July 2016 Trading & Investment Strategy By: | June 30, 2016 | Email | Print

6/29/2016: Dow 17694.68 | S&P 2070.77 | NASDAQ 4779.25 | Russell 2K 1131.62 | NYSE 10350.53 | Value Line Arith 4586.37

 

Psychological: Troubled. The polls got it wrong and the market paid too close attention only to be shocked by the actual Brexit vote outcome. And the Fed just pulled a 180. Weekly stats like the most recent Investor’s Intelligence Advisor Sentiment survey are still essential neutral. Bearish advisors stand at 23.8%, correction advisors are at 34.6% and Bullish advisors are 41.6% as of the most recent report. CBOE Weekly Put/Call ratio may have peaked last week at 0.74. Overall, sentiment is mixed and extreme readings typically seen a significant market bottoms or tops remain absent. In times of elevated uncertainty, it may be best to stick to your strategy. As of today, ours is largely defensive.

 

Fundamental: Mixed. Arguably the case could be made that fundamentals are actually, in fact, deteriorating. Labor market gains have slowed, the Fed has lowered its growth outlook and the fate of the EU is way up in the air. These negatives are being offset by an improvement in consumer spending which accounts for approximately 70% of the U.S. economy and low interest rates. Will consumer spending and “cheap” money be enough? Probably not.

 

Technical: Recovering. The Brexit vote outcome hit global markets like a freight train. DJIA, S&P 500 and NASDAQ all suffered their worst day of 2016 last Friday and for NASDAQ it was the worst day since August 2011. However, no new lows were made and the market is bouncing back. DJIA and S&P 500 are on course to reclaim their respective 50-day moving averages today. NASDAQ may do so as well today. Further upside is likely to be limited as heavy resistance exists just below all-time highs.  

 

Monetary: 0.25-0.50%. At the Fed’s last meeting, just before the Brexit vote, it flip-flopped again on interest rates. Previous hawkish statements were sweep away in favor of a far more dovish tone. Lowered growth forecasts, a weakening labor market and inflation well below target were the dominant factors cited. Any future rate increases will be gradual and lower rates are most likely sticking around longer.

 

Seasonal: Bearish. July is best month of the third quarter for the DJIA and S&P, but performance for the other two months, August and September, makes comparisons easy. Recent “hot” Julys in 2009 and 2010 have boosted July’s average gains since 1950 to 1.2% and 1.0% respectively. Such strength inevitability stirs talk of a “summer rally”, but beware the hype, as it has historically been the weakest rally of all seasons (page 72, Stock Trader’s Almanac 2016). Election year Julys rank in the bottom half of all election year months. DJIA: 0.3%, 6th worst; S&P 0.2% 6th worst; NASDAQ (since 1972): -1.3% 2nd worst; Russell 2000 (since 1980): -0.9% 3rd worst.

 

Leading up to Brexit markets were held back by concerns that Britain would leave the EU. Then a few days prior consensus was that the UK would stay in the EU and the markets rallied smartly. Then when everyone was wrong on Friday morning, markets around the world sold off sharply for two days. Then when Article 50 and the logistics of leaving made it apparent that nothing would happen soon, markets rallied back toward pre-Brexit levels. 

 

There is some buyer’s remorse from those that voted for Britain to exit the EU. Political leaders in the EU have expressed anger and encouraged a swift exit. Yet citizens across the Union have also expressed interest in leaving. At the same time there is a political vacuum in Britain with no clear successor to the outgoing, resigning Prime Minister Cameron. Meanwhile, despite a sharp two-day selloff in global equities last Friday and Monday, the market now appears rather unfazed after being extremely nonplussed for two days.

 

Perhaps as is often the case, all the fear of the dire consequences of a British exit from the EU are quite overblown. Of course there are risks, but there are always risks. Remember this vote is non-binding it is just a recommendation by the voters to Parliament that 52% of them would like to leave the EU and 48% want to stay. It still remains to be seen if Brexit will actually happen and if it does how detrimental it will be to the UK, EU and global economies and markets. However, we believe it will proceed and the UK will leave the EU.

