1/28/2021: Dow 30603.36 | S&P 3787.38 | NASDAQ 13337.16 | Russell 2K 2106.61 | NYSE 14669.52 | Value Line Arith 8281.04

 

Fundamental: Mixed. Vaccine rollout continues to appear to be lacking, speed, quantity and organization further extending the pandemic. New Covid-19 variants are spreading and only further muddy the already rather murky data that is available. Economic growth is improving, but likely has a cap as long as sizable portions of the economy remain restricted or shutdown. Corporate earnings from stay-at-home economy companies have been solid while other sectors, namely leisure and hospitality, languish.

 

Technical: Consolidating. DJIA, S&P 500 NASDAQ and Russell 2000 all broke out to new all-time closing this month, but in many areas of the market valuations have been stretched. DJIA, S&P 500 and NASDAQ are all comfortably above their respective 200-day moving averages. DJIA touched its 50-day moving average yesterday while S&P 500 and NASDAQ did not. If support at the 50-day moving average fails, the next area of support is around the highs reached last September.

 

Monetary: 0 – 0.25%. During the first Fed meeting of the year this week, the Fed once again confirmed its commitment to doing whatever it takes to support the economy. This commitment is linked to employment and inflation and the most recent announcement suggests near-zero rates and QE will be around for the foreseeable future and likely beyond. Should weakness appear in February, it is likely to be brief and any retreat shallow. “Don’t fight the Fed.”

 

Seasonal: Mixed. It is the middle of the “Best Months,” but February can be a weak link. In post-election years, February ranks last for S&P 500, NASDAQ and Russell 2000. #10 for DJIA and #11 for Russell 1000. Steep losses in February 2001 and 2009 pull average performance deeply negative.

 

Psychological: Euphoric. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 61.2%. Correction advisors stand at 22.3% while Bearish advisors are at 16.5%. Bullish advisors are slightly lower than their recent peak at the end of November, but the CBOE Put/Call ratio fallen below 0.40 in each of the last two weeks, the lowest we have seen going back to at least 2001. 

 

It’s been a dynamic six weeks since we made our Annual Forecast for 2021 on December 17, 2021 and volatility has spiked this last week of January as the merry Gen Z traders made on run on the shorts of the old guard on Wall Street. Robinhood Markets and other trading apps and services and online communities used by younger up-and-coming retail traders were able to organize en masse and create an old-fashioned short squeeze. You’ve got to hand it to them. 

 

Just like all new investment and trading vehicles and trends this will get under control. But as we have seen in recent years this sort of thing is becoming more frequent as connectivity and technology bring the world closer together with transactions and communications transpiring near the speed of light. This is a market flaw that runs the risk of injuring innocent investors who are not privy to what is happening. 

 

Honestly, we’ve seen this sort of thing before over the years. There is always a new twist and this one will get hammered out by the exchanges, the broker/dealers, the new platforms and the regulators. While it may be exciting to see the next generation embracing the market and flexing their muscle our markets thrive on fair and orderly transactions. Admittedly a little comeuppance every now and then is interesting and it does help to keep the big players more transparent on their toes.

 

Members of Congress from both sides of the aisle chimed in on the subject as lawmakers criticized trading restrictions of the hot-button stocks on these platforms. The new Biden administration has stated that its economic team is monitoring the situation. Perhaps this will be the issue that helps bring our divided government closer together.

 

Technically speaking, by some measures, the market is over extended and the selloff on Wednesday, January 27, 2021, the biggest one-loss since October, was to be expected. Valuations and sentiment are also high. The retreat was also triggered by some disappointing earnings and perhaps the voracity of the Biden administrations barrage of executive orders and the realization by the markets that there’s a new sheriff in the White House.

 

But we don’t foresee a selloff of any consequence. Pullbacks and consolidations are bound to happen and also February is the weak link in the Best Six Months and worse in post-election year. Let’s look at the technical picture first. Since the market has been dominated by big tech even more for the past year during these Covid times the NASDAQ 100 Index (NDX) is the index of focus.

