5/28/2020: Dow 25400.64 | S&P 3029.73 | NASDAQ 9368.99 | Russell 2K 1400.67 | NYSE 11804.91 | Value Line Arith 5760.23

 

Fundamental: Vague. The market has recovered nicely over the past two months, but valuations are now getting rather elevated even when using the most optimistic of earnings estimates. Reopening is underway in many parts of the country, but jobless claims are still accumulating at an unprecedented pace. U.S. GDP for the second quarter is estimated to be –40.4 by the Atlanta Fed’s GDPNow model as of today. And that is actually an improvement over the previous estimate.

 

Technical: Overextended? NASDAQ is back in the green year-to-date. S&P 500 is not all that far behind having reclaimed its 200-day moving average this week, but DJIA is lagging still unable to clear its 200-day moving average. However, even lagging DJIA has rebounded enough to satisfy the criteria for a new cyclical bull market. The surge higher has many technical indicators stretched to the upside and at some point, a pause and/or pullback is likely.

 

Monetary: 0 – 0.25%. The Fed’s next scheduled meeting is June 9-10. As long as the market continues to log gains, don’t expect to hear much from Fed officials. They are quite busy buying hefty amounts of Treasuries, MBS and commercial paper. And if the market does weaken expect to hear there is still more that can be done by the Fed. It may be wise to remember “not to fight the Fed.” 

 

Seasonal: Neutral. June is the last month of NASDAQ’s “Best Eight Months.” DJIA and S&P 500 “Best Six Months” has already ended. NASDAQ’s Seasonal MACD Sell Signal can trigger as soon as the close on June 1. An email Alert will be sent when it triggers. June has performed better in Election Years, second best S&P 500 month, #5 DJIA, #4 NASDAQ and Russell 2000.

 

Psychological: Neutral. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors are up to 50.5%. Correction advisors stand at 25.7% while Bearish advisors have slipped to 23.8%. At these levels the scales are essentially balanced. As long as the gradual reopening of the economy across the country stays on track with few or no setbacks, the bulls will likely maintain the upper hand and reap the benefits of being long. However, if things do not go smoothly, then the opposite is quite likely.

 

Our Best Six Months Seasonal MACD Sell Signal for DJIA triggered on May 13 when this recovery rally took a brief pause. The rally then resumed adding to May’s gains and putting NASDAQ back in the black for the year and up nearly 5% year-to-date. But the market is bumping into some resistance here technically and looks set to pause again and pullback to recent support levels.

 

 

After blasting through key resistance levels in April at S&P 2580, 2725, 2815 and 2875 we began to stall at 2955. Now we are struggling to put 3010 behind us. 3010 is the level of the July and September 2019 highs. 3010 is also still right at the 200-day moving average. Above 3010 is 3115 where the big waterfall decline broke below the long uptrend line from the December 2018 low. Any upside above 3115 will likely be hard to come by.

 

With the country beginning to reopen, traders have been bidding up stock prices in anticipation of rejuvenated economy. Sure there are bright spots, but with the impact of the pandemic shutdown barely hitting the economic data, corporate guidance is not much more than a guessing game. The rally appears to be way ahead of the recovery. 

 

NASDAQ’s Best 8 Months ends in June so we will begin tracking NASDAQ’s MACD Sell indicator for a new negative crossover on or after June 1. After the current turn of the month bullish period from the last few days of May through the first couple days of June is over we would not be surprised if the market retreated. 

 

You can see this historic June retreat in the updated composite graph of the seasonal pattern for the 22 years since 1950 (NASDAQ 14 years since 1971) when both the January Barometer as measured by the S&P 500 were down and the Dow closed below its previous December closing low in the first quarter – known as the December Low Indicator on page 34 of the 2020 Stock Trader’s Almanac.

 

 

The dotted lines for the indices in 2020 are plotted on the right axis and show that despite the big difference in magnitude 2020 is tracking this pattern of down January Barometers and December Low Indicator triggers. This supports our cautious outlook for the Worst Six Months (May-October) and our analysis that while the bottom appears to be in, we should expect an overall sideways market bouncing up and down in a range, flirting with testing the lows and stalling at resistance near current levels. 

 

Jobless claims continue to trend lower, which is a good sign we have seen the market bottom as we detailed in the May Outlook. The chart below shows how the 2020 spike high in claims and rapid retreat is closely correlated with the March 23 low in similar fashion to the previous bear market lows in the longer term chart we published in the May Outlook last month at this time.

 

 

But the latest reading of 2.1 million weekly initial jobless claims is still of epic and of historic proportions and brings the total jobless claims since mid-March to a staggering 40.8 million. The unemployment rate is expected to rise beyond last month’s 14.7%. Second quarter GDP is projection to be -40.4% by the Atlanta Fed’s GDPNow model.