 

Much remains to be figured out, but let’s step back for a moment and take all the worst cast scenarios with a grain of salt. Will Brexit really happen? Who will be the next Prime Minister of the UK. Will others leave? What will happen to the EU? Will Brexit hurt the UK or EU more? 

 

In the long run Brexit will likely be a blessing in disguise. It has the potential to strengthen both the UK and EU, by freeing up the UK, which is the 5th largest economy in the world and not in the Eurozone to set its own economic path, and catalyze the EU to hone its structure. In the near term, however, it is likely to add to market volatility and hamper economic growth as the powers that be figure out the next steps to Brexit and are pulled away from concentrating on implementing economic growth policies and initiatives. 

 

Stock Trader’s Almanac seasonality, probabilities and strategies proved themselves this past week. This Brexit event happened in the “Worst Six Months” and we came in to the situation positioned defensively and will remain so through the balance of summer and into the early fall. Market weakness this June was not emblematic of the more bullish election year June scenario. The inability of the market to log new all-time highs and gain any ground this June, or this year for that matter, underscores the lack of upside drivers in the near term. 

 

As the UK and the EU figure out what the heck they are going to do, and the US hunkers down for the battle for the White House to heat up, we are dealing with an alarming increase in terror attacks around the world. All this has the market on edge and primed for a further correction this summer. After the snapback rally from the Brexit shock recedes and early-July seasonal bullishness dissipates, look for lower prices and a test of the 52-week lows over the next four months. Stay the course.

 

 

Losses from last week’s surprising Brexit vote outcome have not been recovered yet. As a result, both the faster and slower moving MACD indicators (1) applied to DJIA remain negative. Since first closing above 18000 in December 2014, DJIA has failed to move meaningfully higher and hold onto gains and since last July DJIA has spent about the same amount of time below its 200-day moving average (solid red line) as it has above it (2). This key support level is approximately where DJIA bounced from earlier this week, but it would not be surprising to see it violated again sometime later this summer.

 

 

Last Friday’s 610 DJIA point plunge (–3.4%) was the worst day of 2016 (3) and the worst loss since August 24, 2015. S&P 500 shed 3.6% on that day and was also its worst day of 2016. NASDAQ dropped 4.1% and you have to go all the way back to August 2011 to find a worse NASDAQ day.

 

Friday’s declines spilled over to Monday, triggering the fifth Down Friday/Down Monday of 2016 (4). No matter how these occurrences are analyzed, the result is ominous with DJIA frequently lower sometime during the next 90 calendar days. Sometimes the declines are nearly immediate while other time there will be a bounce first. DJIA’s streak of four straight down Friday’s (4) also confirms that traders and investors are reluctant to hold long positions over the weekend. This is either because summer is here and/or a lack of confidence in the market.

 

After three straight weeks of gains, S&P 500 (5) and NASDAQ (6) were down three consecutive weeks. As of today the market is on track to break this streak, but typical first-trading-day-of-July strength falling on the Friday before the long holiday weekend could be a catalyst for profit taking this year.

 

NYSE Weekly Advancers and Decliners (7) over the last three weeks confirm weakness, but have not reached the grossly lopsided values usually seen at or near major market bottoms. Because the lows from February and/or last August were not breached during the recent market retreat, NYSE Weekly New Highs and Lows (8) are also not at extremes. New index highs or lows would likely be needed to see any meaningful move in these metrics.

 

Weekly CBOE Put/Call (9) climbed to 0.74 last week from a 0.59 reading at the end of May. The steady trend higher is concerning as it would seem to indicate that traders do not believe the worst is over yet. This week’s reading is on a course lower which would be welcome.

 

 

 

July begins NASDAQ’s worst four months and is the third worst performing NASDAQ month since 1971, posting a 0.2% average gain. Dynamic trading often accompanies the first full month of summer as the beginning of the second half of the year brings an inflow of new funds. This creates a bullish beginning, a soft week after options expiration and strength towards the end.