 

 

Yesterday’s big selloff seems to have bounced off new support levels that have formed just above the yearend highs and the early January consolidation as well as in that gap between the January 19 close and the open on the pop on January 20. The old major overhead resistance we highlighted last fall at the September 2 high was cleared by the usual strength in the last half of December and the Santa Claus Rally. That appears to be the new major support level at NDX 12420.

 

Our forecast six weeks ago for the yearend rally to continue was on track as the market closed 2020 at new all-time highs. Market behavior remains on track with historical seasonal patterns. This was confirmed by the arrival of the Santa Claus Rally (SCR), which registered a 1% gain for the 7-trading-day stretch that ended on January 5. Gains continued into the first week of January pushing the First Five Day (FFD) early warning system solidly into the black. 

 

This puts our January Indicator Trifecta at two for three so far in 2021. If the S&P 500 can hold these gains tomorrow our January Trifecta would be satisfied with a positive reading from our January Barometer (JB). The most bullish set-up is when all three indicators, SCR, FFD and JB, are positive. The details are in the table in our January 8 Alert, but the bottom line is that the last 31 times the market hit this Trifecta the S&P 500 was up for the full year 28 times for an average gain of 17.5%.

 

That’s not to say we don’t have concerns. Aside from this new Robinhood short squeeze event, sentiment remains extremely frothy and complacent with the weekly CBOE Equity Only Put/Call Ratio hovering at historic lows around and under 0.40 since Thanksgiving. Then there are the rich valuations and extended technicals. Plus we have a pandemic that’s still raging, roadblocks in the vaccine rollout, a struggling travel/leisure/hospitality sector and still elevated unemployment. 

 

On top of all that it’s a historically week post-election year and we are heading into February, the seasonal the week spot of the Best Six Months. But as we discussed in the Annual Forecast last month the markets have done better in recent post-election years and even better under new democrats with democratic control of congress. And while February is even weaker on average in post-election years most of the damage that brings the averages down came from massive losses in February 2001 and 2009.

 

However, there is strong support for the bull. The Fed continues to have our back with a commitment to keep rates at near zero for the foreseeable future and continue to flood the market with cash. More fiscal stimulus is likely on the horizon and most importantly if we can gain any traction with the vaccine rollout, pent-up demand is likely to rev the economy up again and push the market to new heights.

 

For now be prepared for a February pullback, but nothing sinister. With seasonality back in gear and the prospects for reining in the Covid-19 pandemic improving we expect the market to be positive for the year somewhere in range of our best and base case Annual Forecast scenarios. We will have an even clearer picture when we get our January Barometer reading at the close of the month tomorrow. 

 

 

Right up until yesterday January was performing more in line with its bullish longer-term, historical track record since 1950, with solid gains for DJIA and other major indexes. The recent spike in volatility is much more consistent with January’s recent track record over the past 21 years with a propensity for sizable swings and volatility. Yesterday’s DJIA decline stopped right on DJIA’s 50-day moving average (1). Provided today’s rebound sticks and yesterday’s decline proves to be an aberration, January will likely finish with a gain and a bullish January indicator Trifecta will be completed.

 

Even though DJIA has been steadily climbing higher since mid-November, the pace of gains has been moderating causing both the faster and slower moving MACD indicators to seesaw between bullish and bearish. As of the close on Wednesday, both the faster and slower MACD indicators were negative (2).

 

 

After two straight months of gains in November and December, DJIA recorded it first Down Friday/Down Monday (DF/DM) of 2021 earlier this week (3). Historically, the vast majority of DF/DM occurrences have been followed by continuing market weakness of varying magnitude and duration sometime during the next 90 calendar days. It is currently to soon to tell it the recent occurrence will be shrugged off by the market or a meaningful decline could still be forthcoming. If DJIA can quickly reclaim recent losses the chances of a larger decline in the near-term would be less. 

 

Bullishly, DJIA, S&P 500 (4) and NASDAQ (5) weekly declines have been small and infrequent since the beginning of November and the “Best Months.” The return of seasonality persists, and it suggests that the economy and the market are returning (slowly) to a normal as the pandemic is being slowly brought under control.

