7/25/2018: Dow 25414.10 | S&P 2846.07 | NASDAQ 7932.24 | Russell 2K 1685.20 | NYSE 12933.63 | Value Line Arith 6287.67

 

Psychological: Unwavering. July strength helped sustain bullish investor sentiment. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 54.9%. Correction advisors are up modestly to 26.5% and Bearish advisors are just 18.6%. Thus far Q2 earnings season has supported the bulls with the vast majority of companies reporting better than expected numbers. As long as the trend of better-than-expected reports continues, the market is likely to continue to climb the wall of worry.

 

Fundamental: Firm. U.S. unemployment ticked higher to 4.0% earlier this month, but remains solid. Atlanta Fed GDPNow model is currently forecasting Q2 growth of 3.8%. Tariffs and U.S. dollar strength could have an impact on corporate earnings, but it will likely be limited as China will support its exporters by weakening the yuan and other stimulus efforts.

 

Technical: Conflicted. NASDAQ traded at new all-time highs earlier this month, but DJIA and S&P 500 are still lagging. DJIA’s chart is the weakest as the gap between its 50- and 200-day moving averages continues to shrink while DJIA is currently just above its 50-day moving average. Even Russell 2000 is beginning to show signs of weakness as it failed to trade at new highs this month. The divergences between the major indexes are still not a bullish indicator.

 

Monetary: 1.75-2.00%. The Fed’s next meeting will end on August 1 and the current probability of a rate increase at this meeting is just 2.5% according to CME Group’s FedWatch Tool as of July 26. The Fed has raised rates seven times thus far and they are shrinking their balance sheet. This combination of monetary policy tightening is beginning to raise concerns that they may go too far. Already there have been calls for a pause in rate increases. The Fed could be the market’s and the economy’s worst enemy if they tighten too quickly or too much.

 

Seasonal: Bearish. August is the worst month of the year since 1988. Average losses over the last 30 years range from 0.3% by NASDAQ to 1.2% by DJIA. In midterm years since 1950, Augusts’ rankings improve slightly: #8 DJIA, #9 S&P 500, #11 NASDAQ (since 1974), #7 Russell 1000 and #11 Russell 2000 (since 1982). Average losses range from 0.1% for Russell 1000 to 1.9% for Russell 2000. DJIA suffered double-digit losses in 1974, 1990 and 1998.

 

Geopolitical concerns over the past few months from snafus and issues at the U.S. southern border over immigration disputes to tough tariff talk and trade war concerns have been shrugged off by the market since the end of June. Positive Q2 earnings, rising GDP growth, sustained unemployment and low rates continue to please the market, sending the market higher in July. This put DJIA up 4.00%, S&P 500 up 3.75% and NASDAQ up 4.40% for the month of July so far, qualifying this as a “Hot July Market”. 

 

Gains of this magnitude for July, however, have frequently been followed by a late-summer or autumn selloffs and better buying opportunities than now. In the past, full-month July gains in excess of 3.5% for DJIA have been followed historically by declines of 6.8% on average in the Dow with a low at some point in the last 5 months of the year.

 

 

Our concern presently is that as the market enters the historically worst two months of the year, August and September, it is getting a bit extended. This is reminiscent of the market in January 2018. Equity prices are once again pushing the top of the trading range and sentiment is heating up again. Sentiment is not quite as high as it was in January, but the market is more vulnerable seasonally as August is historically the worst month of the year. Volume tends to dry up during the vacation month leaving a vacuum of buyers that has frequently sucked the market lower.

 

In the chart below of the S&P 500 Seasonal Patterns, you can clearly see the S&P 500 in 2018 as represented by the black line finally poking above recent overhead resistance at the March and June highs. However, it is now at the time of the year historically where the market has stalled at its seasonal peak. The green line representing all years since 1949 and the blue line representing the years since the 1987 Crash both enter a sideways to lower trajectory from August through October.

 

 

The red line that represents the average of all midterm years since 1949 is clearly weaker during the historically worst six months May-October. This year has defied history for now, but the concern is that the market is poised to revert to the mean and consolidate over the next three months, more in line with the midterm year seasonal pattern.

