Market Outlook
U.S. indexes had their sixth positive week out the past seven.
Equities have been boosted lately by further assurances that interest rates are
likely to remain at record lows in many major economies for some time. The Dow
Jones Industrial Average logged its fourth straight record high while the
S&P 500 Index touched an all-time peak and settled above 2,000 for the
third straight session. Helping U.S. market was this past Friday's news that
Scotland voted to remain as part of the U.K. as well as a wildly successful initial
public offering (IPO) from Alibaba Group Holding Ltd. One item of note in the
updated chart below is the Russell 2000 index dropping into negative territory
for the year. You would prefer to see
all the major indexes breaking out to new highs to have confidence in a bullish
move. Small caps underperformance is an indication of investors wanting to
avoid riskier trades at stocks current frothy levels.
According to the Stock Trader Almanac the Worst Six Months,
May through October have only averaged a 0.3% DJIA gain since 1950 versus a
7.6% average gain during the “Best Six Months”, November to April. For S&P
500 the gain is slightly better at 1.3% during the “Worst” and 7.1% in the
“Best” over the same time period. As of the close on Friday the Dow Jones
Industrial Average was up 3.5% and S&P 500 6.2% since the last trading day
in April. The market’s resilience in the face of mounting geopolitical
concerns throughout the “Worst Months” this year is impressive and suggests
that the upcoming “Best Months” could also be above average. But, before the Best
Months begin the market still has to navigate weak end-of-Q3 seasonal factors
and the frequently troublesome month of October. With solid fundamental data
and an accommodative Fed at its back, any market dips between now and the end
of October are likely to be a great entry point for the next “Best Six Months”
cycle.
We said recently “…
market highs were generated primarily on the strength high flying biotechnology
shares…other than technology and maybe financials, other market sectors are
starting to struggle…declines were led by utility companies and other stocks
that pay high dividends…” The updated chart below confirms this analysis is
still valid, with the exception that Treasury bond prices are firming up as the
Federal Reserve committed to maintaining a low interest rate environment.
Investor Analysis
The Stock Traders’ Almanac says that Although DJIA and
S&P 500 managed to close at new all-time highs this week, celebrations
could be short-lived as fund managers tend to clean house as the end of the
third quarter approaches. In the table below, it is clear that next week, the
week after September options expiration, has consistently been one of the worst
of the year. Since 1988, weekly declines average from –0.88% for NASDAQ to
–1.43% for Russell 2000. S&P 500 has only posted full-week gains five times
in the last 26 years. In the chart below you can see that over the past
month, only the healthcare and financial S&P sectors have shown any
substantive gains. Buying shares in these sectors should be a good bet as they
will lead the market if stocks breakout higher.
By Gregory Clay
Investment Strategist
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