All Good Things Come to an End Fri, Apr 12, 2024 The rally from the October lows through the end of March was enough to make any bull giddy, but April has brought a decidedly different market mood. Stocks have hit the pause button, and in many cases the rewind button. While the S&P 500 was comfortably above its 50-day moving average (DMA) from early November through the end of March, it has been creeping towards that level all April, and as of Friday afternoon, it even dipped slightly below. If the S&P 500 closes around these levels this afternoon, it will snap a streak of 109 trading days of closing above its 50-DMA. This streak, though impressive, wasn't record-breaking, but since 1953, only ten were longer, with the last exceeding it coming in 2011. (See chart below for historical context) The chart below shows where each sector, the S&P 500, Nasdaq, and Russell 2000 are trading relative to their 50-DMAs now versus where they were trading on 3/28 when the S&P 500 last closed at a record high. Not surprisingly, every sector and index is less extended now. Nearly half of the eleven sectors have also broken below their 50 DMAs, while three others (Industrials, Materials, and Technology) are precariously close. While corrections, or what in this case has merely been a pullback, can be unsettling, they are a natural part of any market, even a bull market, environment.
April 2 Seasonal MACD Signal Triggered Right on Time We issued our Best Six Months MACD Seasonal Sell signal for DJIA and S&P 500 to newsletter subscribers on April 2 when slower moving MACD indicators applied to DJIA and S&P 500 both turned negative after the start of the last month of the BSMs. This marked the start of our transition to a more cautious stance. Arrows in the charts point to a crossover or negative histogram on the slower moving MACD used by our Seasonal Switching Strategy to issue a sell signal. NASDAQ’s “Best Eight Months” lasts until June. Subscribe to our Almanac Investor Newsletter and get all our trades. https://stocktradersalmanac.com/Alerts.aspx We do not merely “sell in May and go away.” Instead, we take some profits, trim or outright sell underperforming stock and ETF positions, tighten stop losses and limit adding new long exposure to positions from sectors that have a demonstrated a record of outperforming during the “Worst Months” period.
Election Year Drawdowns Happen – S&P 500 Average Pullback 13% since 1952 After five straight months of gains and numerous new all-time highs, recent weakness and the corresponding spike in volatility seem unfamiliar. Despite lingering inflation and escalating geopolitical tensions, S&P 500 was down 3.86% from its closing all-time high of 5254.35 on March 28 through its close on April 16. This is well below the average historical largest drawdown during an election year since 1952 of 13.07%. Were it not for steep declines in 2020 and 2008, election years have tended to enjoy relatively modest drawdowns. Of the last 18 election years, 11 experienced single-digit drawdowns. The smallest was just 3.55% in 1964. DJIA’s record is similar to S&P 500 while the higher beta stocks of the NASDAQ Comp have experienced larger election year drawdowns.
Stocks Can Go Down “However beautiful the strategy, you should occasionally look at the results.”- Winston Churchill After more than a 30% total return on the S&P 500 the past 12 calendar months, a five month win streak, and a 27% rally in the first 100 trading days off the late October lows, we could finally be looking at a well deserved break. We want to stress, this isn’t something to fear, as it is all part of the process. In fact, now could be a good time to remind investors that volatility is the toll we pay to invest. Meaning, we all want the gains, but sometimes you have some pain along the way. Or to quote Ben Franklin, “There are no gains without some pains.” Remember last year? Stocks gained more than 20%, yet there was a 10% correction into late October and many investors were quite worried at what was a fairly normal stock market development. Here’s a great table that we’ve shared before on volatility in most years. Thanks to help from our friends at Ned Davis Research, the average year has more than seven 3% dips a year, more than three 5% mild corrections a year, and a 10% correction a year on average. After yesterday we’ve officially had our first 3% dip. That’s it, one 3% dip and your average year tends to see more than seven. That should put in perspective just how calm things have been lately. Here’s one more way to look at things. The average year for the S&P 500 since 1980 saw a peak-to-trough correction of 14.2%, with the smallest ever at only 2.5% in 1995. More than three months into 2024 and stocks have only pulled back 3.7%, which would make it one of the smallest ever. Even last year, when stocks gained more than 25% there was a 10% correction into late October. Once again, we think we are in a bull market and stocks will be higher from where they are now until the end of the year, but to think it’ll be an easy ride getting there isn’t very likely. Looking at the past 44 years, 23 times stocks fell at least 10% peak-to-trough at some point during the year and 13 of those times (so more than half the time) stocks managed to finish green. The average gain those 13 years? 17.5% on average, suggesting that a correction can indeed happen quite often, but that doesn’t mean stocks have to have a bad year. Lastly, the S&P 500 closed beneath it’s 50-day moving average for the first time in more than five months yesterday (or 110 trading days to be precise). This was the longest such streak since 2011! I looked at other long streaks that lasted at least 100 days and what happened after an eventual close beneath this important trendline. Sure enough, three months later stocks were higher more than 87% of the time and six months later higher more than 81% of the time. Could there be a little more weakness, yes, that wouldn’t be out of the ordinary, but big picture we expect any weakness to be well contained and this bull market is still alive and well.
