July 2020 Trading & Investment Strategy
June 25, 2020
Market at a Glance - 6/25/2020
By: Christopher Mistal
June 25, 2020
6/24/2020: Dow 25445.94 | S&P 3050.33 | NASDAQ 9909.17 | Russell 2K 1389.74 | NYSE 11726.54 | Value Line Arith 5757.90
Fundamental: Fuzzy. Weekly jobless claims are still running in the millions even as the economy is broadly reopening. Q2 GDP is estimated to have fallen 46.6% according to the Atlanta Fed’s GDPNow model. Despite these numbers, the worst is most likely over. That’s the good news. The bad news is the economic recovery is not likely going to be as quick as the market’s rebound. Covid-19 is still spreading and still impacting the economy.
Technical: Divergent? NASDAQ trading at new all-time highs while DJIA and S&P 500 struggle. This time the divergence is indicative of the overall economy. Some areas have held up nicely and even flourished while other areas are still on life support. As the economy mends the divide is likely to close. Until that time additional gains could be limited, and the major indexes could find themselves range-bound. 
Monetary: 0 – 0.25%. At its June meeting the Fed reaffirmed its commitment to using its full range of monetary policy tools to support the U.S. economy. The nearest the Fed got to surprising its followers was in its Summary of Economic Projections material were its median and central tendency for Fed funds was projected to remain near zero through 2022. Expectations of a “v-shaped” economic recovery don’t fit that projection well. 
Seasonal: Neutral. July is the best month of the third quarter, but bulk of gains are in first half of month. July is historically weaker in election years. NASDAQ’s summer rally lasts until July 14 this year. July is the first month of NASDAQ’s “Worst Four Months” and the third month of DJIA & S&P 500 “Worst Six Months.”
Psychological: Disconnected. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors are up to 57.3%. Correction advisors stand at 24.3% while Bearish advisors have slipped to 18.4%. Shortest bear market in history, unprecedented amounts of fiscal and monetary stimulus are key reasons to be bullish. What if the Fed’s projections are right and the economy doesn’t sharply rebound? What about spiking covid-19 cases? Markets appear priced for the best case scenario while paying little attention to anything else.
July Outlook: Climbing COVID Cases Threaten Rally
By: Jeffrey A. Hirsch & Christopher Mistal
June 25, 2020
Climbing COVID cases and confusion about reopening the economy continues to confound the market. Even though hard working people and prudent businesses around the country are working diligently to reopen and safely serve clients and customers the increase in positive tests and hospitalization nationally is hard for the market to ignore. 
Waiters are reminding diners to done their masks when ordering. Folks are waiting for the next elevator and not crowding in and business have hand sanitizer at the ready for all patrons. But Texas is pausing its reopening plan and new case rates and hospitalizations are rising to record levels in 16 states.
Nevertheless, the spread and uncertainty continue to make the market vulnerable to negative developments on the pandemic, economic and geopolitical fronts. Valuations are high. Technical chart resistance has become more prevalent and the incumbent president and party are on the ropes against the virus and civic unrest. 
Our NASDAQ Best Eight Months Seasonal MACD Sell Signal triggered on June 11, so we are in full “Worst Four Months” defensive mode. But there are still a few seasonal bright spots in July. July is the best month of the third quarter though most of July’s gains usually occur in the first half and then we have the August/September disaster area where the market is often weak as folks are preoccupied with outdoor activities in August and end-of-Q3 portfolio restructuring in September. 
NASDAQ’s mid-year rally over the 12-day period starting with the last three trading days of June through the ninth trading day of July, what we affectionately refer to as “Christmas in July,” has been up 27 of the last 35 years and the past nine out of ten years with an average gain over the 35-year stretch of 2.5% vs. 0.9% for the month of July as a whole.
NASDAQ Christmas in July Table
After the mid-year rally we are concerned that recent market resistance will become formidable again and support will be tested. Early in June S&P 500 stalled at our 3210 level, which is just below the intraday low on January 31 when we had the first major COVID scare selloff and the gap-down day on February 24. Then we found support near our 2955 level associated with several touch points and is right at the pink 50-day moving average.
[S&P Technical Chart]
S&P 3010 is an important level at the July and September 2019 highs. 3010 is also still right at the 200-day moving average. 3115 is where the big waterfall decline broke below the long uptrend line from the December 2018 low. A range in the 2955-3210 seems to be materializing, but 3115 is still putting up resistance at the moment. If 2955 does not hold as support, the next major support level is 2725 where the 50-day moving average turned higher back in May.
On the Election Cycle front things are still concerning. While the market has historically performed better when a sitting president is running for reelection, this year may be flashing an incumbent party defeat warning, which does not bode well for the next few months or the year as a whole. 
