November Is Usually A Good Months For Stocks

Market Summary

Investors cautiousness heading into the presidential election have got November off to a dismal start for the stock market. However stocks reversed course and is on pace to maintain November's historically positive performance. Jeff Hirsh in the Stock Trader’s Almanac talks about how November begins the “Best Six Months” for the DJIA and S&P 500, and the “Best Eight Months” for NASDAQ. Small cap stocks start percolating in November but don’t usually take off until the end of the year. November is the number-three DJIA and number-two S&P 500 month since 1950. Since 1971, November ranks third for NASDAQ. November is also a very strong month for the Russell 2000. November maintains its status among the top performing months as fourth-quarter cash inflows from institutional investors drive November to lead the best consecutive three-month span November-January. In the updated S&P sector graph below, stocks in the Financial sector are soaring the past month. A combination of an anticipated December Fed rate hike and expected Republican evisceration of Dodd-Frank regulations are driving investors to bid up financial shares. The next best performer is the Industrial sector which is expected to benefit from Trump administration stimulus spending.

By Gregory Clay

Investment Strategist

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gregoryclay@nellaadvisors.com

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Beware Of Stocks Worst Six Months

Market Summary

The Dow and S&P 500 have not hit new all-time highs since this time a year ago. The major indexes are still about 5% below these peaks. Many market pundits believe that there are no compelling reasons for stocks to hit new records anytime soon. Investors should prepare for daily triple digit price moves. "Investors had gotten used to a low volatility environment but they have been rudely awakened. This could be the beginning of a multi-year period of volatility," said David Jilek, chief investment strategist at Gateway Investment Advisers.

“The markets are just treading water here. Normally markets rally on strong earnings and we've seen lackluster corporate earnings," said Stephen Kalayjian, chief market strategist of KnowVera. "A lot of companies are also talking about cost cutting and that usually means layoffs," he added. U. S. equities are at a critical juncture. May is the first month of the Worst Six Months for the stock market. Stocks made a brief high 4/20, then technical signals began to deteriorate. Weekly advancing issues on the NYSE have been falling the four weeks while declining issues have been on the rise and greater than advancers the past 2 weeks. New 52-week highs have expanded the past three weeks, but so have new lows, albeit not by much. 

The Ned Davis definition of a bear market requires a peak to trough decline of 13% or more after 145 calendar days. The 364 days since the last all-time-closing high is an issue. History shows that similar gaps between market peaks tend to bode poorly for the stock market's direction. "The longer the S&P 500 goes without registering a new high, the more likely that it is a bear market," Michael O'Rourke, chief market strategist at Jones Trading in Greenwich, Connecticut said in a May 16 note to clients. Starting with the S&P 500 closing all-time highs since 1929, finds 13 previous times where S&P 500 spent more than 1-year before closing at a new all-time high. With the exception of 1994, there was always a bear market. Using a 20% decline, S&P 500 avoided a bear market just 3 times out of 13. In other words, there is a 76.9% chance that the current all-time-high dry spell will not end before there is a 20% or greater S&P 500 decline.

  

Trading Strategy

The release of the FOMC minutes from the last meeting on April 27 suggested that a rate hike in June is quite possible. Inflation, retail sales, disposable income and the dollar index are on the rise in conjunction with a firm labor market. The Stock Barometer says the word June was used 8 times in the minutes in close proximity to the increased possibility of a rate increase, leaving open the possibility of an increase in the federal funds rate at the June FOMC meeting. It also mentioned, Perhaps a surprise hike from the Fed in June might be the straw that will knock the market down. As we suggested last week, it is critical to honor stop-loss plans and don’t be afraid to convert to a high cash position.

By Gregory Clay

Investment Strategist

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gregoryclay@nellaadvisors.com

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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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Looking For The Bounce

Market Outlook

It took Friday’s best one-day performance for the Dow Jones Industrial Average and S&P 500 index since March 4^th to spur the indexes to their modest gains for the week. Obama’s targeted air strikes in Iraq this week intensified the risk in one of the world’s biggest oil-producing nations jolted the energy markets, sending crude prices higher. The updated graph shows the Nasdaq 100 and S&P 500 indexes up year-to-date, while the Dow Jones Industrial Average and Russell 2000 down for the year.

