3/25/2021: Dow 32619.48 | S&P 3909.52 | NASDAQ 12977.68 | Russell 2K 2183.12 | NYSE 15410.37 | Value Line Arith 8945.76

 

Fundamental: Supportive. Here in the U.S. vaccine rollout has accelerated and case counts have receded from their recent peaks which is supporting expanding economic activity. Weekly initial jobless claims have fallen to their lowest level since the start of the pandemic. Another massive stimulus package has been passed into law and funds are flowing. As of March 24, Atlanta Fed’s GDPNow estimate of Q1 growth stands at a solid 5.4%. Pushing back on the positives is talk of higher taxes and valuations in some areas of the market. 

 

Technical: Diverging. DJIA, S&P 500 and Russell 2000 all closed at new all-time highs in March. NASDAQ did not. All four have been retreating since mid-March. NASDAQ and Russell 2000 have slipped below their respective 50-day moving averages. DJIA and S&P 500 are still above their 50-day moving averages. Profit taking and/or rotation is likely underway. Until this abates and all four indexes exhibit strength, meaningful gains could be hard to come by.

 

Monetary: 0 – 0.25%. No recent significant changes have occurred. The Fed has to walk a fine line to appease equity and bond markets and so far, it appears to be doing so as the 10-year Treasury yield has cooled. It seems reasonable to expect the Fed to unwind its current accommodative stance similar to the way it last did, slowly and well calculated.

 

Seasonal: Bullish. April is the last month of DJIA and S&P 500 “Best Six Months.” It is DJIA’s best month since 1950, second best S&P 500 and fourth for NASDAQ. DJIA has been up 15 Aprils in a row. Remain vigilant as our Seasonal MACD Sell for DJIA and S&P 500 can occur anytime on or after April 1.

 

Psychological: Climbing. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors have rebounded to 57.4%. Correction advisors have slipped to 23.8% while Bearish advisors are at 18.8%. All of these numbers are about the middle of the range that has existed for months as there have been only a few bumps in the market’s rocket-like move higher off of last March’s lows. Current elevated bullish sentiment suggests a cautionary stance at least in the near-term.

 

The last month of our “Best Six Months” is now upon us. So it’s the perfect time to provide a refresher for longtime subscribers and primer for those that have recently joined us. We thank you all for the support. We do not simply “Sell in May and go away.” We employ a more nuanced and subtle approach to how we implement our Best & Worst Months Switching Strategies. We are not issuing the signal at this time.

 

As we prepare for our upcoming Best Six Months Seasonal MACD Sell Signal that can occur any time on or after April 1 there are several factors and aspects of the strategy we’d like to be sure you’re up to speed on. DJIA’s and S&P 500’s “Worst Six Months” are May through October. NASDAQ’s “Worst Four Months” are June through October. We begin tracking DJIA and S&P 500 for our “Best Six Months” MACD Seasonal Sell Signal on or after April 1. We begin tracking NASDAQ for its “Best Eight Months” MACD Sell Signal on or after June 1.

 

All three indices are currently in sell mode (you can see this in the DJIA in the chart below). 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 signal on or after April 1. We will not be issuing our NASDAQ Best Eight Months MACD Sell Signal until on or after June 1. Historical dates for the “Sell Signal” can be seen in the tables under the “Our Strategy” tab on the website.

 

When we issue our DJIA and S&P 500 Seasonal Sell Signal you will receive an email Alert after the close that day. At that time we will either sell associated positions outright or implement tight trailing stop losses. Additional bearish/defensive positions in: iShares 7-10 Year Treasury (IEF), iShares 20+ Year Treasury (TLT), iShares Core US Aggregate Bond (AGG), Vanguard Total Bond Market (BND), ProShares Short Dow 30 (DOG), ProShares Short S&P 500 (SH) and/or other protective strategies may also be considered. 

 

All current stock and ETF holdings will be reevaluated at that time. Weak or underperforming positions can be closed out, stop losses can be raised, new buying can be limited and we will evaluate the timing of adding positions in sectors that perform well in the Worst Six Months and presenting you with a new basket of defensive stocks.