 

Market breadth measured by NYSE Weekly Advancers and NYSE Weekly Decliners (6) has remained positive as the market climbed higher into the New Year. Advancers have outnumbered Decliners by respectable margins for six weeks straight despite losses during the week ending January 15. This broad participation in the rally is bullish and suggests the rally can persist even if there is a pullback. 

 

Weekly New Highs (7) had expanded to their highest level since December 2016 last week. Weekly New Lows have also declined to their lowest levels since June of last year and have bounced around near those levels. Last week and likely this week will have broken the positive trend of expanding New Highs. Should the market quickly rebound and reestablish the trend of expanding highs then further gains in the near-term are likely.

 

One area that warrants close observation is the Weekly Put/Call ratio (8). Readings over the last two weeks match the early December 2020 reading of 0.39 and are the lowest in our data set going back to May 2001. This suggests bullish sentiment, at least when it comes to options, is frothy at best and dangerously euphoric at worst. Market excesses rarely resolve in an orderly and calm fashion. The timing is unknown as sentiment indicators can remain elevated for extended periods especially when the market continues to climb higher.

 

 

Even though February is right in the middle of the Best Six Months, its long-term track record, since 1950, is rather tepid. February ranks no better than sixth and has posted meager average gains except for the Russell 2000. Small cap stocks, benefiting from “January Effect” carry over; tend to outpace large cap stocks in February. The Russell 2000 index of small cap stocks turns in an average gain of 1.0% in February since 1979—just the sixth best month for that benchmark. 

 

February’s post-election year performance since 1950 is miserable, ranking dead last for S&P 500, NASDAQ and Russell 2000. Average losses have been sizable: -1.5%, -3.3% and -1.6% respectively. February ranks tenth for DJIA in post-election years with an average loss of 1.1%. February 2001 and 2009 were exceptionally brutal. NASDAQ dropped 22.4% in February 2001, its third worst monthly loss ever.

 

 

The first trading day is bullish for DJIA, S&P 500 and NASDAQ. Average gains on the first day over the last 21-year period are right around 0.5%. Strength then tends to fade after that until the stronger sixth, eighth, ninth and eleventh trading days. Expiration week had a spotty longer-term record but has been improving recently. Russell 1000 and Russell 2000 have advanced 10 of the last 11 years during options expiration week. The week after also had a clear negative bias that appears to be fading even though average losses remain across the board for the past 31 years. Last year’s option expiration week was the market’s turning point as covid-19 rapidly spread around the globe. All five indexes suffered double-digit losses in the last week of February.

 

Presidents’ Day is the lone holiday that exhibits weakness the day before and after (Stock Trader’s Almanac 2021, page 98). The Friday before this mid-winter three-day break can be treacherous and average declines persist for three trading days after the holiday going back to 1980. In recent years, trading before and after the holiday has been more bullish. S&P 500 has been up 9 of the last 10 years on the day before and NASDAQ has been up 7 of the last 8 years on the day after.

 

 

With nine trading sessions of the New Year complete, January and 2021 are off to a solid start. DJIA is up 1.26% as of today’s close, S&P 500 stands at 1.05%, NASDAQ 1.74% and small caps, measured by the Russell 2000 are up a whopping 9.14%. These gains all point to and confirm the return of seasonality that we have recently noted. 

 

Last September was weak as it has historically been, then October exhibited it historical tendency toward volatility while November and December were both positive, in line with typical seasonal patterns. A positive Santa Claus Rally and First Five Days are also encouraging indications that seasonal forces are once again tracking. We expect seasonality will continue to present itself going forward as extraordinary efforts are made to quell the pandemic and return to a pre-Covid, open-for-business, way of life.

 

Due to the reemergence of seasonality, we would not be surprised to see some market weakness in the second half of January next week that could persist throughout the rest of January and possible spill over into February. In the following seasonal pattern chart of January, the last 21 years of data for DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 have been plotted with January 2021 through today’s close plotted on the right vertical axis. 

 

Over the last 21 years, it has been NASDAQ leading at the halfway point, this year it is Russell 2000. Other than that, the major indexes have been tracking their historical patterns fairly well. There was strength early on, followed by sideways action. Should the current trend follow historical patterns then weakness after the eleventh trading day (January 18) is possible. Any weakness could be considered an opportunity to add to existing positions or to put new capital to work as more than half of the “Best Months” still remain.

