June 2018 Trading & Investment Strategy By: | May 31, 2018 | Email | Print

5/30/2018: Dow 24667.78 | S&P 2724.01 | NASDAQ 7462.45 | Russell 2K 1647.99 | NYSE 12625.87 | Value Line Arith 6289.99

 

Psychological: Resolute. Market volatility this year has reminded everyone that the market does not always go straight up in a nice predictable path. This has not deterred many from remaining bullish. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 50.0%. Correction advisors are down to 30.8% and Bearish advisors are just 19.2%. The recent increase in bullish sentiment has coincided with broad market strength and will likely fade just as quickly should the market falter for more than just a few days.

 

Fundamental: Firm. Most incoming data suggests the economy is on firm ground. The labor market appears tight with unemployment at 3.9%, but labor force participation is still well below its all-time high. Growth forecasts for the current quarter remain strong with Atlanta Fed GDPNow model forecasting 4.7%. Corporate profits are firm as well. Risks include protectionist policy (new tariffs), renewed European Union concerns (Italy) and midterm elections. It is always a good idea to be aware of what could happen, just don’t lose sight of what is happening. 

 

Technical: Range bound. Until DJIA, S&P 500, NASDAQ and Russell 2000 all make higher highs or lower lows this best describes their recent trading. Recent NASDAQ and Russell 2000 strength is encouraging, but these two alone cannot pull the broader market higher. Mid-May’s breakout above April’s high by DJIA and S&P 500 is increasingly looking like a fake out. Key support remains right around each index’s 200-day moving average.

 

Monetary: 1.50-1.75%. May’s Fed meeting came and went with little drama. Interest rates were left unchanged, inflation was seen running near target and labor market conditions remain firm. Currently, there is an 83.8% chance of a rate hike at the June meeting based upon the CME Group’s FedWatch Tool. Rates are still quite accommodative to continued growth within historical context.

 

Seasonal: Bearish. June is the last month of NASDAQ’s “Best Eight Months.” NASDAQ’s Seasonal MACD Sell signal can occur as soon as June 1. In midterm years, June really struggles. June is #12 DJIA, S&P 500 and Russell 1000 month with average ranging from 1.4% to 1.9%. June is #10 for NASDAQ and #9 for Russell 2000.

 

To all the market seasonality naysayers and “Sell in May” or Best Six Months/Worst Six Months critics, we say thank you for your skepticism. Despite your disbelief (and perhaps because of it) the recurring seasonal market patterns highlighted in the Stock Trader’s Almanac continue to persist. Of course they are not perfect and do not work 100% of the time, and some have fallen by the wayside and some have shifted – we’ve tracked and updated those. 

 

However, supported by a host of academic studies and papers (just Google them yourself) and now years of evidence-based results, our Tactical Seasonal Best & Worst Six Months Switching Strategy, a slightly more sophisticated version of “Sell in May and Go Away,” continues to outperform over the long and short term, 2017 notwithstanding. Yes the Worst Six Months (or “Sell in May”) was quite positive in 2017 and better than the Best Six. 

 

This has happened before as it did in 2009 (Post Financial Crisis) and 2003 (Iraq war) and it will again. But that has not changed or tainted the seasonality, strategy or results. Just think back to how well the market and the Switching Strategy did following those years. And remember we are not talking about the plain vanilla “Sell in May” on May first (see page 52 of the Stock Trader’s Almanac 2018 for the results of our Best Six Months Switching Strategy using MACD Timing. Here are the results since 2009 to give you an idea.

 

 

 

So far since our Best Six Months Seasonal MACD Sell Signal for the Dow and S&P 500 the Dow is up about 2.1% and the S&P 500 is up about 2.6%. Definitely a solid move, but this has enabled us to take some profits and sell losers at favorable prices. And our defensive, risk-off bond positions in iShares 20+ Year Treasury (TLT) and iShares Core US Aggregate Bond (AGG) are up and on the rise as stocks have begun to weaken again as seasonality and midterm machinations begin to kick in.

 

As most presidents do, President Trump has ramped up his efforts to push through his more difficult, less savory policy initiatives before the usual loss of Congressional seats in the midterm election. It will be more difficult to pass any new legislation and more likely he’ll receive greater pushback from Congress on his executive orders, decrees and decisions if he loses a majority in one or both Houses of Congress. 

