Stock Trader's Almanac

Market as a Glance

Psychological: Complacent. Weekly CBOE put/call ratio reached 0.42 for the week ending April 16, the lowest it has been since September 2000. VIX was under 16 (a new recovery low) until the SEC launched a civil suit against Goldman Sachs and Greece appeared ready to default. Any potential effects from possible defaults by Greece, downgrades of Spain’s and Portugal’s sovereign debt are being largely ignored much like when sub-prime mortgages began to implode in 2007. Has anyone noticed China’s mediocre market performance year-to-date? If they are the global growth engine and a major raw materials consumer then why is there such disconnect from other global markets?

Fundamental: Fair. Corporate earnings are one homerun after another and analysts are scrambling to adjust their forecasts. But, honestly given the recent off-the-charts productivity statistics and easy year-over-year comps, it is hard to imagine anything different. The amazing earnings growth surge is going to ebb as easy comps and well above average productivity gains fade. In spite of strong profit growth, companies remain reluctant to hire. Recent labor numbers are lackluster and continue to indicate only early signs of a modest economic recovery.

Technical: Toppy? Since early February the major U.S. indices have gone only one direction, up. Dow, S&P 500 and NASDAQ MACD indicators are solidly confirming a sell signal following nearly a month of oscillating back and forth (intermittent buy/sell signals). However, the weekly advance/decline numbers and new highs remain strong and indicative of further strength. Should breadth sour and new highs fade, a correction (or bear market) could be on its way.

Monetary: Tightening. Although the fed funds rate remains near zero at a target of 0.0% to 0.25%, the Fed has closed all but one of its special liquidity facilities that it established to support credits markets during the peak of the financial crisis. All that remains is the Term Asset-Backed Securities Loan Facility, which is scheduled to close on June 30. This program provides support to the mortgage industry and the housing sector. Rates are likely to remain historically low until there is a substantial improvement in the labor market.

Seasonal: Bearish. May is the first month of the Worst Six Months for the Dow and S&P 500. However, technology and small-cap strength continues until June. Since 1985, May is the top performing month for the S&P making it a great month to take profits, hence “Sell in May.”

By Jeffrey A. Hirsch

The economy and market have rebounded and staged an impressive comeback. While we are not out of the woods yet, the USA is on the road to full recovery. However, our analysis projects a pause in the rally over the next several months.

We have been preparing subscribers for this over the past several months and forecasted in mid-December that the Dow would rally towards 12000, but fall short, followed by a correction that would amount to a mild bear market that would be contained in 2010 before another bull market began that could carry us to new highs in 2011 or 2012.

Midterm Machinations & Euro Debt Contagion

The writing is now on the wall and the cracks in the bull market are starting to widen. Wall Street is not yet concerned about fallout from the Goldman lawsuit, inevitable new financial regulations, and a potential chain-reaction across the Euro-zone and the pond from the Greek and Spanish sovereign debt downgrades and economic woes. The European debt crisis may be widening.

But I am and have used the rally to go short with the Grizzly Short mutual fund (GRZZX) and play some defense with iShares Barclays 7-10 Year Treasury ETF (IEF), though I am still waiting on getting some iShares Barclays 3-7 Year Treasury ETF (IEI) on a dip. Our Best Six Months Seasonal MACD Sell Signal triggered early this month and bonds tend to go up May-October as stocks often decline. Several alerts have been sent over the past few weeks on this and updates on our 2010 Annual Forecast.

Midterm years are notorious for downturns as 9 of the past 15 bear markets since 1961 have bottomed in the midterm year. Midterm machinations are now in full swing. After Democrats won the long and arduous battle on Health Care Reform, both parties are now on the offensive for the midterm elections in November. This battle for control has spooked Wall Street in years past and with the Dow up about 71%, the S&P 500 up nearly 80% and NASDAQ up almost 100% – and financial reform on the top of the docket – the bull is in a precarious position.

In the 2010 Stock Trader’s Almanac however, we remind traders that Midterm Election Years are Where Bottom Pickers Find Paradise (page 32) and that from the midterm low the Dow has rallied 50% to the next year’s high since 1914 (page 78). Wait for a fatter pitch over the next several months.