 

 

In the near-term there are a few possible catalysts to trigger a brief market pause or pullback. Valuations are one potential area of concern as they are quite elevated within historical context. The run-up in equity prices has been fueled by expectations of a strong rebound in earnings. If that rebound is not as strong as anticipated, it could easily trigger some selling. 

 

Sentiment is also quite lofty suggesting that the majority of capital that wants to own stocks, most likely already does. Recent employment numbers, although largely overlooked on the premise they are just poor enough to support further stimulus, are also concerning. Here again, consensus is nearly certain that the new administration will be able to deliver a big and timely stimulus package. Entirely possible, but it also appears to be a perfect setup for disappointment.

 

Longer-term, we remain positive on the economy and the market and await the January Barometer’s reading at month end. Should the S&P 500 finish the month with a gain, no matter the size, it will complete the historically bullish January Indicator Trifecta which would further boost prospects for a positive post-election year 2021.

 

 

Over the last eight weeks through yesterday’s close, S&P 500 climbed 6.8% while Russell 2000 leapt 19.4%. During the same time period the entire portfolio climbed a respectable 3.5% higher excluding dividends and any trading fees. Our Mid-cap stocks were responsible for the majority of the overall advance, gaining 6.4%. Small-cap stocks rose 3.7% on average including the sizable cash balance held in that portfolio while our Large-cap portfolio trailed with a small 0.2% gain.

 

The Free Lunch basket of stocks making new 52-week lows on quarterly options expiration in December was a dud this year. There were a very limited number of new lows to choose from and those that did meet the criteria for inclusion were down for good reasons. There have been baskets of three stocks in the past so this year was not the first time for such a small basket. Nonetheless, all three positions were added to the portfolio on December 21 and all three have already been stopped out. Only A2 Milk Company (ACOPF) managed to post a small gain of 1.2%.

 

Sizable gains by Russell 2000 would suggest small-cap stocks in the portfolio should have performed well too. With the exception of the two Free Lunch Stocks, that is the situation. The open position average performance has climbed to 39.8% versus 20.5% in the last update. The five new positions presented on November 12, are now up an average of 26.2%. AVID Tech (AVID) is the top performer of the group, up 52.5% as of yesterday’s close. Small-cap banks have also enjoyed solid gains as the Treasury yield curve has steepened and stimulus payments were sent out. Xpel Inc (XPEL) ran away and has been cancelled.

 

Mid-cap positions also performed well, but with a few exceptions. Overall gains were supported by healthy advances by Valmont Industries (VMI), Aerovironment (AVAV) and OSI Systems (OSIS). The average performance of these three positions was 22% before today’s trading. AVAV’s 30.28% advance today on news it is purchasing Arcturus UAV further lifts gains.

 

Performance in the Large-cap portfolio was held in check by numerous defensive positions (shaded in light grey in table below) that have been held since April of last year. Many of the defensive positions are from interest rate sensitive sectors like Utilities and Consumer Staples. Weakness in these positions offset gains made by recently added positions. Overall performance was also hindered by two positions being stopped out, Entergy Corp (ETR) and Solarwinds Corp (SWI). Bright spots include Autodesk (ADSK) and Infosys (INFY); both are up over 20% since joining the portfolio last November.

 

Please see table below for specific buy limits, stop losses and current advice for each position in the portfolio.

 

 

Solid across the board gains today lifted S&P 500 to a year-to-date gain of 1.8% at today’s close and thus our First Five Day (FFD) early warning system is positive. Combined with this week’s positive Santa Claus Rally (SCR), our January Trifecta is now two for two. The January Trifecta would be satisfied with a positive reading from our January Barometer (JB) at month’s end.

 

 

The best case, most bullish scenario is when all three indicators, SCR, FFD and JB, are positive (in table above). In 31 previous Trifecta occurrences since 1950, S&P 500 advanced 87.1% of the time during the subsequent eleven months and 90.3% of the time for the full year. However, a January Indicator Trifecta does not guarantee the year will be bear or correction free. Of the four losing “Last 11 Mon” years, shaded in grey in the above table, 1966, 1987 and 2011 experienced short duration bear markets (2011, S&P 500 –19.4% peak to trough). In 2018, S&P 500 retreated 19.8% from its September high close to its December low close. 