 

However, we are not expecting any major selloff or decline at this juncture. We searched high and low and negative indicators and data are few and far between. The biggest risk to the market right now is the Fed. So far this new Fed under the guidance of Chairman Powell seems to be doing a superlative job. But that job entails normalizing rates as much as possible and reducing the balance sheet to chaperon the economy and market into a healthy growth state without the Kool-Aid of super easy money.

 

For now, expect the market to fade into summer with increased volatility heading into what promises to be a rather contentious midterm election season with a low point in the August-October time frame, holding the February/March lows at worst. Then as we hit the sweet spot of the 4-Year Cycle, which begins in Q4 of the midterm year (as you can see in the chart) and runs through Q2 of the pre-election year we expect the market to rally to new highs toward yearend 2018 and into 2019.

 

 

Late-June’s market swoon ended just days before the third quarter began. Q3 began in typical fashion with gains on the first trading day of July and NASDAQ’s Mid-Year rally gained traction lifting the overall market higher. DJIA quickly reclaimed its 200- and 50-day moving averages (1) and is currently trading at its highest levels since late February. The shift in momentum was confirmed by both the faster and slower moving MACD indicators applied to DJIA (2). Both indicators remain positive and trending higher.

 

 

At the start of this week DJIA logged its sixth Down Friday/Down Monday (DF/DM) of 2018 (3). Declines on Friday and Monday were mild and were recovered quickly. Historically when this has occurred subsequent declines were mild or avoided all together. Provided data and headlines remain favorable, this is likely to be the outcome in the near-term.

 

Recent technology strength has lifted S&P 500 (4) in seven of the last nine weeks while NASDAQ (5) has advanced in six of the last nine weeks. DJIA has been slightly weaker, up five of the last eight weeks. This lagging performance by DJIA appears to be fading this week, but DJIA is still furthest from its all-time closing high last reached in January.

 

Market breath has been mixed with NYSE Weekly Advancers out numbering NYSE Weekly Decliners in two of the last four weeks (6). Last week’s slightly positive breadth was accompanied by a minor NASDAQ loss and two weeks ago all three indexes advanced solidly, but breadth was negative. New Highs and New Lows (7) continue to oscillate with no clear trend for any meaningful duration of time. Expanding numbers of New Highs and shrinking number of New Lows is usually the trend of a healthy bull market.

 

30-year Treasury bond yields (8) have slipped below 3% suggesting long-term growth and inflation are likely in check. The 90-day Treasury yield has resumed its march towards 2% after pausing around 1.9% for seven weeks. The flattening of the yield might be a signal the Fed should heed.

 

 

 

Contributing to this poor performance since 1987; the shortest bear market in history (45 days) caused by turmoil in Russia, the Asian currency crisis and the Long-Term Capital Management hedge fund debacle ending August 31, 1998 with the DJIA shedding 6.4% that day. DJIA dropped a record 1344.22 points for the month, off 15.1%—which is the second worst monthly percentage DJIA loss since 1950. Saddam Hussein triggered a 10.0% slide in August 1990. The best DJIA gains occurred in 1982 (11.5%) and 1984 (9.8%) as bear markets ended. Sizeable losses in 2010, 2011, 2013 and 2015 of over 4% on DJIA have widened Augusts’ average decline. A strong August in 2014 of S&P 3.8% and NASDAQ 4.8% preceded corrections of 7.4% and 8.4% respectively from mid-September to mid-October.

 

 

In midterm years since 1950, Augusts’ rankings improve slightly: #8 DJIA, #9 S&P 500, #11 NASDAQ (since 1974), #7 Russell 1000 and #11 Russell 2000 (since 1982). Average losses range from 0.1% for Russell 1000 to 1.9% for Russell 2000. DJIA suffered double-digit losses in 1974, 1990 and 1998.

 

The first nine trading days of the month have exhibited weakness while mid-month is strongest. Note the bullish cluster from August 15-17. The end of August tends to get whacked as traders evacuate Wall Street for the summer finale. S&P 500 has been up only six times on the next to last day in the past 22 years. In the last 22 years, the last five days of August have averaged losses of: Dow Jones Industrials, –0.9%; S&P 500, –0.8% and NASDAQ, –0.4%.

 

On Monday of expiration the Dow has been up 16 of the last 23 times with four up more than 1%, while on expiration Friday it has been down seven of the last eight years (–3.1% in 2015). Expiration week as a whole is down slightly more than half the time since 1990, but some of the losses have been steep (-2.6% in 1990, -2.3% in 1992, -4.1% in 1997, -4.0% in 2011, 2.2% in 2013 and 5.8% in 2015). The week after expiration is mildly stronger up 17 of the last 28.