In their consummate monthly Investment Strategy report on April 29, 2010, Ned Davis Research declares that although the fundamentals support the continuation of the global bull market, the potential for a correction exists. I could not resist quoting a few paragraphs. They confirm and reiterate many issues I have touched on recently and say it rather eloquently without any hyperbole.

“The global uptrend has been shaken by the two “G” forces – Goldman and Greece. But the bigger threat could be the g-forces experienced by earnings growth, now far into record levels on a year-to-year basis. In the months ahead, comparisons will become more difficult, economic momentum will be likely to decelerate, and earnings growth will drop. If earnings expectations are slow to follow suit, the market will be vulnerable.…

“The “G” forces notwithstanding, conditions are right for the continuation of the market advance. But expectations are high for earnings and economic performance. As the quarter progress, we’ll be watching for signs of downward revisions to the optimistic expectations, which could trigger a correction. Lacking signs that global market performance is detecting an economic contraction, a correction would give way to the resumption of the cyclical bull market later in the year.…

“Stock prices, however, anticipate economic activity. And later in the year, our economics team expects economic growth to moderate….it seems reasonable that stock prices would soon be vulnerable, and likely to correct the excessive optimism that is now being priced in. Not only would this be consistent with several of our historical studies that show a market correction during Q2-Q3 is likely, but more importantly, our current sentiment indicator readings also confirm that risks are rising.”

We wholeheartedly agree and find solace that our analysis is in such fine company. It scares us when we are in the consensus, but thankfully this is currently the minority opinion as most analysis is considerably more bullish. Admittedly our forecast is for more downside and a mild, short-lived cyclical bear, followed by another cyclical bull. (For our position on the secular market trend, refer to our March 12, 2010 Alert, Proving Grounds: Nature of the Bull)

Pulse of the Market

In spite of Greek and European sovereign debt contagion worries and the Goldman SEC law suit and Senate hearing festivities, the uptrend remains intact and the Dow stands strong above its 50-day moving average (black line) as it has since March 1st (1). The 200-day MA (red line) also remains in a positive uptrend. Since July we have been able to withstand several tests of the 50-day MA, yet a breach of the 200-day MA could have more ominous implications. On April 8, our Best Six Months Seasonal MACD Sell signal triggered (2) and we have added the two bearish mutual funds and the two intermediate bond ETFs to the portfolio. 



Both the Dow and NASDAQ logged their eighth straight week of gains (3) (4). The Dow is on pace to make it nine, but NASDAQ has a bigger hurdle to clear, closing out last week at 2530. The last time the Dow managed this feat was in January 2004 and prior to that was November 2002. NASDAQ’s most recent weekly winning streaks came in at nine, just after the March 2009 bottom; and eleven from October-December 1999, just prior to the tech bubble bursting in March 2000.

Shortly after the 8-week streak ending in January 2004 the Dow hit its first half 2004 high of 10738 on February 11 and drifted down to 9750 on October 25, 2004, culminating in a minor 9.2% correction before powering ahead. The 8-week run in November 2002 came after a 31.5% bear market that began in March 2002 and was at the outset of the powerful bull that topped out in October 2007, as the Great Recession and bear market got underway.

Market breadth and internals are still strong and trending higher. After a brief respite during Income Tax week (5), advancers beat decliner by a 3.5-to-1 margin. As discussed in the April 16, 2010 Alert, Proving Grounds: Top Spotting With Sentiment Readings & Market Internals, the advance-decline line remains in a steep uptrend. Perhaps finding delight in the Chinese lucky number “8,” traders pushed new highs to their highest reading since January 2004 (6), while maintaining the comfortably wide margins over new lows we have enjoyed since the January-February mild correction.

Investors Intelligence counts its Bullish Advisors % this week at 54.0%, higher than the 53.4% reading in January of this year when the averages were also making new highs just before the Dow retreated about 7.6%; and the highest reading since December 2007! Bears have ticked up to 18.0% and 28.0% expect a correction. Weekly CBOE Equity Only Put/Call Ratio fell to 0.42 (7), a level not seen since September 2000 – 10 years ago!

In Tuesday’s Alert, May Almanac: Sell in May — Merry Month Best Since 1985, we reminded subscribers that May has been the best S&P month since 1985, down only five times in 25 years., lending support to the “Sell in May,” old adage and our Best Six Months Switching Strategy. The accompanying chart illustrates the Dow’s tendency to make an annual peak in May. May is a great month to take profits and get defensive. 