 

Even if S&P 500 was to suddenly reverse course and finish the full month in the red, the prospects for the next eleven months and the full year remain decent. Of the last 11 times since 1950 (last year, 2020 is the most recent) that the SCR and FFD were both positive (and the full-month January was negative), the next eleven months advanced 81.8% of the time and full year advanced 72.7% of the time with gains of 8.2% and 4.1% respectively.

 

Positive SCR and FFD are encouraging, and further clarity will be gained when the January Barometer (page 16, STA 2021) reports at month’s end. A positive January Barometer would certainly boost prospects for full-year 2021. The December Low Indicator (2021 STA, page 34) should also be watched with the line in the sand at the Dow’s December Closing Low of 29823.92 on 12/1/20.

 

[2021 Stock Trader’s Almanac shipping update: Following production delays at our publisher, John Wiley & Sons, the 2021 Almanac was shipped to all existing members on December 28 via USPS. The USPS is also experiencing some delays, but your 2021 Almanac should be arriving soon in your mailbox, if it has not already. New Members that joined since December 30, we are shipping your 2021 Almanac as quickly as possible based upon the date you signed up.]

 

Now that the Georgia Senate seats runoff is settled and Joe Biden’s presidential election win has been certified we have more clarity on the political alignment for the next two years. We can extrapolate expected market performance based historical market performance under various political alignments and scenarios.

 

The two newly elected Democratic Senators from Georgia have tipped the balance of power in the Senate toward the Dems to an effective 50/50 split with the two Independents that caucus with the Dems. Democrats will gain control of the Senate with Kamala Harris’ tie-breaking vote once she is sworn in as vice president. Though the Democratic majority in the House of Representatives was diminished in the November elections they still maintain control. 

 

So the Dems control the White House and have virtual control of Congress, albeit by the thinnest of margins. The Senate majority is so thin you could consider this a split Congress. The thinking here is that this slim Democratic majority is likely sufficient to pass additional stimulus packages and perhaps even some real infrastructure legislation that has eluded Washington for decades. Yet, it’s not wide enough to push through any major tax increases or a Green New Deal.

 

In our Political Alignment Market Performance chart below you can see that the market has done best under a Democratic President with a Republican Congress gaining an average of 16.4% since 1949 and less than half as well with a Democratic Congress averaging 7.4% a year. However with a split Congress and a Democratic President, DJIA has returned an impressive 11.7%, though this is an extremely small dataset of four instances all under Obama from 2011-2014.

 

 

The other political cycle wrinkle to note is that we have change in party with a new, first year Democratic President. There are limited data points here as well with four. But they all came with democratic control of Congress and significantly higher performance for the S&P 500, averaging 10.6% with a median gain of 15.1% versus 7.0% for the average post-election year since 1949. The only loss came during Jimmy Carter’s first year that was saddled with the rampant stagflation of the late 1970s. 

 

 

We have concerns about the slow vaccine rollout, high unemployment and new jobless claims, and the lagging service/restaurant sector and travel/leisure industry. As detailed on page 32 of the new 2021 Almanac, there is also the Post-Election Year syndrome, where we have historically paid the piper with a long history of bear markets, wars and foreign fiascos plaguing the Post-Election Year. But we are encouraged by the low rate environment, more fiscal stimulus and tame inflation. We suspect pent up demand to be unleashed later this year that should alleviate any market or economic setbacks we may experience in 2021. 

 

Based upon the NYSE ARCA Natural Gas Index (XNG) there is a seasonal tendency for natural gas companies to enjoy gains from the end of February through the beginning of June. Detailed in the Stock Trader’s Almanac 2021 on page 92, this trade has returned 13.8%, 11.5%, and 19.3% on average over the past 15, 10, and 5 years respectively. Seasonal strength can be seen in the following chart, highlighted in yellow.