May Almanac: Historically Poor in Election Years May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 “flash crash”. It used to be part of what we once called the “May/June disaster area.” From 1965 to 1984 the S&P 500 was down during May fifteen out of twenty times. Then from 1985 through 1997 May was the best month, gaining ground every single year (13 straight gains) on the S&P, up 3.3% on average with the DJIA falling once and NASDAQ suffering two losses. In the years since 1997, May’s performance has remained erratic; DJIA up fourteen times in the past twenty-six years (four of the years had gains exceeding 4%). NASDAQ suffered five May losses in a row from 1998-2001, down –11.9% in 2000, followed by fourteen sizable gains of 2.5% or better and seven losses, the worst of which was 8.3% in 2010 followed by another substantial loss of 7.9% in 2019. Since 1950, election-year Mays rank rather poorly, #9 DJIA and S&P 500, #8 NASDAQ and Russell 2000 and #7 Russell 1000. Average performance in election years has also been weak ranging from a 0.4% DJIA loss to a 0.6% gain by Russell 2000. Aside from DJIA, the frequency of gains in election year Mays is bullish, but down Mays have tended to be big losers. In 2012, DJIA, S&P 500, NASDAQ, Russell 1000 and 2000 all declined more than 6%.
Bears Come Out of Hibernation Thu, Apr 25, 2024 The S&P 500 may have rebounded since this time last week, but sentiment has continued its slide. This week's AAII Sentiment Survey saw only 32.1% of respondents report as bullish, the lowest percentage since 11/2/23. In total, bullish sentiment has declined 17.9 percentage points since just four weeks ago when it hit 50%. That is the largest drop since December 2021 for any given four-week span. Given the drop in bulls, bears have picked up to 34%. However, that reading was little changed week-over-week with a modest 0.1 percentage point increase. Like bulls, this is the highest bearish sentiment reading since last November. Although the increase in bearish sentiment has been less pronounced, the inverse moves with bullish sentiment have been enough to push the bull-bear spread into negative territory for the first time since 11/3. The 24 consecutive weeks with a positive bull-bear spread was one of the longest streaks in the survey's history and was tied with the 24-week streak that ended in July 2021 for the longest since 2015 (31 weeks). In all, there have only been 11 streaks that lasted at least 20 weeks in a row.
When Bullish April Is Down Stocks Often Struggle Until Q4 April was the first down month in 6 months. Almanac readers know April is the best Dow month by average percent change and #2 for S&P. It’s ranked fourth for average percent change on NASDAQ and Russell 2000. In general, April is a notoriously bullish market month overall with a high average percent and plurality of gains across the board. A negative April is cause for concern. When the #1 Dow month is down that could be significant. Digging into the data in the tables below of all down Aprils since 1950 there is a plethora of red in May and through Q2 and Q3. There are several steep drops scattered throughout these 21 down April years. May, Q2 and Q3 show consistent and average losses. Q4 however delivered solid gains except for four years: 1973 (Watergate, Vietnam, Oil Embargo), 1987 (Crash), 2000 (Undecided Election) and 2012 (ZIRP, QE3, Operation Twist, Big Q1 & Q3). You can see why we expect the market to struggle for the next several months.