Buying stock market dips has been a very profitable strategy this year. Declines in the S&P 500 index have lasted an average 1.5 days…using dips to get better prices on stocks you have been eyeing has generally paid off…the S&P 500 index has recovered its losses from each price pullback…Investors found little reason to move money into stocks, faced with the growing geopolitical concerns in Israel and Ukraine, as well as banking problems in Europe…investors moved funds out of equities and invested in treasury bonds and gold as these assets prices moved higher… The updated chart shows as market volatility edges up, investors park funds into treasuries and gold on days they are selling equities and pulling money out the next day to bid equities higher.

The late July stock market decline turned the month into a loss and snapped the consecutive five-month winning streak for the Dow Jones Industrial Average and S&P 500 indexes. And of course, the NASDAQ and Russell 2000 ended down as well, with the Russell losing a whopping 6.1%. This was the worst month for the Russell 2000 since May 2012. Market weakness was broad based with 27 of the 29 S&P sectors tracked posting declines last month. For the current quarter investors are playing it safe by investing in safe-haven assets. Equities have experienced selling pressure the past few weeks as investors have been cautious about high stock valuations and worried about geopolitical crisis in Ukraine and Middle East. Bonds and gold are the primary ‘risk off’ assets investors are using at the expense of equity investments.

  

Investor Analysis

According to the Stock Trader’s Almanac Next week is options expiration week and mid-August is often better performing than the beginning and the end of the month. This strength is punctuated with a four-day string of bullish days that wrap the weekend from August 14 to 19. A bullish day is defined as a trading day in which the S&P 500 has risen greater than or equal to 60% of the time over the past 21 years. Unfortunately, this bullish cluster has not always resulted in full-week gains during option expiration. Both DJIA and S&P 500 have suffered a weekly loss in three of the last four August expiration weeks. 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. Back-to-school and holiday spending combined with the effects of the “Best Six Months” is the most likely driving force behind this seasonality.

As displayed in the updated graph below, over the past 90 days the biggest winners in the equity market have been technology and healthcare stocks. The technology sector has been booming primarily because it consists of a lot of high beta stocks that recovered sharply from the tech crash that happened earlier this year. Healthcare stocks are benefiting from the Affordable Care Act (also known as Obamacare). Also, some of the healthcare shares belong to pharmaceutical companies that are considered high beta stocks. The current price pullback might be a good opportunity to purchase some of these hi flyers at a cheaper price before the market surges higher again.

These recent trading strategy suggestions are still valid "...options traders should return to a neutral weighting between bullish and bearish positions. Bullish in the event that the indexes regain their upward momentum, and bearish in the event that bonds and commodities prove to be correct and economic uncertainty translates into equity weakness…” The updated graph below confirms recent weakness in equity shares, especially cyclicals. Those investors who took our advice and executed bearish positions to hedge long trades should still be showing a net gain. And of course when the market does bounce back, the long positions should sustain profits… we consider the current market action to be a ‘trader’s market’ with triple-digit daily up and down price moves. Traders can get short-term profits from bearish positions on down days, and gain from bullish plays on price recoveries…”

By Gregory Clay

Investment Strategist

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Keep An Eye On Small Caps

Market Outlook

Even if next week’s economic data signal a mediocre rebound in U.S. economic growth, that might be enough to keep the stock market churning toward record highs and the Federal Reserve on target in its winding down of stimulus through bond purchases. Relatively weak data on housing and capital spending, plus a mixed bag of second-quarter earnings, have raised the concern that even a moderate GDP bounce may fall short of expectations. While recent anxiety over conflict in Ukraine and Middle East has somewhat contained stock prices, it has not scared investors enough to prompt them to dump equities for other investment assets. "The market has been resilient to these setbacks. They have taken bad news in stride," said Steve Weiting, global chief investment strategist with Citi Private Bank in New York.