 

 

Recent weakness following the Ides of March arrived on cue with historical seasonal trends as you can see in the chart below of the “S&P 500 One-Year Seasonal Pattern Since 1949.” Weakness this week is rather typical of the week after Triple Witching as we discussed last month and as is detailed in the Stock Trader’s Almanac 2021. Today’s late-day rebound is encouraging, but the last several days of March often succumb to end-of-Q1 selling pressures. Late-March weakness has frequently been recovered early in April.

 

Once those end-of-Q1 pressures are alleviated we expect April to deliver its usual upside performance. In fact, this recent weakness sets up well for an April rally. An April rally would in turn set up a solid Best Six Months MACD Seasonal Sell Signal. With only 7 S&P 500 losses in the last 31 years, April has been a consistent performer. April is the first month of the second quarter and welcomes in the new earnings season, which promises to help buoy stock prices as year-over-year comparison should be improved over last year’s Covid-impacted numbers.

 

 

Seasonal patterns remain on track as you can see in the chart above, though they are more pronounced from the powerful post-Covid bear market recovery rally and recent increased volatility. Levels may be more extreme, but the seasonal trends remain intact this year as they have been since September 2020 as we last illustrated in the December Outlook. 2021 as represented by the orange line in the chart above has exhibited rather typical post-election year seasonal patterns with the late-February weakness, early March strength and the recent week after Triple Witching selling.

 

In addition to April bullish seasonality current fundamentals are supportive. Vaccines are rolling out as hoped and positive cases continue to retreat here in the States. The jobs market continues to improve and funds are flowing from the latest giant stimulus legislation. Q1 GDP and earnings are expected to be robust, but valuations are high and the threat of higher taxes could take the air out of the market.

 

The Fed has managed to appease the market for the time being, but if inflation fears ramp up quickly, pushing long bond yield higher, the market is prone to a correction or consolidation. Lingering pandemic/vaccine and geopolitical issues around the world, along with teetering market internals, a stretched technical picture, and the end of the Best Six Months November-April on the horizon, it is not inconceivable to expect the market to consolidate over the Worst Six Months May-October (AKA “Sell in May”).

 

The market is also prone to some mean reversion after the 1-year gain of 74.8% on the S&P 500 from the March 23, 2020 low. We ran the numbers on the 1-year rolling returns for the S&P 500 back to 1949 on the blog earlier this week. While these giant spikes do come at the early stages of extended bull runs, gains of this magnitude have not been sustained and the market has tended to revert to the mean. The arithmetic mean or average rolling 1-year return since 1949 is 9.15%, which isn’t bad either.

 

Last time we had a 1-year rolling return of this magnitude in 2010 when the S&P was up 68.6% on March 9, 2010 from the March 9, 2009 secular bear market low we had a 10.3% correction to the July 2, 2010 low and a 15.75% rolling 1-year return from March 9, 2010 to March 9, 2011. And let’s not forget the May 6, 2010 flash crash. While we are by no means “bearish” perhaps a little caution and portfolio defense in the near future is not a crazy idea.

 

The prospects for the resumption of the rally are encouraging, but heeding our “Sell Signal” when it arrives and following our defensive portfolio maneuvers can help reduce risk in the event April fails to live up to its reputation. Avoiding losses is even more important than making gains.

 

 

After struggling to maintain pace with technology stocks throughout much of last year, DJIA is the second-best performing index of this year. Of the five key indexes that we routinely track, only the Russell 2000 is having a better year. On March 17, DJIA closed above 33,000 for the first time ever (1). This puts DJIA comfortably ahead of our schedule for DJIA to reach 38,820 by 2025.

 

But recent, seasonal week-after-quarterly-options-expiration weakness has transpired pulling the market lower as the end of the first quarter approaches. Due to recent weakness, both the faster and slower moving MACD indicators applied to DJIA have turned negative (2). Historically, late-March weakness has set up April (DJIA’s top month since 1950) nicely. DJIA has been positive in 15 straight Aprils. DJIA’s last down April was in 2005.

