2/24/2022: Dow 33223.83 | S&P 4288.70 | NASDAQ 13473.58 | Russell 2K 1996.01 | NYSE 15996.00 | Value Line Arith 9200.93

 

Seasonal: Bullish. March is the fifth month of the Best Six/Eight Months for DJIA, S&P 500 and NASDAQ. Normally a solid month, March has historically been even stronger in midterm years ranking #4 for DJIA and S&P 500 since 1950 and #3 for NASDAQ since 1971. Average gains in midterm Marchs range from 1% from DJIA to an impressively 2.7% from Russell 2000.

 

Fundamental: Murky. Russia’s invasion of Ukraine further threatens already stressed supply chains. Spiking oil prices are likely to quickly spill over and fuel inflation further. Long-term sanctions on Russia and the likely resulting suppression of global economic activity are also likely to weigh heavy in the near-term. Positively, Q4 U.S. GDP was revised higher to 7% while employment metrics remain firm. Corporate earnings have also remained solid. 

 

Technical: Correcting. DJIA, S&P 500 and NASDAQ are all below their respective 50- and 200-day moving averages. A death cross has formed on NASDAQ’s chart (50-day has fallen below 200-day moving average). NASDAQ is down 16.1% from its November closing high through today’s close. S&P 500 is down 10.6% while DJIA is holding up best, down 9.7%. At the lows of today, NASDAQ was down over 20%, the threshold widely used to define a bear market. All three indexes have taken out support around last October’s lows now. The next key level of support appears to be around the lows of March 2021; around DJIA 31500, S&P 500 3850 and NASDAQ 12500.

 

Monetary: 0 – 0.25%. Prior to Russia’s invasion consensus was building for the Fed to be more aggressive with rate hikes. Considering the amount of uncertainty that has been introduced by the invasion and sanctions our view that the Fed will likely only raise rates four times this year still appears reasonable. Spiking energy prices could cause inflation to spike higher, but the Fed is likely to view that as transitory and remain committed to it data-dependent approach. Rates will be higher however, even at 1 to 1.5%, they are still low compared to historical levels (and will still remain negative when compared to inflation’s projected trajectory).

 

Psychological: Neutral. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors have retreated to 32.2%. Correction advisors stand at 36.8% while Bearish advisors are at 31.0% as of their February 23 release. The continued swelling of the Correction and Bearish camps suggests that cash has likely been raised by this group. Historically, the best buying opportunities have occurred when Bears outnumbered Bulls (occasionally for weeks). This week’s trading and geopolitical events has the potential to begin to satisfy these criteria by sending more advisors into the Bear category.

 

Despite all the warnings and rhetoric from US et al and Putin’s own words the world still seemed unprepared and shocked by Russia’s full-scale invasion of Ukraine that got officially underway at dawn local time February 24, 2022, with the brazen, matter-of-fact speech by Russian leader Vladimir Putin in no uncertain terms threatening the west with historic wrath should they interfere. 

 

Under the auspices of protecting the breakaway regions and his disdain for NATO’s continued eastward expansion toward his borders he launched his gambit to take over Ukraine as he made the case that Ukraine is rightfully and historically for centuries been part of Russia. The US was not too thrilled with Russian Missiles in Cuba in October 1962, which at the height of the Cold War set off the Cuban missile crisis.

 

In the table below we compiled the relevant historical geopolitical events that had an impact on energy prices and/or sovereign boundaries. As you can see the longer more drawn-out crises were accompanied by weaker markets. Arguably back in 2014 Putin stopped in Crimea due to plunging oil prices hurting his coffers. Our guess is he will use the same playbook or similar for the rest of Ukraine and eventually kick out the pro-western government and hold some kind of election to install and establish a new pro-Russian government.