Shorts Surge Mon, May 13, 2024 Thanks to a single tweet marking the return of the poster child of 2021's meme stock mania, shares of GameStop (GME) are back in the news thanks to a soaring share price. As shown below, the stock that was at the center of the 2021 short squeeze is once again flying with gains of well over 70% in today's session. As always, one day does not make a trend. Although the massive rally in GME today is impressive, overall, highly shorted stocks have not done much since their heyday from a few years back. Below we show an index comprised of the 100 most highly shorted Russell 3,000 members, rebalanced monthly over the past five years. As shown, while there have been a couple of higher lows in the past six months, the index has been rangebound at best over the past two years. Perhaps more importantly, current levels are still well below those from 2021. Moving back to the present, today's outperformance of the most highly shorted names is remarkable. Below we break down the Russell 1,000 into deciles based on their levels of short interest. Decile 1 represents the 100 stocks with the least short interest while decile 10 is made up of the stocks with the most heavily shorted names. As shown, whereas the average Russell 1,000 stock is up 31 bps today, the average gain of the 100 most shorted members is 3.5%. Of course, that includes GameStop (GME), but even when that one name is removed the average gain is still an impressive 2.75%. Moving down the line, performance gets much less impressive. As shown, stocks in deciles 1 through 6 are all averaging declines today while deciles 7, 8, and 9 are averaging modest gains. The surge in GME, though, has caused traders to pile into other heavily shorted names in hopes of additional squeezes. Late last week, the latest short-interest data was published with readings through the end of April. Below we show the Russell 1,000 members with the highest levels of short interest per that data. Medical Properties (MPW), Petco (WOOF), and Kohl's (KSS) top the list as each one has more than a third of its float sold short. Each of those are rallying hard today, but only MPW is up on the year. Moving further down the list, there are multiple clean energy-related names—Lucid (LCID), ChargePoint (CHPT), Plug Power (PLUG), and Sunrun (RUN)—falling in the top ten most heavily shorted names. Right behind those names is, of course, GameStop (GME). Worth noting is that after today' gain, GME joins MPW and only a handful of others on this list that have year-to-date gains.
Weak May Monthly OpEx Week - DJIA Down 12 of Last 15 Since 1990 May’s monthly OpEx week has a slight bearish bias with DJIA and S&P 500 down 18 and up 16. More recently, DJIA has suffered declines in 12 of the last 15, monthly expiration weeks. S&P 500 has one additional weekly gain since 2009, down 11 of the last 15. NASDAQ has declined in 9 of the last 15.
Small Businesses Sit Out Growth Tue, May 14, 2024 Earlier in the day on 5/14, the NFIB published the results of its latest survey of Small Business Optimism. While economists expected a modest decline, the index rebounded from 88.5 in March to 89.7 in April. As shown below, albeit higher month over month, current levels of small business optimism remain historically depressed, even lower than at the height of COVID. While the optimism index sits in the bottom decile of historical readings, the 1.2 point month-over-month jump ranks in the top quartile of monthly moves, and it was on account of a wide number of categories. In fact, the only categories not rising were expectations for the economy to improve, expected credit conditions, and expansion outlook. As we discussed in today's Morning Lineup, the six different labor market series in aggregate rebounded following a large drop in March. As previously mentioned, one of the few areas to decline month-over-month was expectations for the economy to improve. The drop was small at just 1 point, and as shown below, the reading is still progressing in the right direction over the past two years. However, the progress has been painfully slow as the reading remains below anything observed before the past few years. In addition to the weak economic outlook, only 4% of businesses consider now a good time to expand. That was unchanged versus March, and current levels are consistent with the past two recessions and lower than the two before that! The NFIB provides greater detail into why small businesses are reporting optimism or lack thereof. As shown below, economic conditions are overwhelmingly blamed for the negative expansion outlook. Headed into the final six months before the election, another 11% point the finger at the political climate. Next up, with each at 7% of total responses, are interest rates and the cost of expansion. Below we plot those reasons for negative expansion outlooks over the past decade. Although it remains the biggest problem, the percentage of respondents reporting a poor economy as a reason for not growing their businesses has come down significantly over the past couple of years. Similarly, interest rates are not as big of an issue as it was only a few months ago. However, as another negative on the inflation front, cost of expansion is back to swinging higher. At 7% in April, the reading matches previous highs of the past decade.