Disclosure Note: At press time, Hirsch held a position in GRZZX and IEF.

Best in Show — Buyback Dog'' Pedigree Outclasses Competition — Up 43%

We first profiled the Buyback Dogs Portfolio last year at this time. Since then it is up 42.6%, increasing the gain since inception by 81.3%! Its long-term record continues to impress: 172.2% since inception, outperforming the S&P 500 by 125.9% and the Dow Jones Industrials by 115.4%.

The Buyback Dogs is one of the most popular features in The Buyback Letter. It is a five-stock portfolio that features companies in the Dow Jones Industrial Average that have not only been most actively repurchasing their shares, but also boast excellent fundamentals. The name, of course, is a play on “The Dogs of the Dow,” a strategy in which investors buy those DJIA companies with the lowest P/E ratios and highest dividend yields.

Read More

Bear''s Choice — Bull May Be Headed Out To Pasture — Finger on Trigger of Best Six Months MACD Sell

As we enter the last month of the Best Six Months (November-April) the Dow is up about 11% from our October 9 Best Six Months MACD Buy Signal, inline with the historical average return of this seasonal switching strategy. Sideways action over the past week has put the MACD Sell Indicator on the brink of triggering our Best Six Months Seasonal Sell Signal. After a couple of tough years the Best Six Months are back in form, suggesting that the Worst Six Months (May-October) will return to their historically weak tendencies.

Soon enough the financial headlines and news programs will begin to feature the well-known old saw “Sell in May and Go Away.” You may even spot my affable mug on the tube or hear my dulcet tones on the airwave espousing the historical validity of seasonal market timing and the precarious position the market is in after the powerful bull run over the past year.

Read More

Best Six Months Sell Strategy Update

In last Thursday’s Alert, Best Six Months Strategy: Bear’s Choice — Bull May Be Headed Out To Pasture – Finger on Trigger of Best Six Months MACD Sell, we presented four recommendations to be executed on the Dow Jones Industrials Best Six Months Seasonal MACD Sell Signal. At that time the S&P 500 MACD was in Sell territory and we stated we would wait for a confirmation MACD Sell Signal from the Dow before adding these recommendations to the portfolio.

Read More

Take the Pepsi Challenge - A Refreshing Change to the Baker''s Dozen with More Bounce to the Ounce

We first recommended RPM International (RPM) as part of The Baker’s Dozen on May 2, 2006. Since then and without taking dividends into consideration, the stock is up 15.8% vs. a 9.1% loss for the S&P 500. With dividends considered, the margin in RPM’s favor would have been even greater since it’s always maintained a higher yield than the market. As it stands today, RPM yields 3.73% compared to 1.85% for the S&P, and with a still-growing annual dividend.

Although there will be some yield give-up, we are selling RPM and switching into PepsiCo (PEP) , which adds one more “bluest of the blue chips” to The Dozen alongside 3M, IBM, McDonald’s, United Technologies and Wal-Mart, all of which are rated A++ in financial strength by the Value Line Investment Survey including PEP.

Read More

Worst Six Months Loom on Horizon — Protect Your Profits

No new seasonalities begin in May, the first month of DJIA’s and S&P 500’s “Worst Six Months.” However, four sector’s favorable periods do come to an end: Pharmaceutical, Cyclical, Materials and Transports. As of the close on April 7, the four positions in the portfolio providing exposure to these sectors have an average gain of 16.4%, modestly above the average 10-year return of 13.8%.

Read More

Best Six Months MACD Sell Signal Triggers

Last Thursday on the day before the Good Friday holiday we entered April with the S&P 500’s MACD Sell indicator barely in sell territory, while the Dow Jones Industrial’s was not. We opted to wait until both the S&P 500 and DJI MACD Sell indicators had triggered before issuing our Seasonal Best Six Months MACD Sell Signal. After a week of truly flat action with the Dow closing at exactly the same price (10927.07) it was a week ago, both the S&P 500’s and the Dow’s Best Six Months MACD SELL Signals triggered on yesterday’s close.

From our MACD Buy Signal back in October the Dow and S&P are up about 11% and NASDAQ is up nearly 14%. The NASDAQ remains in its “Best Eight Months” which runs through June and we will begin looking for a MACD Sell for the NASDAQ at the beginning of June.