 

Meanwhile democratic midterm election rhetoric has begun to heat up and the Russia collusion probe battle continues. Geopolitically, dysfunction in Italy has rekindled Eurozone breakup fears and rattled the market and now President Trump is playing hardball again on Tariffs with everybody, changing his tune and upending international trade agreements. Good, bad, or indifferent, this is the kind of uncertainty that can roil the stock market. And we still have the on-again/off-again potential powder keg situations in North Korea, Iran, Syria and the rest of the Mideast and Near East hotspots where the action has picked up again.

 

This is why we believe that “Sell in May” is critical this year. Not selling willy-nilly and going away, but making the kinds of tactical, strategic moves we have already begun to implement and waiting for a better buying opportunity more likely later in Q3 or early Q4 as is quite common in the midterm year – what we call the “Bottom Picker’s Paradise” right at the sweet spot of the 4-year cycle.

 

As we enter the cruel month of June, the last month of NASDAQ’s Best 8 Months, our MACD Sell indicator is on the brink of triggering a Sell Signal for NASDAQ. Since our November 28 Buy Signal NASDAQ is up 7.75% in the chart below. Highlighted in the chart below in the yellow box with the black arrow is the MACD Sell Indicator on the verge of a Sell Signal. Also note NASDAQ is stalling just above the red-dotted line monthly pivot point resistance. Stochastics and Relative Strength are exhibiting weakness and the chart is struggling to break the downtrend since the March high with a down-trending 50-day moving average in the pink line heading toward the red line 200-day moving average. So be nimble, stay vigilant and ready to take on a more defensive, risk-off position over the next several days, weeks and months.

 

 

 

Our “Best Six Months” Seasonal Sell signal for DJIA and S&P 500 triggered on the close of trading on May 2 after a tepid start to the month (1). This was our signal to begin lightening up on long positions outside of technology and small-cap related positions and begin adding some defensive positions. The markets mid-May rally offered adequate opportunity to do this before the return of weakness and volatility near the end of May. DJIA’s slower moving MACD indicator is once again negative (2) confirming the loss of upward momentum.

 

 

In recent years, the Friday before the three-day Memorial Day weekend has become an early get away day leading to mild average losses on the day. This was once again the situation this year as DJIA slipped 0.24% last Friday. Anyone that trimmed long positions that day was spared even larger losses on Tuesday when DJIA fell 1.58% completing the fourth Down Friday/Down Monday (DF/DM) warning of the year (3). This DF/DM warning confirms traders and investors are becoming increasingly less confident in the market in the near-term. Based upon historical DF/DM occurrences there is also an increased likelihood of higher volatility and additional losses. Both of which were witnessed today.

 

NASDAQ’s outperformance relative (5) to DJIA (3) and S&P 500 (4) over the past four weeks is not unusual for this time of the year. Technology focused NASDAQ enjoys a Best Eight Months that runs from November until June. Tech strength could last into early July, but is beginning to waver.

 

Market breath remains generally positive with NYSE Weekly Advancers out numbering NYSE Weekly Decliners in three of the last four weeks (6). New Highs and New Lows (7) have also been trending in positive directions. New Highs have expanded for four weeks straight while New Lows are in a choppy trend lower. This week’s stats could mark the end of these trends.

 

30-year Treasury bond yields (8) continue to linger just above 3% suggesting long-term growth and inflation are likely modest and in check. However, the 90-day Treasury yield has maintained its slow and steady rise higher which is flattening out the yield curve and putting some pressure on the banks.

 

 

 

In midterm years since 1950, June ranks no better than ninth. June is the #12 DJIA, S&P 500 and Russell 1000 month in midterm years. Average losses range from 1.4% by Russell 1000 to 1.9% from S&P 500. Of the five indexes, none has a winning track record in June. All have declined more than they have risen.