 

 

It looks likely Russia will take over all or most of Ukraine. There will be resistance, but Ukraine’s military is no match for Russia and there is not much the west can do about it either on the ground or militarily. We just don’t have the stomach or bandwidth for it. Sure, we will battle him on the economic front with sanctions and with cyber as well as support for Ukraine and NATO, but Russia has prepared for this and has withstood it before for decades during the Cold War. 

 

We are likely looking at sanctions on Russia for many years. He has been preparing for this for years and in earnest when he ramped up his rhetoric six months ago in his notorious essay. He does not need the west now and it looks like China has clearly approved this action by the recent friendly summits and likely has his back. Putin has been selling dollars and amassing gold in preparation for this and has benefited greatly from the rise in oil prices.

 

 

However, the market showed some impressive resilience to this invasion with the big rebound today. As we have been warning all year long this is typical midterm election action for a new president where foreign adversaries take advantage of new administration weakness and unpreparedness. 

 

Unfortunately, our worst-case scenario has now come into play. But on the positive side it looks like the midterm bottom is nearing. When we made our 2022 Annual Forecast this past December prospects for a full-scale Russian invasion of Ukraine were low. For now, expect volatility to continue through Q2 and Q3 as the market seeks support, digests the developments in Ukraine, elsewhere in the geopolitical arena and on the Fed/inflation front. We still expect the Q4 rally illustrated in our updated chart here of the S&P 500 Midterm Election Year Seasonal Pattern to materialize as we approach the midterm elections in the late summer or early fall.

 

 

 

Historically, February has been a better month in midterm years. For numerous reasons that has not been the situation this year. As of today’s close DJIA is down 8.6% year-to-date. Early February strength was quickly reversed by the beating of Russian war drums and DJIA promptly retreated back below its 200-day moving average (1). The failed early-February rally is confirmed by negative readings from both the faster and slower moving MACD indicators (2) applied to DJIA.

 

 

DJIA (3), S&P 500 (4), and NASDAQ (5) have all declined in five of the last seven weeks since the start of the year. So far this year, DJIA has logged four Down Friday/Down Monday (DF/DM) occurrences with two landing in January and two more during the last two weeks. Historically, DF/DM occurrences have frequently been ominous warnings especially when closely grouped together. Thus far this has been the case this year.

 

NYSE Weekly Advancers and Weekly Decliners (6) have been consistent with the market’s overall move. Decliners have outnumbered Advancers during losing weeks while the opposite occurred in advancing weeks. The lone exception to this was the last week of January when DJIA, S&P 500 and NASDAQ all logged a modest weekly advance even as Weekly Decliners outnumbered Weekly Advancers by about 2-to-1. Despite the accumulating market losses, the Weekly Advance/Decline numbers have yet to approach the extreme one-sided spike in Decliners last seen at the March 2020 lows when Weekly Advancers fell to less than 100.

 

With all the weakness this year, Weekly New Highs (7) have remained subdued. New Lows however have been on the move but have only exceeded 1000 during the final week of January. Today’s early morning sell off is likely to elevate this week’s reading of New Lows. Once again looking back to the last major market bottom in March of 2020, Weekly New Lows exceeded 2500 for two weeks then. 

 

Yields for the 90-day and 30-year Treasury had been steadily climber higher (8) in anticipation of Fed rate hikes coming sooner rather than later up until this week. Russia’s Ukraine invasion has resulted in a mild flight to safety and a corresponding dip in yields. The dip will likely not last that long as the Fed is expected to take some action at its next meeting.

 

Even before Russia invaded Ukraine there was more than an ample amount of uncertainty that the market was trying to sort through. The additional political instability only further muddies the waters. Throughout history the market has been tested over and over and it has always found its way higher. The exact timing remains unknown but should not be viewed as a reason to bail on all your positions. Heed stops, remain focused on your strategy, and be prepared to put cash back to work.