 

 

DJIA’s leadership this year can be confirmed by its eight weekly gains over the first twelve weeks compared to seven by S&P 500 (4) and six from NASDAQ (5). DJIA’s current streak of eight advancing Mondays (or first trading day of the week) (3) is also notable. DJIA’s last Monday winning streak lasted thirteen weeks started in mid-May of last year and lasted into August. During that run DJIA gained nearly 4075 points (16.7%).

 

Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) was positive in two of the last four weeks. For the week ending March 12, Weekly Advancers reached their second highest level of 2021 as NASDAQ joined DJIA and S&P 500 with a weekly gain. However cumulative market Advance/Decline lines have been trending lower since mid-March (technology since mid-February).

 

Weekly New Highs (7) had expanded to their highest level since January 2004 two weeks ago. That peak at 951 was one better than the peak reached in April 2010 when the market corrected over 10% from its April high to an early July low. Prior to the surge in Weekly New Highs, Weekly New Lows jumped to over 200, the most in nearly a year. The most clearly bullish scenario is expanding New Highs and shrinking New Lows. That trend had been in place and appears to be in danger now. The market could experience some rotation, a sideways period or possible even a pullback or correction before it resumes its climb higher.

 

The Treasury yield curve has continued to steepen over the past four weeks as 90-day Treasury yields held steady just above 0% and the 30-Year Treasury yield climbed to its highest level since July 2019 (8). Historically speaking, rates are still low, but the surge in long-dated yields could encourage the Fed to take some action. A repeat of Operation Twist could appease the market.

 

 

April marks the end of the “Best Six Months” for DJIA and the S&P 500. The window for our seasonal MACD sell signal opens on April 1st. From our Seasonal MACD Buy Signal on November 5, 2020 through yesterday’s close, DJIA was up 16.3% and S&P 500 had advanced 13.2%. These above average gains are encouraging and suggests seasonality is back on track after getting derailed by Covid-19 last year.   

 

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 fifteen years in a row with an average gain of 2.9% to reclaim its position as the best DJIA month since 1950. April is second best for S&P and fourth best for NASDAQ (since 1971).

 

The first trading day of April and the second quarter, has enjoyed notable strength over the past 26 years, advancing 18 times with an average gain of 0.27% in all 26 years for DJIA. However, five of the eight declines have occurred in the last eight years. The largest decline was last year when DJIA declined 4.44% (973.65 points). Other declines were in 2001, 2002 and 2005. S&P 500’s record on April’s first trading day matches DJIA, 18 advances in 26 years. NASDAQ recent performance is slightly weaker than DJIA and S&P 500, but the day is still bullish for technology stocks in general with more advances than declines during the same period.

 

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 (moved to May 17 for 2021) 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. This year, guidance is likely to be the greatest focus as the economy continues to reopen. Traders and investors will likely be looking for signs that “work-from-home” stocks can continue to grow and signs that leisure, hospitality, and travel are rebounding.

 

Typical post-election year blues have done little to damper April’s performance since 1953. April is DJIA’s second best month in post-election years, gaining 1.9% on average. April is fourth best for S&P 500 and NASDAQ. Although post-election year 2005 did suffer a 3% DJIA decline.

 

 

Monthly options expiration week frequently impacts the market positively in April and DJIA has the best track record since 1991, with an average gain of 1.41% for the week with just five declines in 30 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 at the beginning of April this year. Historically the longer-term track record of Good Friday (page 98 of STA 2021) is bullish with notable average gains by DJIA, S&P 500, NASDAQ and Russell 2000 on the trading day before. NASDAQ has advanced 19 of the last 20 days before Good Friday. Monday, the day after Easter has exactly the opposite record since 1980 and is in the running for the worst day after of any holiday. Since 2004 the day after has been improving with S&P 500 up 11 of the last 17.