Read More

New Technology Promises To Make Solar Energy Work, Plus Other Applications And Propel Microcap Stock Higher

Since the mid-1970s as I was being weaned on historical stock market patterns, seasonality and emerging company stock analysis on my off hours from middle school, solar energy and the companies that were trying to bring photovoltaics to market profitably have been attractive to us. Though harnessing the power of the sun into electricity and useable energy has been an ambition of modern society for years, it remained elusive until relatively recently.

Solar energy is on the rise. Unfortunately the United States is not taking the lead in propagating it. Western Europe, China and the Far East are the fastest growing markets right now. But it is only a matter of time before the U.S. gets in gear with a proper solar initiative as it is now proven to be one of the most effective alternative energy solutions and is the ultimate renewable energy source. But until such time innovative American solar companies need to partner overseas and that is exactly what this low-priced, undervalued microcap has done.

Read More

Top Spotting With Sentiment Readings & Market Internals

Our Best Six Months Seasonal MACD Sell Signal triggered a week ago on the close Thursday, April 8, 2010. These signals can occur anytime after April 1 when the MACD Sell Indicator shows a change in momentum once the last month of the Best Six Months (November-April) has commenced. The signal has triggered as early as April 1 and as late as June 13. Sometimes these signals come after the market has already begun to decline, other times the market continues to rise a bit longer before declining during the Worst Six Months (May-October). On some occasions, as was the case in 2009, the market does not decline below that Sell Signal level for a year or more.

Read More

Technology and Small Caps Seasonally Strong till June

On the close of April 8, our MACD Seasonal Sell triggered for the Dow and the S&P 500. NASDAQ and the Russell 2000 remain in their Best Eight Months through at least June 1, which is the earliest date that a MACD Sell Signal can trigger for them. Because the Best Six Months for the Dow and S&P 500 have come to an end we have taken a more defensive position in the ETF Portfolio. On April 8, we exited four sector seasonalities, closed out positions in Diamonds (DIA) and S&P 500 Spyder (SPY) and added two bear oriented mutual funds as well as two intermediate length bond ETFs.

Our Stock Portfolio, comprised entirely of small cap stocks, will remain relatively unchanged as small cap seasonal strength has not yet ended. In spite of poor performance (at least for now) from our most recent recommendations, the open-position average gain continues to grow. Excluding Transgenomics (TBIO), which had not been added to the portfolio at the last update, the stock only portion of the portfolio gained 5.8% over the past four weeks compared to a 4.0% gain for the Russell 2000 (^RUT).

Read More

Credit Call Spread for Sell In May

April brought on an amazing follow through rally in equities and held onto its long term tradition of being one of the Best Six Months and one of the best months to be long, period. Last month also gave us opportunities in other markets that behaved according to historic seasonal tendencies. Last month’s British Pound recommendation was one of my better selective trades. In the March 16 Alert I said:

“One market that might appeal to futures, Forex and stock traders is the British Pound (BP). The Pound Sterling has a strong tendency to move up against the Dollar in mid-March. As noted on page 34 of the Commodity Trader’s Almanac 2010 the fact that Britain’s fiscal year begins in April may help to push the pound higher versus the U.S. dollar from late-March to late-April.

“This currency has had its share of trouble declining from a peak high of around 164.30 in mid-January to a low of 147.68 on March 3rd. The pound could recover to the 154-155 level by mid-April. That is the current Monthly Pivot Point as well as a Fibonacci 38% retracement. Stock traders can participate in this trade by using the ETF CurrencyShares British Pound (FXB).”

Read More

May Almanac: Sell in May — Merry Month Best Since 1985

From 1965 to 1984 as part of the “May/June disaster area," the S&P 500 was down 15 out of 20 Mays. Then from 1985 to 1997 May was the best S&P month, up 13 years in a row, averaging 3.3%. In fact, May has been the best S&P month from 1985 through 2009, down only five times in 25 years. This has helped it be a great month to take profits, AKA “Sell in May,” and get defensive. In the chart below note how the Dow tends to make an annual peak in May. Sell at the top, right? 

Read More

May 2010 Strategy Calendar

May 2010 Strategy Calendar

Read More

Subscriber Q&A

Read More