Monday, September 15, 2014

Price Consolidation Before Next Move Higher

Market Outlook
The prospect of rising interest rates sent the stock market to its first weekly loss since early August. Contributing to investors’ skepticism was a report showing retail sales in August rose more than economists had forecast. That reinforced expectations that the Federal Reserve could start hiking interest rates sooner than expected. All the major equity indexes are in positive territory for the year. Most analysts expect these gains to hold up into year end, even there might be a pause or slight pullback along the way.

According to the Stock Trader Almanac Monday of September options expiration week is bullish for DJIA and S&P 500 although major shellacking’s in 2001 and 2008 pull the day’s average gain since 1982 negative. NASDAQ’s record is much weaker on Monday, declining 20 times in 32 years. Moving forward to September option expiration day, it is generally bullish and has improved recently with DJIA up eight of the past ten years with an average gain of 0.5%. S&P 500 and NASDAQ have nearly identical recent track records. Full-week performance has a somewhat spotty record over the last ten years for DJIA, up six and down four. However, S&P 500 and NASDAQ have fared better, both have gained in nine of the past eleven years. 

We feel compelled to regurgitate analysis from the past few weeks because it is playing out as advertised “…It has been reported that since 1950, September is the worst performing month of the year for the major stock indexes, a majority of analysts feel the August lows will maintain as support for the remainder of the year…Don’t be surprised if September starts strong as it has in thirteen of the last nineteen years. But the market begins to fade as money managers’ start selling off losers and repositioning assets for the end of the third quarter window dressing…”As we said, September started strong with the major indexes reaching record highs, but they started selling off finishing with a weekly loss for the first time in over a month. Recent market highs were generated primarily on the strength high flying biotechnology shares. As displayed in the updated quarter-to-date chart below, other than technology and maybe financials, other market sectors are starting to struggle. It is reasonable to expect market weakness heading into upcoming earnings season. Notice declines were led by utility companies and other stocks that pay high dividends. Those stocks have been in favor this year as investors hunt for other sources of income because bond yields have been low.



Investor Analysis
The Stock Traders’ Almanac says that historically speaking September weakness has been a great time to load up on stocks ahead of the “Best Six Months” of the year, November to April and an even better time in midterm years ahead of the best two consecutive quarter span of the four-year-presidential-election cycle. The market’s sweet spot of the Four-Year Cycle begins in the fourth quarter of the midterm year. The best two-quarter span runs from the fourth quarter of the midterm year through the first quarter of the pre-election year, averaging 15.3% for the Dow, 16.0% for the S&P 500 and an amazing 23.3% for NASDAQ. Pre-election Q2 is smoking too, the third best quarter of the cycle, creating a three quarter sweet spot from midterm Q4 to pre-election Q2. Appling these average gains to yesterday’s closing prices puts DJIA at 19675, S&P 500 at 2315 and NASDAQ at 5656 at the end of Q1 next year. But, considering the markets recent run and the specter of rising interest rates, a mid- to high-single-digit advance is probably more likely between now and the second quarter of 2015. A recent graphic is worth repeating




By Gregory Clay
Investment Strategist

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