 

 

The second Triple Witching Week of the year brings on some volatile trading with losses frequently exceeding gains. On Monday of Triple-Witching Week the Dow has been down thirteen of the last twenty-one years. Triple-Witching Friday is better, up ten of the last fifteen years, but weaker over the past 25 years, up fourteen, down eleven with an average loss of 0.22%. Full-week performance is choppy as well, littered with greater than 1% moves in both directions. The week after Triple-Witching Day is horrendous. This week has experienced Dow losses in 24 of the last 28 years with average losses of 1.1%. NASDAQ and Russell 2000 have fared better during the week after, up five of the last seven years.

 

June’s first trading day is the Dow’s best day of the month, up 23 of the last 30 years. Gains are sparse throughout the remainder of the month until the last three days when NASDAQ and Russell 2000 stocks begin to exhibit strength. The last day of the second quarter is a bit of a paradox as the Dow has been down 17 of the last 27 while NASDAQ and Russell 2000 have nearly the opposite record.

 

For the second day in a row, the Russell 2000 index of small-cap stocks closed at a new all-time high. However DJIA, S&P 500 and NASDAQ still have some ground to cover before doing the same. NASDAQ is closest followed by S&P 500 and then DJIA. Small-cap strength is encouraging, but absent the support and participation of the other indices the run could be short-lived. 

 

 

DJIA and S&P 500 both found support at their respective 200-day moving averages (solid red lines in upper portion of above charts) earlier in the month before bouncing higher. That bounce ended when DJIA and S&P 500 ran into projected monthly resistance (red dashed line) last Friday. Both have been churning essentially sideways since then. Both will need to break through this level before making any run towards old highs.

 

NASDAQ’s chart is somewhat healthier than DJIA and S&P 500. This does not come as much of a surprise as NASDAQ typically enjoys a “Best Eight Months” that run November through June. As earnings season winds down and the three-day Memorial Day weekend nears, catalysts for the market to continue higher in the near-term are fading increasing the possibility of more sideways to lower trading.

 

 

Over the last four weeks, S&P 500 advanced 0.5% and Russell 2000 was higher by 2.1% as of yesterday’s close. The Almanac Investor Stock Portfolio’s blend of cash and long positions slipped 0.9% over the same time period excluding dividends and any trading costs. Our Mid-Cap portfolio was the best performer climbing 1.6%, but their success was erased by a 4.8% decline by Large-Caps and a 0.7% slip by Small-Caps.

 

With the Russell 2000 small-cap index logging new all-time highs, performance from our Small-Cap portfolio is rather disappointing. Global Brass and Copper Holdings (BRSS), the oldest holding in the entire portfolio, along with M/I Homes (MHO) accounted for the majority of weakness in the Small-Cap portion of the portfolio as both declined rather substantially over the last four weeks. Weak copper prices and the end of its seasonally favorable period weighted on BRSS. 

 

MHO’s decline appears to be the result of weaker margins and the potential negative impact higher rates could have on homebuilders. MHO is not alone as many other homebuilder stocks have sold off recently. Higher input and higher borrowing costs are likely to continue to weight on the builders. Sell MHO. For tracking purposes, MHO will be closed out of the portfolio using its average price on Friday, May 18.

 

Builders First (BLDR) is also connected to the housing sector and it was stopped out on April 24.

 

Speaking of input costs, cocoa prices have been steadily climbing putting pressure on Hershey Company (HSY) and Rocky Mountain Chocolate Factory (RMCF). HSY was stopped out on April 19 when it closed below $94.50 (position closed out the following trading day at $93.24). RMCF is down over the last month and should be sold. Sell RMCF. For tracking purposes, RMCF will be closed out of the portfolio using its average price on Friday, May 18.

 

In the Large-Cap portfolio First American Financial (FNF) and Huntington Ingalls (HII) were both stopped out over the last four weeks. FNF is also connected to the real estate market and was not spared from broad sector weakness. HII was sunk by an earnings miss.

 

As of today, the Almanac Investor Stock Portfolio holds fourteen positions and will lose two more tomorrow. There is also a sizable cash position. This is in line with our Tactical Seasonal Switching Strategy which calls for reduced long exposure and a more cautious posture. After we issue our Seasonal Sell Signal for NASDAQ (sometime on or after June 1), we will likely consider further defensive measures and look to take advantage of any seasonal weakness with a basket of short stock positions. Until that time, all positions not mentioned above remain on Hold. Please see table below for current advice and stop losses.