 

So at a minimum we can expect to see some rather unpleasant economic numbers over the next several months. The market also appears to be pricing in a flawless reopening and fast-tracked vaccine solution. And now we are getting some diplomatic machinations with the White House and China. Disappointments on any of these fronts are bound to send stock prices lower. 

 

The good news is that both the Federal Reserve and Federal Government are fully committed to throwing unlimited sums of money at the situation – as are central banks and governments around the world. Nearly unlimited liquidity from the Fed and massive fiscal stimulus – to the tune of around $9 trillion worldwide so far – will likely prop up the market while economic and vaccine/pandemic disappointments are likely to keep a lid on new highs. 

 

This all reinforces our defensive posture and outlook for a choppy, sideways market over the next several months with the potential for a retest of the lows or at least the lower support levels around S&P 2725, which is near the S&P 500 50-day moving average, and 2580 on the S&P Technical chart above.

 

 

During the first half of May, DJIA (and S&P 500) lost upward momentum and drifted sideways to lower (1). As a result, our Seasonal MACD Sell Signal was triggered on the close on May 13. During the next trading session correlating positions in the Tactical Seasonal Switching Strategy ETF portfolio were closed out. Tech and small-cap positions were held and have benefited greatly over the past few weeks. Shortly thereafter, DJIA (and S&P 500) were successful in breaking through resistance and have continued to move higher since.

 

DJIA’s new life has put the full month of May in positive territory and turned both the faster and slower moving MACD indicators (2) positive again. DJIA reclaimed its falling 50-day moving average in late April and its falling 200-day moving average could be the next key level of resistance. DJIA’s 200-day moving average is currently right around 26,300, so another pause could be just around the next corner.

 

 

Compared to the first three months of the year, Fridays (or the last trading day of the week) have improved significantly over the last seven weeks (3) with five DJIA gains and just two losses. Prior to this, DJIA had been down twelve times on fourteen Fridays. Continued improving Friday performance is a positive sign as it suggests confidence is being rebuilt and traders and investors are less concerned about potentially negative headlines over the weekend.

 

Although Fridays have improved, weekly performance has become something of a seesaw battle with DJIA, S&P 500 (4) and NASDAQ (5) alternating between weekly losses and gains. Should gains thus far this week hold then it will be the first back-to-back weekly winning streak since mid-April. Based upon weekly performance it would appear uncertainty is still elevated and more needs to be done before confidence is truly restored.

 

Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has, for the most part, tracked weekly performance with Advancers outnumbering Decliners in positive weeks and vice versa. One notable exception was the last week of April ending on May 1. Digging into daily numbers from that week shows sizable gains on the first three days that were reversed on Thursday and Friday. Cumulative Advance/Decline lines remain positive and trending higher, but still below their respective highs reached earlier in the year.

 

Weekly New Highs have begun to pick up slightly (7) while Weekly New Lows have remained subdued. This is encouraging but not all that informative as New Highs are not likely going to begin to pick up in any meaningful manner until all the major indexes are much nearer to previous highs.

 

After a volatile March and April, 90-day and 30-year Treasury rates appear to be settling down (8). Both rates are up from their respective lows but remain historically low. Even though other central banks have taken rates negative, the Fed does not appear comfortable with negative rates in the U.S. Unfortunately it may not be up to the Fed. If reopening does not work as smoothly as hoped and the restarting of the economy gets delayed rates could move lower again and potentially deeper into negative territory.

 

 

June has shone brighter on NASDAQ stocks over the last 49 years as a rule ranking seventh with a 0.8% average gain, up 27 of 49 years. This contributes to NASDAQ’s “Best Eight Months” which ends in June. June ranks near the bottom on the Dow Jones Industrials just above September since 1950 with an average loss of 0.2%. S&P 500 performs similarly poorly, ranking tenth, but essentially flat (0.1% average gain). Small caps also tend to fare well in June. Russell 2000 has averaged 0.8% in the month since 1979.

 

In election years since 1950, June’s performance improves notably. June is the #5 DJIA month in election years averaging a 0.9% gain with a record of twelve advances in seventeen years. For S&P 500, June is #2 with an average gain of 1.3% (14-3 record). Election-year June ranks #4 for NASDAQ and Russell 2000 with average gains of 1.6% and 1.4% respectively. This performance improvement is most likely the result of presidential candidate field being sufficiently narrowed, and the ultimate nominees being identified.

 

 

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-three years. Triple-Witching Friday is somewhat better, up ten of the last seventeen years, but weaker over the past 27 years, up fourteen, down thirteen 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 DJIA losses in 26 of the last 30 years with average losses of 1.07%. NASDAQ and Russell 2000 had fared better during the week after, but that trend appears to be fading.