 

 

This March started off with solid across the board gains, but that reversal from late-February weakness was fleeting as the market then continued to decline for the next three trading days. As of today, DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 are all positive for March. The small-cap Russell 2000 index is best, up 6.25%. Second best is DJIA, up 5.02%. NASDAQ continues to lag with a gain of just 1.56% so far. In the following chart March 2021 (dotted lines plotted on right vertical axis) is compared to the typical March seasonal pattern over the recent 21-year period, 2000-2020 (solid lines using left vertical axis).

 

 

This year’s zigs and zags have differed from the recent 21-year pattern modestly as strength was merely a single day this year compared to past gains typically lasting until around the third trading day. Some similarities are present. Weakness did follow strength and it appears mid-month strength arrived early this year. Historically the market has tended to fizzle after mid-month as monthly options expiration and end-of-Q1 pressures weigh on trading. It would not be surprising to see some weakness after mid-month this year especially given the magnitude of current gains compared to full-month historical average performance. New highs by DJIA, S&P 500 and Russell 2000 are encouraging, but NASDAQ is lagging. Without the support of tech, and new NASDAQ highs, the current rally could falter.

 

 

Over the last four weeks since last update through yesterday’s close, S&P 500 dipped 0.3% lower while Russell 2000 inched 0.1% higher. During the same time period the entire portfolio climbed a modest 0.7% higher excluding dividends and any fees. Overall portfolio performance was held in check by a still sizable cash position and weakness in some defensive positions (shaded in grey). Our Small-cap stocks were responsible for all of the overall portfolio’s advance, gaining 2.3%. Mid-cap stocks dipped 2% lower on average while our Large-cap portfolio also lagged, declining 1.6%.

 

Large-cap weakness was primarily the result of declines by defensive utility positions. The utility sector has bounced but not before American Electric (AEP) and CMS Energy (CMS) were stopped out. Both AEP and CMS positions were added to just after last month’s update. As a result their respective Presented Prices have been adjusted for the new purchases prior to being stopped out. All other utility sector positions that were suggested buys last month did trade below their respective buy limits and existing position prices have been adjusted. Large-cap utility positions AEE, DTE, DUK, EXC and SO are all on Hold now. It does appear as though typical seasonal strength in utilities is beginning, but big new spending plans by the new administration could pressure treasury yields that could reignite selling in the sector.

 

Autodesk Inc (ADSK) was also stopped out of the Large-cap portfolio earlier this month. Until today ADSK was trading below the price it was stopped out. Broad tech strength today boosted shares, but it is still below its recent highs over $300 per share reached in mid-February. For now we will move on from ADSK.

 

Poor performance from the Mid-cap portfolio can be mainly traced to two stocks. Aerovironment (AVAV) and Jinko Solar (JKS). AVAV was briefly over $140 in late January, pulled back in early February and was back above $140 just before mid-February, but then rapidly retreated again to trade under $100 on March 5. As a result of its declines, AVAV was closed out of the portfolio on February 25 when it closed below its stop loss for a gain of 37.2% since last November. Other alternative energy stocks displayed a similar pattern over the same period. JKS was also closed out of the portfolio as it closed below its stop loss in February. Prior to being stopped out, it had traded below its buy limit and its position was expanded.

 

On a positive note, JetBlue Airways (JBLU) did help recover some of the Mid-cap portfolio’s declines. In accordance with standard trading guidelines, half the original position in JBLU was sold when its price doubled on February 19. As of yesterday’s close, JBLU was up 132.7%. Valmont Industries (VMI) also had a solid four weeks, now up over 56% since last November.

 

Small-caps have been on a tear since last November and even though the Russell 2000 was essentially flat, our small-caps continued their advance. WSFS Financial Corp (WSPS) became the third position to double in the portfolio and after selling half is still up 102.3%. Other financial positions also performed well with South State Corp (SSB) and Customers Bankcorp (CUBI) up 48.6% and 89.6% respectively since last November.

 

Please see table below for specific stop losses and current advice for each position in the portfolio. All other positions not already mentioned are on Hold.