On Wednesday, the Federal Open Market Committee (FMOC), the Fed's policy-setting group, is scheduled to announce whether it will further pare its bond purchases, currently at $35 billion a month. While more Americans have returned to work, Federal Reserve Chairwoman Janet Yellen told two Congressional panels earlier this month she remained worried about tepid wage growth and a low inflation rate that is below the Fed's 2 percent target. Those concerns have contributed to a perception that the Fed is in no hurry to move away from its near-zero interest rate policy. Market watchers are expecting no new information from the Fed meeting. However if the Fed does make an unexpected pronouncement, expect a volatile reaction from the market. The ultimate question is what will move the market when the Fed completely winds down quantitative easing?

As evidenced in the updated graph below, the Russell 2000 index approached its all-time high in early July challenging the previous high made in early March. But the price support abruptly fell apart and dragged the index into negative territory for the year on what seems to be technical trading, supported by a desire for less risk and increased liquidity offered by larger capitalization stocks. Whether you want to call the technical chart pattern a ‘double top’ or a ‘head & shoulders’ top, the interpretation is the same, small caps are due for a lot more pain if the overall market does turn down. Many market analysts are concerned about the divergence between large capitalization stocks and the smaller caps. Specifically, the Russell 2000 and the S&P 500 index as the former currently sports an approx. one percent year-to-date loss while the latter continues to make new highs and challenges anyone to dare call it a market top. Since peaking out just below its all-time high at the beginning of July, the Russell 2000 index quickly sank almost 5%, basically in a straight line. And because small cap stocks have generally topped out before the overall market during the majority of previous cycles, the current divergence is making many investors nervous.

Investor Analysis

NASDAQ is stuck in the same holding pattern as the Dow Jones Industrial Average and S&P 500 while the Russell 2000 has plunged since early July. The outcome will most likely be the same as earlier in the year; large-caps (tech included this time) will likely meander in a sideways pattern until the Russell 2000 can find a firm footing. Last time, it took nearly three months for that to happen. A similar time frame would have small caps declining and large caps bobbing along until late September.

Our analysis from last week is still valid "Looking at the performance graph covering the past three months you can see which sectors are hot, and who is not. As earnings season picks up steam, the best bets are stocks you like in the best performing sectors. Technology, Energy and Healthcare are the hottest sectors right now; buying shares of the best performing companies in these industries should be profitable… With stock market index indicators in a bullish to neutral position, options traders should return to a neutral weighting between bullish and bearish positions. Bullish in the event that the indexes regain their upward momentum, and bearish in the event that bonds and commodities prove to be correct and economic uncertainty translates into equity weakness…”

The updated graph below confirms that technology and biotechnology stocks are lifting the market higher, especially as these shares surge upward during second-quarter earnings season. According to the Stock Trader’s Almanac, biotechnology shares have enjoyed average gains of 29.1%, 16.4% and 28.0% over the last 5, 10 and 15-year periods respectively from the beginning of August through the beginning of March.

  

By Gregory Clay

Investment Strategist

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Investors Remain Cautious

Market Outlook

America continues to gravitate towards a European-style economy, with fancy footwork by management (e.g. layoffs, working existing employees more, cutting benefits) to beat the bottom line, the fact that sales are stagnant is apparently not an issue. As long as companies 'invest' in themselves with stock buy backs and dividend payments, let’s not forget about merger activity, stock prices will continue to rise. Quality jobs remain scarce as government policies are anti-investment for industry and entrepreneurs. If the government can play fast and loose with the facts why can't the companies?

The wealthiest ten percent of Americans own eighty percent of the stock market and it is this breakdown that’s been the main reason why the Fed’s attempt at market manipulation using Quantitative Easing (QE) to raise asset prices has not benefitted the middle class. The wealthiest ten percent are the people who are least likely to spend Fed cash and are pretty much the only ones on the receiving end of it. The middle class who would actually spend additional cash are not seeing any of it because they barely own stocks directly.