 

 

As part of the Best Six/Eight Months, March has historically been a solid performing month with DJIA, S&P 500, NASDAQ, Russell 1000 & 2000 all advancing more than 62% of the time with average gains ranging from 0.6% by NASDAQ to 1% by S&P 500. Over the recent 21-year period, March has tended to open well with gains accumulating over its first three trading days. Temporary weakness follows before moving modestly higher into mid-month through month’s end.

 

Julius Caesar failed to heed the famous warning to “beware the Ides of March” but investors have been served well when they have. Stock prices have a propensity to decline, sometimes rather precipitously, during the latter days of the month. In March 2020, DJIA plunged nearly 4012 points (-17.3%) during the week ending on the 20th. Removing the highly volatile March’s of 2009 and 2020 from the recent 21-year chart has a minimal effect on the overall monthly pattern. 

 

 

March packs a rather busy docket. It is the end of the first quarter, which brings with it Triple Witching and an abundance of portfolio maneuvers from The Street. March Triple-Witching Weeks have been quite bullish in recent years. But the week after is the exact opposite, DJIA down 22 of the last 34 years—and frequently down sharply. In 2018, DJIA lost 1413 points (–5.67%) Notable gains during the week after for DJIA of 4.88% in 2000, 3.06% in 2007, 6.84% in 2009, 3.05% in 2011 and 12.84% in 2020 are the rare exceptions to this historically poor performing timeframe. 

 

Normally a solid performing market month, March improves in midterm-election years (see Vital Statistics table below). In midterm years March ranks: 4th best for DJIA and S&P 500 and 3rd best for NASDAQ and Russell 1000 while he small-cap Russell 2000 lands at second best. DJIA, S&P 500, Russell 1000 and 2000 have been up for five of the last six midterm Marchs.

 

 

Saint Patrick’s Day is March’s sole recurring cultural event. Gains on Saint Patrick’s Day have been greater than the day before and the day after. Perhaps it’s the anticipation of the patron saint’s holiday that boosts the market and the distraction from the parade down Fifth Avenue that causes equity markets to languish. Or maybe it’s the fact that Saint Pat’s usually falls in historically bullish Triple-Witching Week. 

 

Whatever the case, since 1950, the S&P 500 posts an average gain of 0.27% on Saint Patrick’s Day (or the next trading day when it falls on a weekend), a gain of 0.03% the day after and the day before averages a 0.07% advance. S&P 500 median values are 0.17% on the day before, 0.23% on Saint Patrick’s Day and 0.01% on the day after. In the ten years when St. Patrick’s Day falls on a Thursday, like this year, since 1950, the day before (Wednesday) produced an average gain of 0.03%, while Thursday averaged 0.38% and Friday averaged 0.15%.

 

 

 

Just when it was beginning to look like the market was finding some support and extending its rally off of its January low, today’s headline CPI and comments from Federal Reserve Bank of St. Louis President James Bullard quickly derailed it. CPI came in at a hot 7.5% year-over-year versus expectations of 7.2%. Bullard was quick to share his view that the Fed should move quickly with a big response. The resulting surge in bond yields sent stocks tumbling and the CBOE VIX index jumped around 20%. This is the volatility that we have been discussing and anticipating during this midterm election year.

 

 

Our familiar chart of various midterm year scenarios that are currently applicable has been updated with 2022 performance through today’s close. S&P 500 remains well below its historical average performance for this time of the year and aside from a modest gain in “All Midterm Years,” the historical patterns suggest continued tough trading through the balance of February. It is not until early March that all the historical patterns suggest any meaningful market improvement. This midterm year we may be forced to wait until the Fed meets again on March 15-16 before we get a clearer picture of the course the Fed intends to take to combat persistently hot inflation.

 

 

In the face of broad market declines and no January Effect from small-caps stocks, Free Lunch stocks selected back in December were largely duds this year. Of the four positions that remained open in the last update, three more have been stopped out. LE, MTRX and UPLD were all closed not long after last month’s January 20 update. Core Laboratories (CLB) is the only remaining position still held. CLB did manage to buck today’s broader trend with a modest 0.12% gain today. With mid-February nearly here and the market still struggling, Sell CLB. For tracking purposes it will be closed out of the portfolio using its average price on February 11.