No New Orders and No Spending in the Empire State Wed, May 15, 2024 Among this morning's data releases was another weak NY Fed manufacturing report. The Empire State Manufacturing Survey's headline reading came in at -15.6. That compares to -14.3 for April and expectations of an improvement to -10. That miss relative to forecasts means the indicator has been weaker than expected three months in a row. The last streak of weaker-than-expected readings that lasted as long was in the first quarter of 2022. The negative reading in the headline index indicates a contraction in the Northeast's manufacturing economy that came with weak breadth among the report's categories. Only three categories for current conditions are currently expanding: Prices Paid and Received and Inventories. Most other categories are in the bottom quintile of historical readings. One of the weakest areas of the report has been New Orders. The January report saw this category fall to one of the weakest readings on record. While things have improved since then with little change in May, the current reading remains in the sixth percentile of all months. Perhaps more impressive is that this was the eighth month in a row with a contractionary reading in this index. As shown in the second chart below, that is one month away from tying the record of nine months in a row set in 2008/2009 and again in 2015/2016. In addition to the ugly new orders picture, one area that is just as bad is spending plans. Overall, expectations indices are a bit more of a mixed bag, but the indices for number of employees, capital expenditures, and tech spending are historically low with readings ranging in the 3rd to 12th percentiles. Averaging across these three indices shows that the region's manufacturers have some of the most pessimistic spending plans for labor or capital in the survey's history. The reading edged up only slightly in May and sits roughly 0.1 point above the post-pandemic low set one year ago. On the whole, that reading is in the bottom 6% of readings.
Extreme Nasdaq Extremes Mon, May 20, 2024 The VIX may be trading at 52-week lows lately, but the Nasdaq has been nothing short of volatile. Less than a month ago, we all recall when the Nasdaq traded down at ‘extreme’ oversold levels (2+ standard deviations below 50-DMA), trading down over 5% from its prior 52-week high. As swift as the April sell-off was, the rebound was just as rapid, and just last Wednesday, the Nasdaq was back at new highs and at ‘extreme’ overbought levels (2+ standard deviations above 50-DMA). While it took 17 trading days to move from extreme oversold to extreme overbought for the Nasdaq, late last year, the shift was even more rapid when it took just 16 trading days! Based on recent action, you’d think that these types of rapid shifts between extreme oversold and overbought levels were common, but the last year has been more of an exception than a rule. Since the Nasdaq’s inception in 1971, the current period is just the 15th time it shifted from extreme oversold to extreme overbought levels in 20 trading days or less. In the table below we list each of those prior periods along with the Nasdaq’s performance over the following one, three, six, and twelve months. Are these types of rapid shifts a good or bad sign for the market? The last occurrence was certainly positive as the Nasdaq rallied more than 12% over the following three months and just under 19% in six months. More broadly, though, forward returns were essentially in line with the index’s average returns for all periods since 1971, especially over the following six and twelve months. Nothing extreme about that!
Market Strength Fading Post Memorial Day The week after Memorial Day performed quite well from 1971 to 1995. DJIA & S&P 500 up 68% of the time, averaging 0.8% – DJIA up 12 in a row 1984-95. NASDAQ was up 72% of the time, average 0.6%, up 10 straight 1986-95. Since 1979 Russell 2000 was up 88.2% of the time, average 0.9%, up 13 straight 1983-95. Starting in 1996 the week after Memorial Day performance diminished. DJIA was up only 42.9% of times, average +0.05%, down 9 of last 14. S&P 500, NASDAQ and Russell 2000 all gained ground less than 58% of the time. Monstrous NASDAQ and Russell 2000 gains during the week in 2000 do skew the averages. 2024 Stock Trader’s Almanac page 100 tracks behavior before & after holidays since 1980. Days after Memorial Day show positivity. But weakness has increased in the last 21-years, the 3 days after Memorial Day. Tuesday after Memorial Day, DJIA and S&P 500 down 7 of last 9, NASDAQ and Russell 2000 down 6 of last 9.