 

July’s first trading day is the fourth best performing first trading day of all twelve months with DJIA gaining a cumulative 990.95 points since 1998. Over the past 21 years, DJIA’s first trading day of July has produced gains 81.0% of the time with an average gain of 0.50%. S&P 500 has advanced 85.7% of the time (average gain 0.46%). NASDAQ has been slightly weaker at 76.2% (0.27% average gain). No other day of the year exhibits this amount of across-the-board strength which makes a solid case for declaring the first trading day of July the most bullish day of the year over the past 21 years.

 

Trading on the day before and after the Independence Day holiday is often lackluster. Volume tends to decline on either side of the holiday as vacations begin early and finish late. Since 1980, DJIA, S&P 500, and NASDAQ have recorded net losses on the day after. Russell 2000 is negative on the day before and the day after.

 

 

Election year Julys rank in the bottom half of all election year months. DJIA: 0.3%, 6th worst; S&P 0.2% 6th worst; NASDAQ (since 1972): -1.3% 2nd worst; Russell 2000 (since 1980): -0.9% 3rd worst.

 

 

Brexit day finally arrived. Unfortunately, we will not know the official results until much later tonight at the earliest and possibly not until the early morning hours of tomorrow, if the vote is close. Nonetheless, this fact did not stop European markets from rallying or our market from following suit. The fact that the vote is not legally binding and the reality that any Brexit would likely be a multi-year process may be setting in. Or perhaps the potential risks and the market’s initial reaction were overblown.

 

The point being, we are not likely going to wake up one day to learn that the United Kingdom has completely bailed on the European Union. Today’s vote may begin a process in which the U.K. begins to exit. It could be partially or fully, only time would tell exactly. Like other past political and economic events, such as the collapse of the Soviet Union, there will be traders and investors that sell first and ask questions later. Or in the case of sovereign bonds with negative yields, buy first. Regardless of the event or shock, the market has largely continued on once the shock or event passed. When today’s vote finally comes to a close, the market is likely to shift its focus back to fundamentals, technicals and of course the Fed and interest rates–at least until the next shock happens.

 

Last week, the Fed threw a cold bucket of water on its economic growth outlook which is a fundamental negative, but as a result also acknowledged that interest rates are likely to remain low, longer. This is a potential positive that could offset the drag of tepid growth. Today’s initial weekly jobless claims were also better than expected suggesting the U.S. labor market is at a minimum resilient. The market is bouncing back in the short-term. In the longer-term, the Presidential election is heating up and solid, sustainable growth remains elusive.  

 

 

Every year when the days get long and the temperature rises on Wall Street, we always hear those infamous buzzwords, the “Summer Rally.” As volume begins to shrink the hopes for a Summer Rally catch the ear of investors. On page 72 of Stock Trader’s Almanac 2016 we illustrate that yes, there is a Summer Rally, but there is a rally for all seasons and the one that occurs in summer is weakest. Yes the market has performed well in a few summers (2013, 2009 & 2003 are some recent notable exceptions), but as a rule it generally does not. Any outsized summer gains have been predominantly due to extenuating circumstances and/or after a sizable correction or bear market.

 

NASDAQ however, delivers a short, powerful rally that starts at the end of June. The accompanying table shows NASDAQ averaging a 2.2% gain since 1985 during the 12-day period from June’s third to last trading day through July’s ninth trading day. This year the rally could begin around the close on June 27 and run until about July 14.

 

 

In the mid-1980s the market began to evolve into a tech-driven market and control in summer shifted to the outlook for second quarter earnings of technology companies. This 12-day run has been up 23 of the past 31 years. Since the bursting of the tech bubble in 2000, NASDAQ’s mid-year rally has a spotty track record with seven appearances and six no-shows in the past thirteen years. However, it has been respectable for five of the last six years including a whopping 7.5% advance in 2013.