 

 

 

Today we are not going to bother debating whether one should actually sell in May or not. Instead, let’s focus on what tactical changes can be made in portfolios to take advantage of what actually does work during the “Worst Six Months” while either shorting or outright avoiding the worst of the worst. 

 

In the following table, the performance of the S&P 500 during the “Worst Six Months” May to October is compared to fourteen select sector indices or sub-indices, gold and the 30-year Treasury bond. Nine of the fourteen indices chosen are S&P Sector indices. Gold and 30-year bond are continuously-linked, non-adjusted front-month futures contracts. With the exception of two indices, 1990-2017, a full 28 years of data was selected. This selection represents a reasonably balanced number of bull and bear years for each and a long enough timeframe to be statistically significant while representing current trends. In an effort to make an apple-to-apple comparison, dividends are not included in this study.

 

 

Using the S&P 500 as the baseline by which all others were compared, seven indices outperformed during the “Worst Six Months” while nine underperformed based upon “AVG %” returned. At the top of the list are Biotech and Healthcare with average gains of 9.00% and 4.74% during the “Worst Months.” However, before jumping into Biotech positions, only 23 years of data was available and in those years Biotech was up just 52.2% of the time from May through October. Some years, like 2014, gains were massive while in down years losses were frequently nearly as large.

 

 

Runner-up, Healthcare with 28 years of data and a 66.2% success rate is probably a safer choice than Biotech. Its 4.74% AVG % performance comes by way of one less loss in five additional years of data and just two double-digit losses, both in bear markets during 2002 and 2008.

 

 

Other “Worst Six” top performers consisted mostly of the usual suspects when defensive sectors are considered. Consumer Staples, 30-year Treasury bonds and Utilities all bested the S&P 500. Information Technology also performed surprisingly well, but appears to be highly correlated with S&P 500 (losing years in bear markets and similar monthly performance figures). With a 12.9% gain during the last “Worst Six Month” period, Financials also outperform the S&P 500 now. Although not the best sector by AVG %, Consumer Staples advancing 78.6% of the time is the closest thing to a sure bet for a gain during the “Worst Months.” 

 

 

At the other end of the performance spectrum we have the sectors to short or avoid altogether. The Materials sector was the worst over the past 28 years, shedding an average 1.84% during the “Worst Six.” PHLX Gold/Silver and NYSE ARCA Natural Gas also recorded average losses. However, based solely upon the percentage of time up, the stocks only, PHLX Gold/Silver index is the most consistent loser of the “Worst Six” advancing just 39.3% of the time.

 

 

Also interesting to note is the fact that every sector, gold and 30-year bonds are all positive in May, on average. It’s not until June when things begin to fall apart for many sectors of the market and the market as a whole. July tends to see a broad bounce, but it tends to be short-lived as August and September tend to be downright ugly on average. It is this window of poor performance that has given October a lift in the past 28 years. Only Biotech, 30-year bonds, gold (futures and gold & silver stocks) and Utilities manage to post gains in both August and September.

 

Based upon % Up during the “Worst Six Months,” Consumer Staples and Utilities look like the best place to be while Gold/Silver mining stocks (XAU) and Materials could be shorted or avoided all together. May also looks like a great time to rebalance a portfolio as you will likely be closing out long positions into strength and short trade ideas are worth considering given June’s nearly across-the-board poor performance.

 

 

Based upon the above updated “Worst Six Months” Sector Performance, the Almanac Investor ETF Portfolio is headed in the correct direction with existing long positions in Healthcare, Utilities and bonds alongside short positions in Transports, Gold Miners (through JDST, an inverse ETF) and Materials. What is lacking is a position in Consumer Staples, the sector with the highest win ratio of them all during the “Worst Six Months.”

 

SPDR Consumer Staples (XLP) is an excellent fund to consider filling this void. Top Five holdings of XLP consist of long-established and well-known brands, Procter & Gamble, Coca-Cola, PepsiCo, Philip Morris and Walmart. XLP also has a dividend yield right around 3%.

 

 

In the above chart it is evident that XLP has been under heavy pressure this year, down 12.9% year-to-date at yesterday’s close. A brisk move by 10-year Treasury yields up towards 3.0% has been one of the key driving forces for the decline in the staples sector. The brisk move in Treasury yields could be over. Today’s CPI was less than expected as inflation cooled in April. XLP could be considered around current levels with a buy limit of $49.70. If purchased an initial stop loss of $45.00.