 

 

Over the past four weeks since last update, S&P 500 climbed 1.7% through yesterday’s close. Russell 2000 slipped 0.9% over the same time period. Overall, the entire Stock Portfolio climbed 0.5%. Mid-caps performed the worst falling 1.5%. Large-caps were best adding 5.7% while Small-caps edged lower by 0.2%. Compared to the S&P 500, the overall portfolio’s performance lagged due to a still sizable cash position and declines by small- and mid-cap positions.

 

Last month’s basket of Defensive Stocks is performing as expected for the most part. Of the 21 stocks selected sixteen are positive while five are lower. Four of the five decliners are from the Computer and Technology sector and can be found in the large-cap section of the portfolio. TE Connectivity (TEL) is the worst laggard, down 6.6%. Overall, technology has been leading for much of the year and these positions will likely turn around. The other laggard in the portfolio table is Algonquin Power (AQN) from the utilities sector. AQN climbed 2.7% today.

 

Of the sixteen positive defensive positions, ten of them are up more than 4.5% since being added to the portfolio a little over one month ago in mid-June. The best performing position is McCormick & Company (MKC), up 10.9% so far as of yesterday’s close. This “boring” old company in the spice and flavor market reported better than expected quarterly results on June 28 that triggered the rally in its shares.

 

Copper’s rout caught up with Southern Copper (SCCO) resulting in the third oldest holding in the portfolio being stopped out. SCCO had more than doubled while being held in the portfolio so after closing out the remaining half position a total gain of 97.5% was realized excluding any dividends or trading fees. Global Brass and Copper Holdings (BRSS) has also retreated with copper, but has held up better because of its use of recycled materials and the value-added nature of their products.

 

Historically speaking, the best part of July for the market has passed and we are now officially in the Worst Four/Six Months of the year. In an average year, trading volumes generally dry up and the market meanders until sometime in late Q3 or early Q4. In midterm years, the tendency has been to drift lower under the pressure of unfavorable policy initiatives and political uncertainty surrounding Election Day. Cash and defensive positions held in the portfolio can provide some level of protection during this period. All positions in the portfolio are currently on Hold. Please see portfolio table below for updated stop loss suggestions.

 

 

 

Selling the September S&P 500 futures contract on or about July 16 and holding until on or about July 25 has a 58.3% success rate registering 21 wins against 15 losses in the last 36 years. The best win was $19,150 in 2002, and the worst loss was in 2009, posting a $12,650 bereavement. This trade had been successful in 13 of 15 years from 1990 to 2004. However since then it has nearly the opposite record, posting losses in 10 of 13 years from 2005-2017. 

 

 

In these recent years, weakness did materialize however; it was not well aligned with the window defined by this trade. In some years weakness arrived early and was fleeting while in other years it was later and lasted into the early part of August. In 2015 this trade returned and was nearly perfectly aligned with the seasonal trend. This year the setup is compelling as S&P 500 is struggling to breakout above resistance around 2800. Yesterday’s modest sell off is a reminder of how quickly the market can change direction, especially with ongoing and escalating tariff concerns now that one round sparks another and so on. 

 

 

Looking at the chart above, you will see the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October (blue arrow). This trade targets the initial part of weakness (shaded yellow). Part of the reason is perhaps due to the fact that July starts the worst four months of the year for NASDAQ and also falls in the middle of the worst six months for DJIA and S&P 500. Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade, as active traders may have “bought the rumor” or bought ahead on anticipation of good earnings expectations and then turn around and “sell the news” once it hits the street.

 

For the Almanac Investor ETF Portfolio, our top choice to execute a trade based upon this seasonality is ProShares UltraShort S&P 500 (SDS). This trade is not for the faint of heart or those without the desire or ability to routinely monitor as SDS is leveraged two times the daily move of the S&P 500. This relationship can be seen in the following chart comparing SDPR S&P 500 (SPY) (daily bars) to SDS (solid black line). We will add SDS to the ETF Portfolio if SPY trades back down below its projected monthly resistance (red dashed line) at $276.84. Once added to the ETF Portfolio, a 3.5% trailing stop loss, based upon daily closing prices of SDS, is suggested.  