Semis - 20% in Five Weeks Fri, May 24, 2024 Since its closing low on April 19th, the Philadelphia Semiconductor Index (SOX) has rallied over 20% in five weeks. When anything rallies that much in so little time, you can't help but take notice, but in the case of the SOX, the current rally is already the second this year - and it's not even June! As shown below, the SOX rallied 21.2% in the five weeks ending on March 7th, and back in June 2023, it was also up 20% over five weeks for a third time in the last year. The fact that there have been three separate five-week rallies of at least 20% sounds pretty remarkable. In the post-COVID environment, though, they've been somewhat common with eight other occurrences (besides the current one) since April 2020. That's more than the seven total occurrences from 2003 through 2019, but from the SOX's inception through the end of 2002, when semis were a much less 'mature' sector, there were a total of 20 different periods when the SOX rallied at least 20% in five weeks. As shown in the chart below, in many of those periods, the magnitude of the gain was much larger than 20%!
A Tale of Two Indices Wed, May 29, 2024 Even after today’s decline, the S&P 500 still sits on a year-to-date gain of over 10% indicating just how strong the first five months of 2024 have been. The Dow, however, has followed a much weaker path as it’s barely holding onto gains for the year at 2.2%. The scatter chart below shows the YTD performance of the S&P 500 and the Dow in the first five months of the year, and they tend to track each other very closely. Even though the construction of the two indices is very different and 500 stocks comprise the S&P 500 compared to just 30 for the Dow, the performance of the two indices has been very similar over time. If one index is up in the high-single-digit percentages, the other usually is too. That’s what makes this year and last year so unique. The S&P 500 is on pace to outperform the Dow by over eight percentage points in the first five months of this year, and that follows last year when the performance gap was even wider! As shown in the chart below, the last two years have seen the widest margin of outperformance between the S&P 500 over the Dow. In 1999, the Dow outperformed the S&P 500 by a similar magnitude, but the last two years have been unprecedented in terms of the S&P 500 outperforming the Dow. The table below shows the YTD performance and weightings of the 30 Dow components (sorted by weighting). Overall, the average stock in the index has rallied 4.25%, so on an unweighted basis, the performance gap isn’t quite as wide, but one of the bigger drags on the Dow this year has been UnitedHealth (UNH). The stock's weight in the Dow is over 8.5%, and shares have slipped nearly 4% on the year. Boeing (BA) doesn’t have as large of a weight in the index, but its 30%+ decline has been a big drag as well, while other notable losers have been McDonald’s (MCD) and Home Depot (HD). Technology has been a large contributor to the S&P 500’s YTD gain, but within the Dow, the sector has a weighting of over 19%, which isn’t small. The only problem is the Technology stocks that comprise the index (shaded in gray). Regarding tech stocks in the DJIA, outside of Microsoft (MSFT), which has rallied over 14% this year, some of the sector’s other representatives – (we’re looking at you Cisco and Intel) aren’t what most investors would consider cutting edge!
Downward Debt Mon, Jun 3, 2024 Although the second half of May was weak for US Treasuries, long-term US Treasuries had a positive return in May as the iShares 20+ Year Treasury Bond ETF (TLT) rallied 2.9%. Despite that rally, TLT has been in a steady downtrend for who knows how long. It's hard to imagine a stock, index, or asset class that has been in a more well-defined downtrend over the last two years. While there have been plenty of times during this period when TLT has rallied above its 50 and 200-DMAs, they haven't lasted long. The chart below shows the annualized return of the Bank of America 10+ Year Treasury Index over the last one, two, five, ten, and twenty years. While long-term treasuries have averaged a gain of about 8% per year dating back to the late 1970s, in more recent years, performance hasn't been anywhere close to those levels. Over the last year, long-term treasuries are down close to 7%, and over the last two years, the annualized return has been a decline of 7.3%. Even over the last five years, annualized returns are still negative 4%. It isn't until you go out ten years that annualized returns are positive, and at 0.5%, that's hardly anything! The last several years could go down as one of the worst periods on record for US Treasuries. The chart below shows the year/year change in the BofA 10+ Year US Treasury Total Return Index. While there have been plenty of months (15) over the last 40 when US Treasuries had a positive return, there has only been one when the index had a positive return on a year/year basis. As shown in the chart below, the only other period where y/y returns were anywhere close to as consistent to the downside was from October 1979 through October 1981, but even then there were three positive y/y readings in what was a shorter 25-month period. Additionally, the magnitude of the y/y decline during that late 1970s/early 1980s period wasn't anywhere near as deep as the losses during the current period.
