September Outlook: Other Worst Month of the Year Wait for Fatter Pitch
By: Jeffrey A. Hirsch & Christopher Mistal
|
August 20, 2015
|
|
Ouch! Stocks got slammed hard again today pushing the S&P 500 into negative territory for the year. The Dog Days are not over for the market. This hazy, hot and sultry time during July and August were named the Dog Days of summer in antiquity by stargazers in the Mediterranean as the time period before and after the conjunction of Sirius, the Dog Star of the constellation Canis Major (Big Dog) and the sun. Back in the day the Dog Days were often plagued with, fever, disease and discomfort.
 
Selling continues to plague the stock market and we expect selling will continue through September, the other worst month of the year along with its neighbor August. September is the worst month of the longer term since 1950. Around this time last year Jeff was on CNBC and the other commentator in the segment, Dan Greenhaus, Chief Global Strategist, BTIG (Great guy and analyst whom we respect and does great work), keenly pointed out the S&P 500 had been up in 8 of the previous 10 years from 2004 to 2013. So maybe September was not bad for the market anymore. 
 
Jeff pointed out that it’s not merely the month as a whole to be concerned with, but the time around Triple Witching (the third Friday), especially the week after and month end when institutions make many end-of-quarter portfolio adjustments. Not only did we get the biggest pullback of the year from September Triple Witching to mid-October, but September was down as well. 
 
September’s first 11 trading days have a rather bullish bias with 7 of these days garnering our bull icon for being up 60% or more of the time on the S&P 500 the last 21 years. Five bullish days in a row come right after Labor Day. However, after that September often gets ugly. So look for a little respite in early September, but be prepared for another move lower in the second half of the month and into October.
 
As is frequently the case many market pundits were ready to call Sell in May a bust this year when the market made nominal new highs in May and July. O ye of little faith. Thankfully, our April 30 Best Six Months MACD Seasonal Sell Signal for DJIA and S&P and our June 4 Best Eight Months MACD Seasonal Sell Signal for NASDAQ were rather timely and have helped us avoid much of the carnage. 
 
Our colleagues at Probabilities Fund Management, LLC (Jeff is an Investment Committee Member) are quite pleased with their current cash position. Since our MACD Seasonal Sell Signals DJIA is down about 5%, S&P –2.5% and NASDAQ –3.5%. From their respective highs DJIA is –7.4%, S&P –4.5%, NASDAQ –6.5%.
 
Most stock sectors come into season in October so we’ll be preparing sector ETF buy limits and a fresh basket of small-, mid- and large-cap stocks from our fundamental and technical screens throughout September. Recent seasonal sector trade ideas in iShares NASDAQ Biotech (IBB), iShares US Tech (IYW) and SPDR Retail (XRT) are getting close to our buy limits. 
 
So try to be patient and keep your powder dry for what looks likely to be a decent seasonal buying opportunity later this summer or early autumn. Wait for the fatter pitch and enjoy the last days of summer.
 
Pulse of the Market
 
For the forty-fourth time since 1950, DJIA’s 50-day moving average crossed below its 200-day moving average triggering a frightening-sounding death cross (1). Our research of DJIA death crosses has concluded that this indicator is not as reliable as it once was as many of the recent death crosses occurred not that much before a short-term bottom and most of the decline had already taken place. Notable exceptions were in August 2001, July 2002 and January 2008 since 1984.
 
August’s first nine trading days lived up to their reputation for weakness this year and there was some mid-month strength late last week and Monday of this week, but it was fleeting. DJIA’s faster moving MACD “Buy” indicator turned positive on August 17 and its slower moving MACD indicator turned positive the following day (2). Both are negative as of today’s close.
 
Dow Jones Industrials & MACD Chart
 
On the close of August’s first trading day, DJIA issued its eighth Down Friday/Down Monday (DF/DM) warning of 2015 forming the second back-to-back reading of the year (3). This back-to-back DF/DM preceded a brief market bounce just like the previous occurrence in June. That bounce and this month’s bounce both proved to be short-lived as the longer-term historical tendency reasserted itself and DJIA subsequently moved lower. Recall, of 163 DF/DM’s since 1999, DJIA was lower 96.9% of the time sometime during the next 90 calendar days after the DF/DM.
 
The see-saw battle between bulls and bears that has been in place for much of this year is quickly identifiable in the Pulse of the Market table. S&P 500 (4) and NASDAQ (5) have seen a week of gains followed by a week of losses since mid-July. This week is slated to be a losing week by the pattern and the market appears to be staying true to that pattern. The week after August options expiration has a bullish bias that may help lift markets next week.
 
NYSE Weekly Advance, Decline, High and Low metrics continue to paint a weak outlook for the market. During positive weeks, Advancers only modestly exceed Decliners while during down weeks Decliners outnumber advancers by a wider margin (6). New Highs (7) are still tepid, but new Lows have begun to ease. A more robust Advance/Decline ratio during up weeks and an uptick in new Highs would potentially be a sign that the market is rounding the corner and preparing to make a meaningful move higher. Until then, the path of least resistance is now lower.
 
Two weeks ago Weekly CBOE Put/Call Ratio once again reached 0.78, its highest level (8) since the start of July 2015 and May/June of 2012. July’s reading did precede a bounce, but that was about it. This time around it may take a few weekly readings near 0.80 or a spike up near 1.0 before the final bottom is reached.
 
Click for larger graphic…
Pulse of the Market Table