 

 

One of the factors for this seasonal price gain is consumption driven by demand for heating homes and businesses in the cold weather northern areas in the United States. In particular, when December and January are colder than normal, we see drawdowns in inventories through late March and occasionally into early April. This has a tendency to cause price spikes lasting through mid-April and beyond. Crude oil also has a tendency to rise during this timeframe in anticipation of the summer driving season.  

 

Natural gas and crude oil prices both plummeted last year as the global pandemic significantly cut demand. Prices have recovered as lockdowns eased and economies have recovered, but not fully as the pandemic continues. As vaccine rollout accelerates, energy demand is also highly likely to improve. The increase in demand also appears it could arrive when supplies may be under pressure by a new administration in the White House and production cuts from OPEC.

 

First Trust Natural Gas (FCG) is an excellent choice to gain exposure to the company side of the natural gas sector. FCG could be bought on dips below $10.00. Once purchased, consider using an initial stop loss of $8.40 and take profits at the auto sell, $12.52. Top five holdings by weighting as of yesterday’s close are: Diamondback Energy, Devon Energy, Apache Corp, Occidental Petroleum and Hess. The net expense ratio is reasonable at 0.6% and the fund has approximately $117.7 million in assets.

 

 

 

Broad market strength in November and December has continued into the New Year and the overall Sector Rotation Portfolio has benefited nicely. Nearly every position in the portfolio is positive. The lone exception is iShares Silver (SLV). As is often the situation, the portfolio has its leaders and its laggards. Since our November 5 Seasonal Buy signal the best performing position has been SPDR Financials (XLF), up a solid 21.5%. iShares PHLX Semiconductor (SOXX), SPDR industrials (XLI) and SPDR Materials (XLB) are all up double-digits. Vanguard REIT (VNQ) is the laggard, up just 2.9% (excluding dividends and fees). 

 

Last month’s Seasonal Sector Trades ideas targeting seasonal strength in copper have been added to the portfolio. United States Copper (CPER) and Global X Copper Miners (COPX) were added in mid-December when both broke out above projected monthly resistance. CPER and COPX are on Hold.

 

Last month’s trade aimed at oil stocks, SPDR Energy (XLE) has also been added to the portfolio. XLE is on Hold.

 

With the exception of the new trade idea, all other positions in the portfolio are currently on Hold. Many positions have enjoyed solid gains and the broad market is headed toward a seasonally soft patch that can last from mid-January into early February. Please see table for updated buy limits and stop losses.

 

 

 

As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio has an average gain of 11.3% since our Seasonal Buy Signal. iShares Russell 2000 (IWM), is the top performing position in the basket, up a whopping 24.3%. After leading throughout the majority of 2020, Invescos QQQ (QQQ) is the laggard of the group, up just 5.1%. All positions in the portfolio are on Hold.

 

Please note, positions in the Tactical Switching Strategy portfolio are intended to be held until we issue corresponding Seasonal MACD Sell Signals next year after April 1. As a result, no stop loss is suggested on these positions.

 

 

As defined in the Stock Trader’s Almanac, the Santa Claus Rally (SCR) is the propensity for the S&P 500 to rally the last five trading days of December and the first two of January an average of 1.3% since 1950.

 

The lack of a rally can be a preliminary indicator of tough times to come. This was certainly the case in 2008 and 2000. A 4.0% decline in 2000 foreshadowed the bursting of the tech bubble and a 2.5% loss in 2008 preceded the second worst bear market in history.

 

Despite a challenging first trading day of the New Year, S&P 500 did finish the seven-day trading span defined by the Santa Claus Rally with a 1.0% gain. Including this year, Santa has paid Wall Street a visit 57 times since 1950. Of the previous 56 occasions, January’s First Five Days (FFD) and the January Barometer (JB) were both up 31 times. When all three indicators were positive, the full year was positive 28 times (90.3% of the time) with an average gain of 17.5% in all years.

 

A positive SCR is encouraging, and further clarity will be gained when January’s First Five Days Early Warning System (page 14, STA 2021) gives its reading later this week and when the January Barometer (page 16, STA 2021) reports at month’s end. A positive First Five Days and January Barometer would certainly boost prospects for full-year 2021. The December Low Indicator (2021 STA, page 34) should also be watched with the line in the sand at the Dow’s December Closing Low of 29823.92 on 12/1/20.