EM Election Madness Tue, Jun 4, 2024 Equities here in the US have gotten off to a weak start this month with the S&P 500 (SPY) down modestly over the past couple of sessions. However, those declines are being overshadowed by emerging markets. As we discussed in yesterday's Morning Lineup and Closer and expanded on further in today's Chart of the Day, Mexican equities have gotten massacred following the country's election of Claudia Sheinbaum as president. The US-traded ETF that tracks Mexican stocks (EWW) is down 8.3% month-to-date and 12.3% year-to-date. After that decline, the ETF closed yesterday at a record 4.19 standard deviations below its 50-day moving average (DMA). That recent weakness is also a 180 from last year when EWW was the best-performing country ETF of the 22 tracked in our Global Macro Dashboard. Turning forward to today's news, Indian equities are likewise responding negatively to an election. As we detailed in today's Morning Lineup, Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) and its allies won a majority, but by a much smaller margin than was expected just yesterday. Given the results, the India ETF (INDA) is down 6.6% for its worst day since the final day of 2021. Unlike EWW, INDA is still up on the year, though it has swung from deeply overbought to oversold territory in only a day. As for the rest of the world, we would note that yet another emerging market has fallen on hard times. Brazil (EWZ) has gotten crushed this year with a 16.7% year-to-date decline even outpacing Mexico for the worst performance in 2024. Averaging across countries, EMs have fallen 0.74% year-to-date whereas developed markets are up mid-single digits on average. Relative to prior highs, the gap between emerging and developed markets is even more stark. EM country ETFs currently sit an average of 9.42% below 52-week highs compared to only 3.28% for developed market countries. Below, we show price charts of a handful of emerging market economies over the past year with 50-DMA trading ranges shown. As noted earlier, Brazil has been weak and trending lower all year consistently trading below its 50-DMA (gray line). It is not only extremely oversold today, but it is also on the verge of 52-week lows. While EWZ has been trending lower, China (MCHI) has been a bright spot. MCHI is in a long-term downtrend dating back to early 2021, but since the start of this year, it has rebounded. This week's weakness in Mexico (EWW) comes on what has been a period of consolidation. Since the end of last year, EWW has essentially trended sideways, and current levels are in the middle of last fall's range. As for India, up until today, the country's equities have been in a steady uptrend throughout the past year. After today's decline, the uptrend has taken a hit with the first oversold readings since the fall.
Down April – Up May Signals Q3 Weakness Today’s jobs report pushes the likelihood of a rate cut out further and lowers expectations for multiple cuts. Strong employment number yet higher unemployment rate means more hiring and more people looking for jobs. Healthy economy. Weaker Q1 GDP is understandable considering the tear economy was on last year and since Covid. Rates have stabilized and lower highs on the 10-Year Treasury reduces need for Fed to cut. The last inflation number was better, but we need to see a few readings of consistently lower PCE. Chart Below. Down April – Up May Signals Q3 Weakness When the market goes against seasonality it becomes an indicator. Weakness in a historically strong top month April and strength in weak May suggest more market chop as I have been saying for some time now with the market prone to some Q3 weakness into bear killing October just ahead of the election. There have been some recent notes from the big bank’s research departments calling for a tough Q3. Not a lot of reasons are given but they are probably just referring to their handy copy of the Stock Trader’s Almanac (wink). NASDAQ’s Best 8 Months Ends in June
Jobless Claims Swing Higher Thu, Jun 13, 2024 Economic data, including jobless claims, came in weaker than expected this morning,. For seasonally adjusted initial claims, there was a jump to 242K in the first week of June, the highest reading since last August. Before seasonal adjustment, claims totaled 234.7K. As shown in the first chart below, that is still lower than the comparable week of last year and is also within the range of readings of other recent years save for the much more elevated levels observed in 2020 and 2021. For this point of the year, claims face seasonal headwinds. Historically, the current week of the year has seen claims rise close to three-quarters of the time with a median increase of 37K. That was right in line with the 38.5K uptick that was observed. As we will detail further in tonight's Closer, given the NSA number rose by as much as could be expected, it is peculiar that the seasonally adjusted number rose as significantly as it did. Finally, we would note that continuing claims have also pressed higher, reaching 1.82 million. As shown below, that is the first reading above 1.8 million since the final week of March and the most elevated reading of any week since January 20th.