 

June’s first trading day is the Dow’s best day of the month, up 25 of the last 32 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 29 while NASDAQ and Russell 2000 have nearly the opposite record.

 

 

Initial Weekly Jobless Claims of 3.3 million, 6.9 million, 6.6 million, 5.2 million, 4.4 million, 3.8 million, 3.2 million and 3.0 million the past eight weeks, totaling 36.5 million, is astonishing. The good news is the trend is lower and as we pointed out in the May Outlook two weeks ago a spike peak in Initial Claims and an immediate precipitous retreat has been an effective indication of a bear market low over the years. 

 

The chart we presented two weeks ago from the FRED database hosted at the Federal Reserve Bank of St. Louis compared the history of Jobless claims with the Wilshire 5000 along with the shaded recession bars. All the spike highs in claims correlated extremely well with major bear market bottoms during recession. 

 

We omitted the recent claims number as they are so large they would literally have been off the chart. Now that we have two more weeks of lower claims we present the recent chart of Jobless claims with the Wilshire 5000. (Gaps in the Wilshire index line are market holidays.) Clearly, the March 23 low and the spike high in Claims at the end of that week correlate quite well.

 

 

However, as we also pointed out in the May Outlook the Down Best Six Months, Down January Barometer and the triggering of the December Low Indicator suggest rough sledding ahead with choppy, sideways market action over the Worst Six Months May-October and the potential for several retests of the March 23 lows. With the market pausing thus far in May after the record April rally and posting several recent days of losses a look at some technical support and resistance levels for the S&P 500 may be instructive.

 

In the chart below we have left some of our old support and resistance lines that once again appear to be relevant. March 2020 saw the market plunge through every support level in about three weeks. We reclaimed the December 2018 and early 2018 support/resistance levels in three days initially. Then the S&P 500 began to bump in to resistance around three of our previous levels at 2815, 2875 and 2955. 

 

 

On the downside, 2725 support lines up well with where the 50-day moving average is at the moment. The market held that level in March and June last year and spent a bunch of time there in 2018. A break below 2725 would suggest we’re headed for a retest of the lows. On the upside, we first need to clear 2875 where we topped out in January before correcting 10% to the February 8, 2018 low. Above 2955 there is resistance at 3010 near old summer 2019 resistance and the 200-day moving average.

 

If we can clear 3010 we run into resistance at about 3115 where we broke through the uptrend line from the December 2018 bottom. 3210 is the January 31 low when we had the big selloff that turned the January Barometer negative. Finally, there is 3260 resistance where the market gapped down to start the big waterfall decline. There is a long way to go to reclaim these upper resistance levels and new highs. The path lower and sideways over the next several months is more likely as more economic numbers and the magnitude of the economic situation comes to light.

 

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 portfolio. 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.

 

This “Best Six Months” period for DJIA and S&P 500 was rough to say the least. The Covid-19 induced economic shutdown hammered the market in March washing out the Sector Rotation ETF and Stock Portfolio as positions plunged through stop losses. From DJIA’s closing all-time high in February to its low on March 23 it dropped 37.1% while S&P 500 fell 33.9% over the same time period. Historic monetary and fiscal policy has been put in place and thus far it has proven effective in reversing the market’s decline, but the future still remains uncertain as countless challenges remain. 

 

Top of the list, a vaccine would likely solve many issues, but until one becomes available, we will need to contend with an economy that is still shedding millions of jobs per week even as some areas of the country are beginning to “reopen.” Restarting the economy hosts its own long list of issues. Will the infection rate spike? Will people even feel safe to return to work and their old routines? Only time will tell. Then there is the increasing possibility that there may be a new routine going forward as there is now an expanding number of businesses exploring and considering making “work from home” the new standard.

 

 

In accordance with yesterday’s Seasonal MACD Sell Alert, all SPDR DJIA (DIA) and SPDR S&P 500 (SPY) positions in the portfolio were closed out today using their average prices. Holding DIA and SPY without a stop loss was challenging, however they did recover a significant portion of their declines and were closed out for losses of 13.3% and 5.2% respectively. These are disappointing results, but considering the unprecedented covid-19 pandemic, they are quite reasonable. Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) are on Hold.

 

Half positions in bond ETFs, iShares Core US Aggregate Bond (AGG) and Vanguard Total Bond Market (BND) were also established today as both traded below their respective buy limits during today’s trading session. AGG and BND both appear in the table below with their current buy limits.

