The Market Continues Recent Pattern

Market Outlook

The stock market has been on a roll the past few weeks after recovering from the most recent price dip. The S&P500 index has been hitting record after record and is on pace stream through the 2,000 milestone pretty soon. All the major equity indexes finished the past week with gains, helped out by a modestly good second-quarter earnings season. Also keeping investors focused on equities was the continued flow of data showing little inflationary pressure that would force the Federal Reserve to push up interest rates earlier than the expected timeline, the second half of 2015.  The most recent data, showing prices still well in check and consumer spending flat, suggest the Fed has much more time to continue supporting the economy with its ultra-low benchmark rate.

As discussed in the Stock Trader’s Almanac with the market quickly shaking off geopolitical and Fed interest rate concerns and within striking distance of new all-time highs once again, the resiliency of the current bull market is exceptional. Using a 20% decline as the definition of a bear market, there have been 11 bull markets including the current one and 10 bear markets since 1949. The previous ten bull markets lasted an average of 1770 calendar days and produced gains of 161.4%. Within these 11 bull markets there were 22 corrections ranging from 10% to 19.9% for an average of two corrections per bull market. The current bull market, at 1963 days old and 193.8% gain is above average in duration and magnitude, but average when it comes to number of corrections. The quickest correction was 18 calendar days in 1955 while the longest was 531 from September 1976 to March 1978. The longest the S&P 500 went without a 10% correction was 2553 calendar days from October 1990 until October 1997. The second longest streak without a correction occurred in the last bull market that ended in 2007 when the S&P 500 went 1673 days. The fewest number of days between corrections was 35 in 1974. 

The S&P 500’s current streak of 1025 days is nearly twice the average number of days between past corrections, but unlike past streaks of similar or greater length, the current streak is most likely the result of unprecedented monetary policy actions rather than robust economic performance. Eventually, the current streak will come to an end, just like all those from the past.

In the last 414 days, the S&P 500 index has gained about 42% and there are 10 V-shaped recoveries leading to new all-time highs with no consolidation periods longer than a month.

Investor Analysis

According to the Stock Trader’s Almanac the market is handsomely outperforming this August compared to historically averages. So far DJIA has gained 2.6%, S&P 500 3.0 % and NASDAQ a solid 3.9% this August. Since 1987, DJIA has averaged a loss of 1.1% in August. Over the same time period S&P 500 and NASDAQ have averaged losses of 0.8% and 0.1% respectively. Since 1996 over the last five trading days of August, DJIA, S&P 500 and NASDAQ have declined two thirds of the time (NASDAQ is slightly better with one additional advance) with average losses in excess of 1%. Even when crisis filled 1998 is dropped from the averages, the average improves only modestly for DJIA (–0.8%) and S&P 500 (–0.7%). Again NASDAQ proves best; excluding 1998 it is still down –0.1%.

The prospects for full-month August gains have improved. In the last 22 years, when the S&P 500 was positive in August through the ninth trading day it went on to post a full month gain in seven of nine years. In these nine years August finished with a well-above average gain of 2.0% however, the bulk of the move was usually completed by the ninth trading day as S&P 500 only averaged 0.5% from the ninth trading day to the end of the month. 

Last week we reported “….Brian Reynolds, chief market strategist at Rosenblatt Securities in New York, believes tech, healthcare and large-cap biotechs are in position to lead the U.S. stock market higher for the next several weeks... If this analysis is accurate, now might be an opportune time to bid on some of the stocks in the best performing sectors…”

As we have been saying recently “…the updated graph below, over the past 90 days the biggest winners in the equity market continue to be technology and healthcare stocks…Historically speaking, the consumer sector tends to begin its favorable period near the end of September and typically remains strong until the beginning of June in the following year…”

  

By Gregory Clay

Investment Strategist

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