In the chart here we have plotted the one-year seasonal chart patterns for the S&P 500 during election years for 1949-2019 overlaid with 2020 year-to-date performance. Due to the magnitude of 2020’s bear market decline we have plotted it on the right scale in order to illustrate the trend comparison to election years during the 1949-2019-period versus incumbent party wins and losses. As you can see 2020 is tracking the trend of the red incumbent party losses line more closely.
[Incumbent Wins & Losses Chart]
We will also be keeping an eye on our good friend Sam Stovall’s, Chief Investment Strategist at CFRA, rather reliable “Presidential Predictor” indicator (see page 26 of the 2020 Almanac. When the S&P 500 is up from July 31 to October 31 during presidential election years the incumbent party retains power 11 of the 13 election years or 85% of the time since 1936. Losses for the S&P 500 over this 3-month span, just before the election, have seen a shift in party control in 7 of the 8 years for an 88% success rate. 
So if looks like the president will not be reelected expect the S&P 500 to be down from the end of July to the end of October, but to rally to yearend. For now, remain cautious, stay on the defense, hold winners, sell losers and be ready for the summer doldrums and then a yearend rally.
Pulse of the Market
Fueled by strong expectations of a quick economic reopening and a wildly much better than anticipated May jobs report, DJIA surged higher in early June to briefly trade back above its 200-day moving average (1) and 27,000. However, when DJIA was surging higher in early June new covid-19 cases were also beginning to jump higher. The spike in cases is problematic and sufficient to briskly knock DJIA lower. 
DJIA’s recent declines and shift in momentum has been confirmed by both the faster and slower MACD indicators turning negative (2). Weakness this week has keep the trend of the MACD indicators negative. Historically MACD generates the best buy signals when a positive crossover occurs below the zero line. Should such a crossover occur soon, it could be an indication that NASDAQ’s summer rally is underway. 
Dow Jones Industrials & MACD Chart
At the start of this week DJIA (3), S&P 500 (4) and NASDAQ (5) all recorded gains in four of the last five weeks (and five of the last seven). Going forward sustained gains like these are not as likely as valuations are stretched and the near-term outlook is becoming increasingly muddled by spiking covid-19 cases.
Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has tracked weekly performance with Advancers outnumbering Decliners in positive weeks. Last week the number of Advancers did decline compared to previous weeks where the market recorded gains. That could be an indication that the broad recovery rally since the March low has or is nearing its end. 
Weekly New Highs have picked up (7) but appear to be stalling as only NASDAQ has been able to fully recover and break out to new all-time highs. Absent a prolonged retreat, Weekly New Lows have remained subdued. Recent relatively stable readings are worth monitoring closely as an expansion of New Lows or New Highs could aid in confirming the markets next direction. More Lows could point to a move lower while more Highs could suggest a move higher for the major indexes.
Less volatility in the 90-day and 30-year Treasury rates is encouraging (8). The 90-day rate is not likely to make any major moves as the Fed has signaled and confirmed repeatedly that it will keep rates low and take whatever action is needed to support the economy and smooth operation of financial and credit markets. The 30-year Treasury rate is also not likely to make any major moves unless there is a major change in the longer-term economic outlook.
Click for larger graphic…
Pulse of the Market Table
July Almanac: Not Much Sizzle in Election Years
By: Christopher Mistal & Jeffrey A. Hirsch
June 18, 2020
July historically is the best performing month of the third quarter however, the mostly negative results in August and September tend to make the comparison easy. Two “hot” Julys in 2009 and 2010 where DJIA and S&P 500 both gained greater than 6% and a strong performance in 2013 and 2018 have boosted July’s average gains since 1950 to 1.2% and 1.1% respectively. Such strength inevitability stirs talk of a “summer rally”, but beware the hype, as it has historically been the weakest rally of all seasons (page 74, Stock Trader’s Almanac 2020).
July begins NASDAQ’s worst four months and is the third weakest performing NASDAQ month since 1971, posting a 0.5% average gain. Dynamic trading often accompanies the first full month of summer as the beginning of the second half of the year brings an inflow of new capital. This creates a bullish beginning, a soft week after options expiration and some strength towards the end.
July’s first trading day is the third best performing first trading day of all twelve months with DJIA gaining a cumulative 1293.21 points since 1998. Over the past 21 years, DJIA’s first trading day of July has produced gains 81.0% of the time with an average advance of 0.39%. S&P 500 has advanced 85.7% of the time (average gain 0.38%). NASDAQ has been slightly weaker at 76.2% (0.26% average gain). No other day of the year exhibits this amount of across-the-board strength which makes a case for declaring the first trading day of July the most consistently bullish day of the year over the past 21 years.