 

 

Over the last three weeks since last update through yesterday’s close, S&P 500 advanced 1.2% while Russell 2000 climbed 1.0% higher. Over the same time period the entire portfolio slipped 1.6% lower, excluding dividends and any fees. Mid-Cap positions, on average, were the worst performing off 2.3% as three positions were stopped out. Large-Caps were second worst, off 2.0% with one position recently stopped out. Small-Caps declined 1.4% on average with one position closing below its stop loss. In total, across all segments five positions were stopped in late January and early February.

 

Bank, energy and utility positions held up reasonably well, but did weaken modestly. Higher interest rates are generally viewed as a positive for banks as long as the yield curve is steepening or is anticipated to steepen. Utility positions typically falter as rates climb higher but considering many of the positions are still offering dividend yields that are better than Treasury yields, they have held up. Being viewed as generally defensive in nature has also likely aided utilities. Crude oil was making a run toward $100 per barrel, but it appears to be pausing and doing a bit of back filling around the $90 level currently. Some stability in the energy market would be welcomed by consumers and inflation hawks, but that does not appear all that likely given the current political climate.

 

Constellation Energy (CEG) has joined the Large-Cap portfolio since last update. This was not a new trade idea; the position is the result of a spin off from Exelon Corp (EXC). For every three shares of EXC held one share of CEG was received. The spinoff resulted in an adjustment to EXC’s Presented Price approximately equal to the value of CEG shares received. CEG opened for trading at $38 and that is the price that will be used to track its performance. Both EXC and CEG are on Hold.

 

After rebounding off its low, AT&T (T) has weakened again. T is the sole open position that was in the red on the close on February 9. T has struggled due to uncertainty with its dividend and its media properties. There is now some clarity on both fronts as T announced that it intends to spin off Warner Media and merge it with Discovery Inc. while its dividend will be cut to $1.11 per share. When the spin off completes T shareholders will receive 0.24 shares of Warner Bros. Discovery for each share of T held. Hold shares of T as the spin off does appear it may be beneficial to both T and the new media company.

 

All other positions are on Hold. Please see the table below for updated stop losses and current advice for positions not covered above.

 

 

February has historically been a rather bland month. Since 1950, S&P 500 has averaged a measly 0.001% gain. Over the more recent 21-year period S&P 500 average performance has declined to a loss of 0.4% in February. February’s first trading day has historically been good, and it was earlier this week, while trading days four, six, nine, ten and eleven have been consistently bullish over the last 21 years with each advancing at least thirteen times. Outside of these six days, the balance of February has been somewhat disappointing for bulls. Weakness after mid-month is most notable with every index giving back all of their respective gains by month’s end.

 

 

 

Featured in the Stock Trader’s Almanac 2022, on page 94, Sector Seasonality, there are two sectors that begin their seasonally favorable periods in March: High-Tech and Utilities. This year we are going to look to take advantage of any seasonal weakness in February to establish new positions associated with these sectors.

 

In the following weekly bar chart of the Utility Sector Index (UTY), seasonal strength (lower pane, shaded in yellow) typically begins following an early or mid-March bottom and usually lasts through early October although the bulk of the move is typically done sometime in late May or early June (blue arrow). Last year’s volatile trading has impacted the seasonal pattern in the lower pane of the chart. Typically the pattern is less choppy as the sector does not usually experience major price swings in a year. Utilities tend to be a defensive sector of the market and historically have seen gains during the “Worst Six Months,” May through October.

 

 

With over $13 billion in assets and ample average daily trading volume, SPDR Utilities (XLU) is a top choice to consider holding during Utilities’ seasonally favorable period. It has a gross expense ratio of just 0.10% and a relatively attractive yield of 2.93%. Top five holdings include: NextEra Energy, Duke Energy, Southern Co, Dominion Resources and American Electric Power Company.