 

Yesterday after the market closed, we sent out our Tactical Seasonal Switching Strategy Sell Alert for DJIA and S&P 500. NASDAQ’s “Best Eight Months” lasts until June and we continue to hold technology and small-cap related positions in the ETF. From now until when we issue our Seasonal Sell Alert for NASDAQ (sometime on or after June 1) we are shifting the ETF Portfolio to a market neutral position by adding some exposure to short and longer duration bonds. A similar stance already exists in the Stock Portfolio that has a sizable cash position.

 

This “Best Six Months” period for DJIA and S&P 500 started off well with a brisk rally to new all-time highs in late January at which point DJIA was up 11.7% and S&P 500 was up 9.4%, but tariffs, inflation and interest rate worries quickly knocked DJIA and S&P 500 back down. From our November 28 “Buy” signal through yesterday’s “Sell” signal DJIA advanced a meager 0.4% and S&P 500 0.3%. This is the poorest showing since the bear market years of 2007 to 2009. While disappointing, this does not mean seasonality is dead nor does it mean the strategy no longer works. It simple means there were stronger forces at work that overrode typical seasonal strength.

 

After spending much of his first year in office working to deliver favorable policy to the market (tax cuts, regulation cuts and defense spending increases), President Trump has shifted to less favorable policy initiatives in his second year. Renegotiating trade agreements that have been in place for decades and slapping tariffs on steel and aluminum imports have ignited legitimate fears about possible trade wars. Factor in a tightening Fed and somewhat lofty market valuations and many of the ingredients for a market correction (or possibly worse) are present.

 

 

Since peaking in late January, DJIA and S&P 500 have bearishly made a series of lower highs, but have not yet made a series of lower lows. They have also managed to remain mostly above their respective 200-day moving averages. They have traded below them, but they have not repeatedly closed and remained below which is a positive. Other technical indicators such as Stochastics and relative strength are also tepid now. It looked and felt like the floor was falling out from under the market in early February, but that has not happened yet.

 

 

Further confirmation that the market is merely treading water can be seen in the above Advance/Decline line charts for NYSE, NASDAQ, Russell 2000 and S&P 500. NYSE A/D line actually reached a modest new high in April, but like the rest it has moved modestly lower since then. Like the market, higher would be great, but sideways is still better than lower.

 

Sideways to slightly lower may be the best the market can muster in the near to mid-term as fiscal policy and monetary policy clash for influence. The Fed is currently tightening monetary policy while the Trump administration has delivered what could/should be pro-growth fiscal policy in the form of tax cuts, expanded defense spending and reduced regulation. As of now a clear cut winner cannot be identified and is sufficient reason to lighten up on long exposure, trim losing positions and consider additional defensive positions. There will be better opportunities down the road to put capital to work than now.

 

As of today’s close, both the slower moving MACD indicators applied to DJIA and S&P 500 are negative (arrows in charts below point to a crossover or negative histogram on the slower moving MACD used by our Seasonal Switching Strategy to issue a sell). At this time, we are issuing our official Best Six Months MACD Seasonal Sell signal for DJIA and S&P 500. NASDAQ’s “Best Eight Months” last until June.

 

 

SELL SPDR DJIA (DIA), SPDR S&P 500 (SPY), SPDR Consumer Discretionary (XLY) and SPDR Financial (XLF). For tracking purposes these positions will be closed out of the portfolio using their respective average prices on May 3. 

 

Continue to HOLD technology and small cap related ETFs as NASDAQ’s “Best Eight Months” ends in June.

 

Continue to HOLD SPDR Healthcare (XLV). 

 

Consider adding to the existing position in iShares 20+ Year Treasury (TLT) on dips with a Buy Limit of $118.00. Consider a half position in iShares Core US Aggregate Bond (AGG) on dips with a Buy Limit of $105.75. 

 

Traders/investors following the Best 6 + 4-Year Cycle switching strategy detailed on page 60 of the Stock Trader’s Almanac 2018 should heed this signal.

 

For positions not previously mentioned, please see table below for latest advice.