 

 

Fed Chairman Powell did little to sooth the market’s concerns about longer-term interest rates today. Arguably, Chairman Powell only further inflamed the market by sticking to the Fed’s recent script of acknowledging current conditions and reaffirming its position to remain accommodative until employment and inflation are at desired levels. The Fed’s tolerance for transitory inflation above 2% seems to also be an issue for the market. Major indexes only weakened further as the 10-year Treasury yield climbed back above 1.5% today. Even though the market did not get a hint of future Fed policy adjustments, major indexes did recover from their respective lows today.

 

Apparently, what the market is looking for is an indication that the Fed is paying attention to and is willing to manage the longer-term end of the yield curve. This would entail focused purchasing of longer-dated Treasuries like it most recently did in 2011. Then it was called Operation Twist. Absent that hint today, we will likely have to wait until the Fed meets later this month on the 16th and 17th. In the meantime, the market is likely to continue to be volatile while looking for technical support.

 

 

 

NASDAQ’s chart is currently the weakest of the three. Support at the late-January lows was broken today. Absent a quick rebound the next major support level for NASDAQ appears to be just above 12000, roughly its highs in September and October of last year. S&P 500 and its sizable tech weighting is still above its late January low, but it closed below its 50-day moving average today. S&P 500 around 3700 is the key current level to watch. DJIA is just below its 50-day moving average, but still nearly 1000 points above its late-January low just below 30000.

 

 

In post-election years, like this year, February and March have historically been weaker than average. February was already the weak link in the “Best Months.” Although typical February weakness did manifest early for mega-cap tech, the broader market did not succumb until later in the month. That weakness has spilled into and continued so far in March with fresh new interest rate and inflation jitters today. Outside of mega-cap tech, most positions had held up well in the Sector Rotation portfolio prior to today.

 

At yesterday’s close, the overall Sector Rotation portfolio average return was 11.5% versus 11.2% for last update. During February, two positions traded at and above their respective Auto-Sell prices: SPDR Energy (XLE) and First Trust Natural Gas (FCG). XLE was sold on February 16 for a 16.3% gain. FCG was sold about a week later on the 24th for a gain of 25.2%. XLE and FCG have continued to move higher and were the only two positions to spend the majority of today’s trading session in positive territory. In recent years, seasonal strength in crude oil and natural gas has been ending earlier. We will take these respectable gains. There could still be some upside left, but we likely caught the bulk of the seasonal move.

 

Last month’s new trade idea, SPDR Utilities (XLU) was added to the portfolio on February 17. XLU continued to trade lower afterwards, but appears to be finding some support today, trading on both sides of unchanged. The 10-year Treasury bond yield certainly has increased, but in historical context it remains low and is still less than half the yield of XLU. Shares of XLU could still be considered at current levels up to its buy limit.

 

With tech taking a breather, previously noted energy positions and copper positions also rallied briskly in February. Global X Copper Miners (COPX) was up 31.1% at yesterday’s close while Untied States Copper (CPER) was up 14.2%. Both are off more than the major indexes today, but seasonal strength does typically last until around mid-April. COPX and CPER are on Hold. Please note associated stop losses have been adjusted in the table below.  

 

iShares DJ Transports (IYT) and SPDR Industrials (XLI) also had solid performance in February. Gains can most likely be attributed to vaccine rollout and the overall positive trends in the economy. IYT and XLI did take a hit today, but the prevailing trend is toward reopening and getting back to pre-Covid activities. As long as that trend remains in place, further gains are likely.

 

All other positions are currently on Hold. Please see table for current stop losses.

 

 

 

As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average gain of 14.7% since our Seasonal Buy Signal on November 5. iShares Russell 2000 (IWM), is still the top performing position in the basket, up 33.3%. Invescos QQQ (QQQ) had slipped to be the laggard, up a modest 5.7%. SPDR DJIA (DIA) and SPDR S&P 500 (SPY) were mid-pack up 10.5% and 9.1% respectively. All positions in the portfolio are on Hold.

 

As a reminder for new and seasoned members, positions in the Tactical Switching Strategy portfolio are intended to be held until we issue corresponding Seasonal MACD Sell Signals after April 1 for DJIA and S&P 500 and after June 1 for NASDAQ and Russell 2000. Due to this no stop loss is suggested on these positions.