 

 

Today the market recovered nicely from yesterday’s tariff induced selloff. Once again technology shares lead the charge higher with NASDAQ closing up over 1.3% at a new all-time closing high. However, Invesco QQQ (QQQ) trading volume today was rather light suggesting limited interest in buying into the rally. The “Best Six/Eights Months” for stocks are over and it also looks like the summer doldrums could be right around the corner. 

 

We refer to the summer months as the doldrums due to the anemic volume and uninspired trading on Wall Street. The individual trader, if they are looking to sell a stock, is generally met with disinterest from the street. It becomes very difficult to sell a stock at a good price. That is also why many summer rallies tend to be short lived and are quickly followed by a pullback or correction.

 

 

In the table below we have beefed up the holiday trading table from page 88 of the Stock Trader’s Almanac to illustrate the effects of dramatic changes in trading volume before and after holidays. As with all the graphs and charts in this study, the volume numbers in this table are based on the deviation from the annual average daily volume. But first we need to take into consideration the shortened trading days that occur around certain holidays. 

 

Thanksgiving has the most consistent “half day” of all the holidays. Since 1992 the New York Stock Exchange (NYSE) has closed early and the roughly 50% reduction in trading should not be surprising as many people stay home recovering from the previous day’s feast and spend time with family. However, it seems that those that do trade are in good spirits, generally driving prices higher on the best post-holiday trading day of the bunch.

 

The day before and after Independence Day and Christmas do not close early as regularly, but have many early closings; when the respective holiday lands on a weekday. In any event all these annual average daily volume deviations provide a useful benchmark for evaluating the relevance or importance of a market move surrounding a holiday.

 

 

 

Monitoring market performance on the individual days of the week has been revealing over the years. The insights were so inspiring that our iconoclastic founder and resident consigliere, Yale Hirsch, entitled his 1986 book Don’t Sell Stocks on Monday. In the following charts we have lined up the performance on each day of the week from pages 141 and 142 of the Almanac with annual average daily volume deviations for each day.

 

Not surprising, Monday, or the first trading day of the week shows substantially reduced trading volume on both the NYSE and NASDAQ of about 9% below the average. Friday is also below average. This underscores the recent trend of market gains being concentrated midweek and weakness at the beginning and end of weeks.

 

Apparently, traders and investors prefer long weekends; or at least not being exposed going into the weekend and being more tentative about taking new positions upon their return. Picking up stocks on Monday weakness and unloading during midweek strength on higher volume would appear to be a prudent strategy for the most part. It also pays to be keen to price and volume action on Fridays and the following Monday for indications of future market direction. Strong volume and price advances tend to be bullish, while back-to-back weakness on normal or elevated volume is frequently bearish.

 

 

 

Examining the typical monthly price patterns from pages 145 and 146 of the Almanac in conjunction with the annual average daily volume deviations for each day below exposes the “follower” tendencies of market participants. Note how volume picks up after the usual month-end price gains and even more substantially following the normal mid-month surge.

 

Similar to the days of the week pattern, it makes sense to go against the crowd. Going long or covering shorts after midmonth into higher volume and selling or shorting the last few days of the month and into the first half as prices rise and volume declines appears to make the most sense.

 

 

 

Below we have plotted the one-year seasonal volume patterns since 1965 for the NYSE and 1978 for NASDAQ against the annual average daily volume moving average for 2018 so far. The typical summer lull is highlighted in yellow. Note the spike in volume that occurred in late June as the market began to weaken after mid-month. The recent volume trend for the current year shows a perennial trail off in volume may be underway.

 

An atypical surge in volume this summer, especially accompanied by outsized gains, would be an encouraging sign that the bull market will continue. However, should traders lose their conviction and participate in the annual summer exodus from The Street, a market pullback or correction could quickly unfold. 

 

 

Over the past seventeen years, June’s employment situation report, usually released on the first Friday of July, has largely been a market disappointment. DJIA, S&P 500, NASDAQ, Russell 1000 and Russell 2000 have all declined a majority of the time. With the exception of NASDAQ, average, historical performance on the day has been slightly negative. Across the board strength in four of the last five years has greatly improved average performance as the prior twelve year stretch was heavily bearish.