 

XLU could be considered near current levels up to a buy limit of $69.90. This is right around its projected monthly pivot point (blue-dashed line in daily bar chart below). After declining for nearly the entire month of January, technical indicators applied to XLU all began to improve in late January and appear to be continuing that trend into February. Based upon its 15-year average return of 8.3% (excluding dividends and trading fees) during its favorable period mid-March to the beginning of October, set an auto-sell price at $83.27. If purchased an initial stop loss of $62.91 is suggested. For tracking purposes, XLU will be added to the Sector Rotation ETF portfolio using its average price on February 4.

 

 

Our favorite ETF to trade High-Tech’s seasonal strength from mid-March through the beginning of July is iShares DJ US Tech (IYW). Our existing position was stopped out on January 25. Any February weakness could be an opportunity to consider establishing a new position. IYW can be considered on dips below $98.25. If purchased an initial stop loss at $88.43 is suggested and should above average gains materialize take profits at the auto-sell price of $119.86. For tracking purposes, we will add to the existing position if IYW dips below the buy limit. Mega-cap tech earnings have been either complete blowouts, like Google or complete blowups, such as Meta Platforms (Facebook). With this in mind, we will hold remaining tech-related positions, but limit new purchases as the outlook is becoming increasingly murky. 

 

 

 

January’s across-the-board weakness was felt across the portfolio. One exception was SPDR Energy (XLE) as crude oil continued to advance and natural gases prices firmed. At yesterday’s close XLE was up 17.8%, good for second best in the portfolio after SPDR Gold (GLD). XLE did retreat modestly today as crude oil broke above $90. It appears as though there is little standing in the way of crude and the $100 threshold. Continue to Hold XLE.

 

GLD is also on Hold. It has held up well considering the relatively rapid shift in Fed policy that is bringing QE to an accelerated end and promising to raise rates in an effort to curtail surging inflation. For nearly a year gold has been trading sideways, but each retreat has been ending at a higher low. This pattern could be setting gold and GLD up for a new and perhaps meaningful upside move.

 

Tech was a loser in January even after a nice late-month surge recovered some of the declines. As a result of the declines, previously mentioned IYW was stopped out along with SPDR Technology (XLK) and SPDR Consumer Discretionary (XLY). Given the choppy nature of tech earnings thus far we are going to let XLK go, and we are also going to pass on XLY due to having nearly 40% of its holdings in Amazon and Tesla.

 

Last month’s new trade idea, First Trust Natural Gas (FCG), was added to the portfolio on January 14. With natural gas prices finding firmer ground, FCG was up a modest 3.2% at yesterday’s close. Today FCG did take a hit, but its decline was less than the broad indexes even as natural gas had a tough day.

 

SPDR S&P Biotech (XBI) is the worst performing position in the portfolio, and it was down more today. Per last update, additionally shares were added to the existing position and the original entry price has been adjusted for the new shares at a lower price. XBI is intended to be a long-term core holding in the portfolio. XBI is on Hold. 

 

With the exception of the new trade ideas, all other positions in the portfolio are currently on Hold.

 

 

 

As of yesterday’s close, the Tactical Seasonal Switching Strategy portfolio had an average loss of 0.01% since our Seasonal Buy Signal. iShares Russell 2000 (IWM), is the worst performing position in the basket, down 9.3%. SPDR S&P 500 (SPY) was best, up 4.6%. As of today’s close Invesco QQQ (QQQ) is also in the red. All positions in the portfolio are on Hold.

 

Positions in the Tactical Switching Strategy portfolio are intended to be held until we issue corresponding Seasonal MACD Sell Signals after April 1 for DJIA and S&P 500 and after June 1 for NASDAQ and Russell 2000. Due to this no stop loss is suggested on these positions and ample time remains for the market and these positions to improve.