Trading on the day before and after the Independence Day holiday is often lackluster. Volume tends to decline on either side of the holiday as vacations begin early and/or finish late. Since 1980, DJIA, S&P 500, NASDAQ and Russell 2000 have recorded net losses on the day after.
[Election Year July Table]
Election year Julys rank in the bottom half of all election year months. DJIA: 0.5%, 6th worst; S&P 0.4% 6th worst; NASDAQ (since 1972): -0.7% 3rd worst; Russell 2000 (since 1980): -0.2% 3rd worst.
July (1950-2019)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank 4 6 10 8 10
# Up 45 40 27 21 21
# Down 25 30 22 20 20
Average % 1.2   1.1   0.5   0.8   -0.2
4-Year Presidential Election Cycle Performance by %
Post-Election 2.2   2.1   3.4   3.2   2.8
Mid-Term 1.3 0.9 -1.9 -0.7 -3.8
Pre-Election 1.0 0.9 1.0 0.6 0.3
Election 0.5 0.4 -0.7 0.1 -0.2
Best & Worst July by %
Best 1989 9.0 1989 8.8 1997 10.5 1989 8.2 1980 11.0
Worst 1969 -6.6 2002 -7.9 2002 -9.2 2002 -7.5 2002 -15.2
July Weeks by %
Best 7/17/09 7.3 7/17/09 7.0 7/17/09 7.4 7/17/09 7.0 7/17/09 8.0
Worst 7/19/02 -7.7 7/19/02 -8.0 7/28/00 -10.5 7/19/02 -7.4 7/2/10 -7.2
July Days by %
Best 7/24/02 6.4 7/24/02 5.7 7/29/02 5.8 7/24/02 5.6 7/29/02 4.9
Worst 7/19/02 -4.6 7/19/02 -3.8 7/28/00 -4.7 7/19/02 -3.6 7/23/02 -4.1
First Trading Day of Expiration Week: 1990-2019
#Up-#Down   20-10   18-12   20-10   18-12   16-14
Streak   U2   U1   U1   U1   D2
Avg %   0.09   0.001   0.08   -0.02   -0.07
Options Expiration Day: 1990-2019
#Up-#Down   10-18   11-19   10-20   11-19   8-22
Streak   D3   D4   D4   D4   D3
Avg %   -0.42   -0.44   -0.54   -0.4   -0.61
Options Expiration Week: 1990-2019
#Up-#Down   18-12   16-14   14-16   16-14   15-15
Streak   D1   D1   D2   D1   D1
Avg %   0.31   -0.01   0.08   -0.03   -0.21
Week After Options Expiration: 1990-2019
#Up-#Down   17-13   15-15   15-15   16-14   12-18
Streak   U4   U2   U1   U2   U1
Avg %   0.02   -0.09   -0.39   -0.11   -0.35
July 2020 Bullish Days: Data 1999-2019
  1, 7, 9, 13, 14, 20 1, 6, 7, 9, 13 1, 7, 9, 13, 14 1, 7, 9, 13, 14, 20 1, 7, 13, 20
    14, 20 20, 28    
July 2020 Bearish Days: Data 1999-2019
  2, 21, 24, 30, 31 2, 15, 21, 29 2, 21, 29, 31 2, 21, 29 2, 21, 23, 29
July 2020 Strategy Calendar
By: Christopher Mistal
June 18, 2020
NASDAQ Seasonal MACD & Stock Portfolio Updates
By: Jeffrey A. Hirsch & Christopher Mistal
June 11, 2020
As of today’s close, the slower moving MACD “Sell” indicator applied to NASDAQ turned negative. At this time we are issuing our official MACD Seasonal Sell signal for NASDAQ.
[NASDAQ Daily Bar Chart with MACD] 
NASDAQ’s “Best Eight Months” have come to an end. As a result, Sell iShares Russell 2000 (IWM) and PowerShares QQQ (QQQ). For tracking purposes, these positions will be closed out of the Tactical Switching Strategy ETF Portfolio using their respective average prices tomorrow, June 12.
Also consider adding to existing positions in iShares Core US Aggregate Bond (AGG) and Vanguard Total Bond Market (BND) on dips. Suggested buy limits: 
AGG – $116.75
BND - $87.25
This NASDAQ Seasonal Sell Signal is a reminder to tighten stop losses and/or take profits on technology related positions as NASDAQ’s seasonally favorable period has come to an end. Russell 2000 exhibits a similar pattern to NASDAQ and small-cap positions could also be reviewed.