 

 

Today’s ADP private sector employment report showed 177k jobs were added in June. This was slightly softer than the 190k forecast, but the report also came with an upward revision to May’s numbers. This suggests that tomorrow’s employment situation report could be solid as well. Current estimates are looking for around 190k net new jobs were added in June and the unemployment rate is anticipated to hover around 3.8%. 

 

The U.S. labor market trend has been positive and likely continued in June. Which under “normal” circumstances would be positive for the market, but this time around it could also lend support for further rate hikes by the Fed which may not be beneficial. There is also the possibility of additional tariffs tomorrow that could outweigh any other data on the day.

 

 

Two new sector seasonalities begin in the month of July. First up is a bearish seasonality in Transports which typically begins in the middle of July and lasts until the middle of October. This seasonality is based upon the Dow Jones Transportation index (DJT). Over the last 5-, 10- and 15-year time periods DJT has declined 2.9%, 4.6% and 3.8% on average during this weak timeframe.

 

iShares Transportation (IYT) is a good choice to establish a short position in. IYT has just over $800 million in assets, has traded an average 202,000 shares per day over the past 20 trading days and has a reasonable 0.44% expense ratio. IYT’s top five holdings include: FedEx, Norfolk Southern, Union Pacific, JB Hunt and United Parcel Service.

 

 

Similar to DJIA and S&P 500, IYT has been struggling to regain ground after peaking in late January. More recently, IYT failed at resistance (red dashed line) in mid-June and has fallen below its 50- and 200-day moving averages (magenta and red lines, respectively). Stochastic, relative strength and MACD indicators are all negative, but bouncing off oversold levels. IYT could be shorted near resistance around $197.02 or a breakdown below $184.60. If shorted, set an initial stop loss at $201.00. If tit-for-tat tariffs spiral out of control and global trade activity does slow, transports are likely to be one of the first to get hit.

 

July’s second seasonality is from gold & silver mining stocks. This seasonality is based upon strength in the Philadelphia Gold & Silver index that typically begins in late July and lasts until late December. Over the last five years this trade has not been that successful however, over the last fifteen years the trade has averaged 10.1%. A three-pronged approach to this trade will be taken this time around. In addition to a long position in VanEck Vectors Gold Miners (GDX) positions in SPDR Gold (GLD) and iShares Silver (SLV) are also suggested.

 

 

GDX has been stuck in a narrow range between around $21 up towards $23 for the majority of the year. Recently it has shown some strength and recovered to trade back above its 50 and 200-day moving averages. Stochastic, relative strength and MACD indicators are all positive and improving. GDX could be considered on dips below $22.25. If purchased an initial stop loss at $21.25 is suggested. Take profits if GDX trades above $26.92.

 

 

Physical gold and silver and the ETFs that hold them have had a challenging year. Economic growth in the U.S. appears to be accelerating (at least in the near and short-term), interest rates are on the rise, the U.S. dollar is firm and a fury of new cryptocurrency offerings have all seemingly diminished the allure of gold and silver. Both GLD and SLV sold off rather briskly in the second half of June and both appear oversold and ready for a bounce. 

 

GLD could be considered at current levels with a buy limit of $119. If purchased, set a stop loss at $116.00.

 

SLV could be considers at current levels with a buy limit of $15.10. If purchased, set a stop loss at $14.60.

 

 

Per our NASDAQ MACD Seasonal Sell signal Alert on June 21, SPDR Technology (XLK), iShares US Tech (IYW), iShares Russell 2000 (IWM) and PowerShares QQQ (QQQ) were all closed out of the portfolio using their respective average prices on June 22. These trades have thus far proved rather timely as NASDAQ and Russell 2000 continued to decline following the Alert and have not yet recovered. 

 

Due to this weakness we were not able to add to existing positions in iShares 20+ Year Treasury Bond (TLT) or iShares Core US Aggregate Bond (AGG) as both did not dip below their buy limits. TLT is now on Hold. AGG could still be considered on dips below its buy limit.

 

Other defensive positions in SPDR Utilities (XLU) and SPDR Consumer Staples (XLP) can still be considered on dips buy their buy limits.

 

Sell Direxion Daily Jr Gold Miners Bear 3X (JDST). Seasonal weakness appears to have come to an end early. For tracking purposes this position will be closed out of the portfolio using its average trading price on July 6.

 

Please see update portfolio table below for the most recent advice, buy limits and stop losses.