You no doubt have heard talking heads shill about all the cash on the sidelines waiting to come back into the market or some pundit claiming that too many investors have rushed into stocks, signaling an imminent sell-off? An authoritative new study published in the Financial Analyst journal shows that all investors, individuals and institutions alike are keeping the lowest percentage of their portfolios in stocks in over half a century. According to Dutch researchers Ronald Doeswijk, Trevin Lam and Laurens Swinkels, investors held only 37.7% of the $90.6 trillion in global investable assets in stocks in 2012, the most recent year their data covered. That and the 37.1% they invested in equities in 2011 were the lowest exposure to equities investors have had since 1959, when records were first kept. It’s considerably below what they held even in the late 1970s, before the Reagan-era bull market began, and in the early 2000s after the dot.com bubble burst.

There may be cyclical and structural reasons for this shift, according to Lam, senior analyst in quantitative research at Rabobank, based in the Netherlands. “I do think that the changes in the global multi-asset market portfolio are cyclical. There are periods in which the weight of equities increases at the expense of bonds, but after the dot.com bust, the weight of bonds rose quickly at the expense of equities.” Equity ownership peaked at around 64% of the total global market portfolio in 1968 and again in 1999, near the top of two great secular bull markets. Yet it never exceeded 53% during the mid-2000s cyclical bull market. Low numbers from 2011-2012’s indicate that, though the S&P 500 and other indices are hitting all-time highs, investor confidence still hasn’t recovered from the dot.com bubble and the financial crisis. It is reported that institutional investors such as University endowments and other asset managers have drastically reduced their holdings in traditional stocks and bonds, investing instead in such formerly exotic asset classes as private equity, hedge funds and timber land.

As seen in the updated chart below the small cap sector has gone from one of the market leaders to the only major index in the red for the year. This is considered a sign that investors are cautious about future economic growth and these shares will be dumped first during a correction.

  

Investor Analysis

Our analysis from last week stated "Looking at the performance graph covering the past three months you can see which sectors are hot, and who is not. As earnings season picks up steam, the best bets are stocks you like in the best performing sectors. Technology, Energy and Healthcare are the hottest sectors right now; buying shares of the best performing companies in these industries should be profitable…” With stock market index indicators in a bullish to neutral position, options traders should return to a neutral weighting between bullish and bearish positions. Bullish in the event that the indexes regain their upward momentum, and bearish in the event that bonds and commodities prove to be correct and economic uncertainty translates into equity weakness.

By Gregory Clay

Investment Strategist

P.S. click on http://www.theoptionplayer.com/ to sign up for a free option trading educational newsletter

Gold And Commodities Are Moving

Market Summary
The Market got what it wanted to hear from Federal Reserve Chairman Janet Yellen as she signaled stocks are due for more gains. Listening to Ms. Yellen speak is like getting lectured by your grandmother, but nonetheless she is following former chair Ben Bernanke’s philosophy in that whatever is good for the stock market is good for America. Look, you can find 100 or 1,000 analysts who will proffer conflicting opinions on why the market should’ve or shouldn’t have performed as it has since the recession started. But I don’t care who you talk to, no knowledgeable market watcher can seriously deny that the Federal Reserve’s various iterations of Quantitative Easing (QE) is the steroid that has juiced the stock market to stratospheric levels.

We can talk about and debate numerous theories on how to price stocks and what factors will influence whether shares will go up or down. However, at its most basic core, what drives the price of any investment is straight-forward, simple supply and demand. If there are more buyers (demand) than there are sellers (supply) the price has to go up and will continue to rise until there is equilibrium with demand equaling supply. Conversely, if there is more supply (sellers) than there are buyers (demand) the price will always drop until there is equilibrium. You can do quantitative analysis and apply all the advanced economic theory you want, but in the end it is the basic demand = supply equation that will drive the price. The reason all the ‘expert’ financial prognosticators keep getting it wrong about a market correction, crash, etc. is because they ignore that fact the Federal Reserve is supplying unlimited demand ‘QE’ to keep stock prices afloat. Company earnings, U.S. political system dysfunction, global political and economic unrest, chronically poor labor markets, etc., none of it have really mattered. Ben Bernanke started the free money train and Janet Yellen is committed to keeping it rolling, and until it comes to a complete stop, betting against this market is a very risky bet indeed.