 

 

 

Per yesterday’s Sell Alert, positions in SPDR Consumer Staples (XLP), SPDR Utilities (XLU) and iShares NASDAQ Biotech (IBB) have been added to the portfolio using their average daily price today. XLP and XLU can still be considered at current levels up to their buy limits. IBB can be considered on dips. Please note: there is no suggested stop for IBB at this time.

 

Please see table for current advice, buy limits and stop losses for positions not mentioned.

 

 

 

Early in April we elected to re-enter numerous positions that had been stopped out in March, plus we presented several new trade ideas that were more speculative in nature. With the exception of three positions, LAD, CHD and CVX, all positions presented have been added to the portfolio. As a reminder, defensive stock positions (dividend paying and generally members of the utility, medical, and/or consumer staples sectors) in the portfolio are shaded in grey.

 

LAD and CVX have run away and the trade ideas are being cancelled. CHD can still be considered on dips below its buy limit of $69.95. All other positions are currently on Hold. Please see table below for updated stop losses.

 

 

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) and SPDR S&P 500 (SPY) positions. For tracking purposes these positions will be closed out of the portfolio using their respective average prices on May 14. 

 

Continue to HOLD Invesco QQQ (QQQ) and iShares Russell 2000 (IWM) as NASDAQ’s “Best Eight Months” ends in June.

 

Consider establishing a half position in iShares Core US Aggregate Bond (AGG) with a Buy Limit of $116.75. 

 

Also consider establishing a half position in Vanguard Total Bond Market (BND) with a Buy Limit of $87.25. 

 

Traders/investors following the Best 6 + 4-Year Cycle switching strategy detailed on page 62 of the Stock Trader’s Almanac 2020 do not need to heed this signal but may still want to consider reviewing positions and holdings. Consider trimming any underperforming or lagging positions and implementing or adjusting stop losses.

 

 

Buy SPDR Consumer Staples (XLP), SPDR Utilities (XLU) and iShares NASDAQ Biotech (IBB). For tracking purposes these positions will be added to the portfolio using their respective average prices on May 14.

 

All portfolios will be updated and emailed in tomorrow’s regularly scheduled Alert after the close. 

 

Another 3.2 million Americans filed for unemployment last week bringing the seven-week total to 33.5 million. This is an unprecedented streak for an unprecedented time, and it highlights the significant impact that the coronavirus pandemic shutdown is having. One small positive aspect of this week’s number is the fact that it is a decline from the previous reading which lends further support to the possibility that the market’s lows of March could be the bottom and that bottom could hold based upon the historical correlation of jobless claims and past market bottoms that we covered in last week’s May Outlook.

 

However, the seven-week total is an unsettling number that suggests the road back to “normal” could be longer than the market appears to currently expect. It is getting increasingly more challenging to envision 33.5 million Americans returning to work as quickly as they left. And with NASDAQ returning to positive for the year in today’s trading it may be time to wonder if the market’s brisk recovery is possibly too far ahead of the actual economy.

 

One early sign that the rally may be getting well ahead of the economy can be seen in the following chart of cumulative daily advance/decline lines for NYSE, NASDAQ, Russell 2000 and the S&P 500. The recent trend since the end of April has been lower while the indexes have managed to move modestly higher. This suggests that fewer and fewer stocks are still participating in the rally. Historically when this persisted the major indexes frequently failed to move meaningfully higher and often turned lower.

 

 

 

Our Seasonal MACD indicator applied to DJIA and S&P 500 remains positive, but the margin has shrunk considerably since last update. Based upon today’s close it would take a single-day decline of 1.15% by S&P 500 and any decline from DJIA to turn both MACD indicators negative.

 

 

Continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.” 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. 

 

 

Last update we presented three new trade ideas best positioned to weather the upcoming “Worst Months.” Thus far the buy limits associated with SPDR Consumer Staples (XLP), SPDR Utilities (XLU) and iShares NASDAQ Biotech (IBB) have proved to be far too conservative as the broad market and these ETFs continued higher throughout all of April. Buy limits for XLP, XLU and IBB have been increased in the portfolio table below and all can still be considered on dips. If they do not trade below their buy limits, we will consider adding them when we issue our Seasonal MACD Sell Signal.

 

Continue to hold SPDR Gold (GLD). 

 

 

 

Although results are still disappointing for this “Best Months” period, the market’s rebound has led to an improvement in the portfolio. DIA and IWM are still the poorest performing positions while SPY has recovered to within a few percent of our original entry price and QQQ is actually up 14.6%.

 

Last month’s trade ideas, iShares Core U.S. Aggregate Bond (AGG) and Vanguard Total Bond Market (BND), have not yet been added as they did not trade below their respective buy limits. Buy limits for AGG and BND have been raised and both can still be considered on dips or when our Seasonal MACD Sell Signal Alert is issued.

 

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 any day now.