Stock Portfolio Updates
Over the last four weeks through yesterday’s close, S&P 500 jumped 13.1% and Russell 2000 leapt 19.0%. During the same time period the portfolio climbed 3.0% excluding dividends and any trading fees. Overall performance was held in check by a sizable cash balance of over 50% of the portfolio. Sizable gains by JetBlue Airways (JBLU) since last update lifted the Mid-Cap portion of the portfolio to a gain of 6.5%. Large-caps were second best, advancing 5.5% while Small-caps advanced just 2.8%.
CenterState Bank (CSFL) completed its merger with South State Corp (SSB) on June 5. For each share of CSFL held 0.3001 shares of SSB were received with fractional shares being paid out in cash. For tracking purposes CSFL was closed out of the portfolio using its last trade price from June and SSB was added to the portfolio using its close on June 5.
Recent housing market data, specifically mortgage data, has provided a boost for home builders. Low interest rates, pent up demand and perhaps a desire to relocate away from coronavirus hotspots are some of the main drivers. Small cap holding KB Home (KBH) was up 55.9% since being added in early April. Today’s decline has eroded some of that gain.
In the Large-cap portfolio, Regeneron Pharm (REGN) is the top performer overall, up over 100% at yesterday’s close. It has retreated from its recent highs, but on the way higher half of the original position, established last October, was sold on May 29 when shares doubled. This is standard trading procedure for the stock portfolio and can be found in the portfolio table’s footnotes below. The remaining shares of REGN are on Hold.
Defensive, dividend paying positions in the Large-cap portfolio have recovered nicely over the last four weeks. Of the 15 positions held (shaded in grey) all but four were positive as of June 10 close. The best performing position was Brookfield Infrastructure (BIP) up 10.6%. Consolidated Edison (ED) is the poorest, down 8.2%. Major portions of ED’s service region were in lockdown longer with the first stage of easing restrictions beginning just this week. As business activity resumes, ED will likely begin to improve as well.
Another portion of the portfolio that was recovering nicely was energy. Exxon Mobil (XOM), BP plc (BP) and TOTAL (TOT) had all bounced nicely higher over the past month. Crude oil supply is still ample, and demand is still down, but as the economy reopens and recovers demand is quite likely going to accelerate. XOM, BP and TOT are on Hold.
Church & Dwight (CHD) came within $0.12 of trading at its buy limit on May 26. CHD can still be considered on dips below its buy limit.
All other positions are currently on Hold. Please see table below for updated stop losses.
[Almanac Investor Stock Portfolio Table]
Persistent Volatility Runs Into Resistance & Exuberant Sentiment
By: Jeffrey A. Hirsch
June 11, 2020
We have all been gobsmacked by velocity and strength of this V-shaped rally off the March 23 bear market low. For the record this rally became an official Ned Davis Research defined bull market on May 26 when DJIA was up 30% from the low when it made a new recovery high after 50 calendar days (see NDR definitions below). And this was on the back of the shortest bear market on record, which lasted only 40 days. Today’s market comeuppance is an important reminder that we need to be patient with this market and heed our cautious analysis and stance. 
This is still the “Worst Six Months” and as we warned in the May Outlook when the market is down during the “Best Six Months” (November-April) as they were in 2020, the “Worst Six Months” (May-October) were down or flat 86% of the time with a median S&P decline of -6.7% since 1950. 
Other seasonal indicators are also flashing the caution sign. This year’s negative January Barometer and breached December DJIA low, point to possible retests of the lows and choppy, volatile trading over the next several months. See the updated composite graph of the seasonal pattern for these 22 years since 1950 in the June Outlook.
It appears that quite a fair amount of hope was built into the rally. Lots of hope that everything is just going back to the way it was real soon. But COVID cases are on the climb again and folks are concerned that a pause and/or reverse of reopening could delay the economic recovery and derail the bull. Up until the past few days it felt like mid-February again with the market ignoring economic and corporate data as momentum pushed everything higher.
The jobs report was a bit unbelievable and then Fed Chairman Powell’s candor and reserved outlook at yesterday’s press conference put the fear right back into the market today. Meanwhile the Atlanta Fed’s GDPNow model currently estimates that 2020 Q2 GDP growth will be down -48.5%. 
Sentiment had also become rather exuberant as the Weekly CBOE Equity Only Put/Call ratio we track in the “Pulse of the Market” hit 0.43 last week – its lowest level since the week ending 4/10/2010 about three weeks before the infamous flash crash. Investor’s Intelligence Advisors Sentiment survey Bullish advisors are now up to 56.9%. Correction advisors are down to 22.5% while Bearish advisors have slipped further to 20.6%, putting us at caution levels.