Investor Analysis
Recent articles mentioned “…the past few weeks ‘risk on’ categories have been the best performing sectors as small caps, energy and financials are leading the market higher…” The updated performance graph below reflects the two major themes of the past few weeks. Oil and gas prices have gone higher as chaos in the Middle East and Ukraine brings into question whether the world-wide energy supply is at risk. The other theme relates to the discussion above about the Federal Reserve’s continued easy money policy. Janet Yellen’s comments indicate the Fed is not concerned about fighting inflation any time soon. Gold has surged the past few weeks as investors are buying it as the traditional inflation hedge. Conversely, higher inflation expectations are a negative for treasury bonds as prices have dropped in response to higher yields demanded by buyers.

We recently opined “…gold prices appear to have bottomed out a support line that has been in place since the beginning of the year. Now is probably an opportune time to look at setting up trades that will profit if gold does bounce off its support level…Gold appears to be bouncing off a support level that has held up the price all year… your bullish trades to take advantage of the bounce off support should already be profitable with gains continuing to run…” The current gold rush has probably made most of its move and now is the time to takes some profits and/or tightens stops to lock in gains. If the price stalls out at resistance, a price neutral gold trade is probably a low-risk opportunity.

As you can see in the chart below, gold and treasury bonds continue to maintain an inversely correlated relationship. Depending on how your investment portfolio is set up, gold and treasury bonds can be used to hedge against each other and the equity market. For example if you took our suggestion to bet on higher gold prices a few weeks ago you should be showing a nice profit. Long bullish gold trades are now more risky since the price has surged and shorting gold is also a risky move at this point. But a long bullish Treasury bond trade is inexpensive and low-risk right now, and if/when gold drops you can expect bond prices to then move higher. Also, you can expect bond prices to rise if equity prices drop significantly.

By Gregory Clay
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Investors Are Still Biting

Market Summary

Investors are continuing to ‘buy the dips’ as they have been for the past few months which contribute to the current range-bound trading environment. Most of the major equity indexes basically finished the week flat, even though the DJIA and S&P500 managed to hit intraday all-time highs last week. The recent pattern has been investors cashing out gains at high prices, pushing prices down as shorts pile on; then buyers step in to buy the dips, pushing prices higher with a ‘short squeeze’. The smaller capitalization indexes are lagging the broader market as exhibited by the Russell 2000 being stuck below its 200-day SMA, a sign of weak momentum. Investors are concerned about weakness in small caps, biotech and technology sectors being a precursor to overall market losses.

Taking a gander at the year-to-date performance graph below, what is clear is that investors are seeking yield. Note the highest performing sectors are utilities, treasury bonds, and real estate which all provides high yields compared to all the other sectors. Investors are pouring money into U.S. Treasury bonds, considered the world's safest asset and they're loading up on dull, but reliable utility stocks. They are playing it safe by dumping holdings that would get hurt most from a stalled recovery, like stocks of retailers and risky small companies. This clearly confirms investors are nervous about the economy and eschewing high growth stocks in favor of capital preservation. The sector rotation continues from the riskier high-growth and momentum names to conservative high-yielding shares. Pimco's Bill Gross called this new secular investment theme "the new neutral". Gross expects slow economic growth and low real interest rates over the next five years, and this will fuel the hunt for yield.

Investor Analysis

In recent articles we discussed our forecast for stocks prices to nudge toward new highs and then drop back down to a support level in a trading range. As earnings season is winding down, the stock market avoided a broad-based selloff which is consistent with our expectation for continued range-bound trading. Looking under the hood of recent market action we can see sector rotation going on. It appears investors are stepping up to the plate and scooping up some of the high-flying stocks that have dropped in price. While it is still relatively risky to trade a lot of the ‘high momentum’ stocks, if there are shares you really like, it might be worth the risk to buy in if you are prepared to ride out future volatility. Any bullish trades need to be hedged for downside protection as the current bull market is getting tired and traders have become quicker on the trigger with bidding down prices. Market neutral portfolio positioning is currently the best trading strategy to take advantage of prices vacillating between recent highs and support levels.

By Gregory Clay

P.S. click on http://www.theoptionplayer.com/ to sign up for a free option trading educational newsletter