZZ was up 8.6% at yesterday’s close and is on Hold. ZSL appears to have run away and the trade is cancelled. A current chart of gold appears to have the best downside potential. Silver is currently closer to its recent lows and appears to have less opportunity.

 

Other than today’s new trade idea in Utilities, all other positions in the Sector Rotation ETF Portfolio are currently on Hold.

 

 

 

All positions in the Tactical Seasonal Switching Strategy Portfolio are on Hold. Our seasonal MACD Sell signal for DJIA and S&P 500 can come as early as April 1, less than four weeks from now.