S&P 500 Technical Chart
Technically, things deteriorated rapidly today. After blasting through several levels of resistance we have been tracking as shown in the chart here S&P 500 stalled at 3210 and plunged 5.9% today through 3115 support/resistance and closed just below 3010 support/resistance which sits at the 2019 summer highs. The next major support level below here is 2725 right near where the 50-day moving average turned up in mid-May, which would be a 15.7% correction from the recent recovery high reached this past Monday, June 8.
Hope springs eternal, but caution remains the prudent course of action.
Ned Davis Research bull and bear market definitions:
A cyclical bull market requires a 30% rise in the DJIA after 50 calendar days or a 13% rise after 155 calendar days. Reversals of 30% in the Value Line Geometric Index since 1965 also qualify. A cyclical bear market requires a 30% drop in the DJIA after 50 calendar days or a 13% decline after 145 calendar days. Reversals in the Value Line Geometric Index also qualify. Bull and bear markets are measured at peak and trough dates, so both the time and price criteria must be met as of the peak and trough dates.
ETF Trades & NASDAQ’s Best Eight Months: Market’s Momentum Fading
By: Christopher Mistal
June 04, 2020
In light of all that has happened this year it is quite surprising to see NASDAQ was just 1.39% from its all-time closing high set on February 19 at yesterday’s close so soon. From NASDAQ’s February high, it was down over 30% on March 23 and from that low to yesterday it was up over 41%. Tech did fare much better during the peak of the shutdown and is still benefiting. Arguably, without their products and services the shutdown may not have even been possible and at a minimum it probably made stay-at-home orders slightly more bearable. Furthermore, job losses would likely have been even worse without the ability to work from home.
[NASDAQ Daily Bars and MACD Sell Indicator Chart]
In the chart above, NASDAQ’s dive lower and subsequent rebound are clearly visible in the upper pane. In the lower pane the current status of our Seasonal MACD Sell indicator is positive but fading. As of today’s close, it would take a one-day loss exceeding 60.35 NASDAQ points (0.63%) to turn MACD negative.
When NASDAQ’s MACD Sell indicator turns negative again, we will issue our NASDAQ Seasonal MACD Sell signal and begin clearing out remaining technology and small-cap positions held in the Almanac Investor ETF Portfolios. Until that time, all related positions are on Hold.
June Sector Seasonalities
There is only one new Sector Seasonality that begins in June, a bearish period for natural gas stocks that is based upon the NYSE ARCA Natural Gas Index (XNG). We are going to pass on this trade setup this time around. XNG has been in a downtrend since early 2014 and may have finally reached a bottom earlier this year in March. At this point, XNG could build on momentum from the economy reopening and easily head higher. And even if reopening does not go perfectly according to plan, delays are likely to be brief, limiting any downside.
[NYSE ARCA Natural Gas Index (XNG) Weekly Bars and Seasonal Pattern]
Sector Rotation ETF Portfolio Updates
Normally at this time of the year we would be in transition from the bullish “Best Months” to the historically tepid “Worst Months.” However, the majority of positions held in the Sector Rotation ETF portfolio were stopped out in early March. At that time the pace of the current market recovery was difficult to envision as job losses were and still are historically massive and the duration of the economic shutdown was also still a major unknown. As a result, we elected to not reenter “Best Months” positions then and instead begin the shift to a more cautious stance in the portfolio.
In early May positions in SPDR Consumer Staples (XLP), SPDR Utilities (XLU) and iShares NASDAQ Biotech (IBB) were established. As of yesterday’s close, all three positions are higher with an average gain of 7.2%. XLU is the top performer, up 12.5%. For now, XLP, XLU and IBB are on Hold
Massive amounts of fiscal and monetary support (here and abroad) have supported the market and also SPDR Gold (GLD). Even as major indexes have rallied to recovery sizable portions of their respective declines, GLD has held up well. Continue to Hold GLD. Gold & silver will soon be entering a seasonally favorable period and could see further gains.
[Almanac Investor Sector Rotation ETF Portfolio – June 3, 2020 Closes]
Tactical Seasonal Switching Strategy Updates
Currently the Tactical Seasonal Switching ETF Portfolio is essentially neutral. SPDR DJIA (DIA) and SPDR S&P 500 (SPY) positions have been closed and positions in bond ETFs AGG and BND have been established. Technology and small-cap related positions remain as they historically remain in favor through June.
All positions in the Tactical Seasonal Switching Strategy portfolio are on Hold.
[Almanac Investor Tactical Seasonal Switching Strategy ETF Portfolio – June 3, 2020 Closes]