 

Consistent end-of-Q2 weakness, especially in the week after June’s option expiration week, also contributes to the setup of NASDAQ’s mid-year rally. Any weakness, particularly sharp, brisk declines near the end of June can make great entry points as the first trading day of July is generally strong and the full-month of July is the best month of the third quarter.

 

 

In the above chart of PowerShares QQQ (QQQ), this long trade appears to be setting up once again this year. QQQ found support at projected monthly support (green dashed line) and has managed to hold its ground. Relative strength (RSI) is beginning to improve. Stochastics are also turning positive while its MACD indicator could confirm a buy signal soon. 

 

QQQ could be considered on dips below $107.50. If purchased, a 1% trailing stop loss is suggested. Update the stop loss using QQQ’s daily closing price. If not stopped out, take profits at $112 or on the close on July 14. This trade will be tracked in the Almanac Investor ETF Portfolio which will be updated again on July 5.

 

It has been one week and a day since we issued our MACD Seasonal Sell Signal for NASDAQ. Since then NASDAQ traded lower, higher and today it is essentially where it was on Monday June 13. In addition to NASDAQ’s Sell Signal, DJIA also triggered its fourth Down Friday/Down Monday (DF/DM) of the year on the thirteenth. Previous research and analysis has shown that from the high within seven calendar days of the DF/DM to the subsequent low over the next 90 calendar days, DJIA has declined an average 7.5% going back to 2000.

 

In the following chart, the 30 trading days before and 60 trading days after a DJIA DF/DM have been plotted alongside the 5 times there was no low after the subsequent high and the 27 times there was no lower low after Monday. The 30 trading days before and the five trading days after the most recent DF/DM are also displayed. This is the same chart that appeared in the May 16 blog post where it was noted, “If DJIA recovers the losses from the DF/DM within about 4-7 trading days, then the DF/DM quite likely was an interim bottom. However, if DJIA is at about the same level or lower then additional losses are more likely.”

 

 

As of today, DJIA is in the window of 4-7 trading days since the completion of the DF/DM. DJIA is also only slightly higher than its June 13 close of 17732.48. This alone would seem to suggest that last week’s low could have been an interim bottom. However, we also noted in that May 16 post that technical and sentiment indicators should also be checked for confirmation.

 

 

In the above chart recent DJIA strength can be seen, but it also appears to be waning already. MACD is still negative, but Stochastic and relative strength indicators appear to have turned the corner and are gradually improving. Some additional strength would be needed to confirm that the worst is over following the most recent DF/DM. This may not occur until after the results of the Brexit vote on June 23. Considering recent strength, it would not be surprising if selling occurs regardless of the vote’s outcome. Traders have been buying the rumor and could quickly sell the fact.

 

 

In accordance with the June 13 NASDAQ MACD Seasonal Sell Signal, SPDR Technology (XLK), iShares Russell 2000 (IWM) and PowerShares QQQ (QQQ) have been sold and closed out of the portfolio using their average prices on June 14 for gains of 3.0%, 14.4% and 6.4% respectively.

 

We have also officially added to existing positions in iShares 20+ Year Treasury Bond (TLT), iShares Core US Aggregate Bond (AGG) and AdvisorShares Ranger Equity Bear (HDGE) using their average prices on June 14. As a result, the “Presented” or purchased price for these positions has been updated. Additional HDGE was purchased at a lower price than the original position while additional TLT and AGG were added at a higher price. HDGE, TLT and AGG can still be considered on dips below their buy limits.

 

Short positions in IYT, XLF, XLB and FCG are little changed as of yesterday’s close. XLF’s corresponding seasonal weakness in the Banking sector last until early July. Natural gas related stocks are usually weak until the end of July while Transportation and Material sector weakness lasts until October. All four of these short positions are on Hold.

 

Other new trade ideas from earlier this month, GDX, COW and DBA have not yet been executed. GDX, COW and DBA can still be considered on dips below their buy limits.

 

USO and XLU are also on Hold. See updated table below for the latest suggested buy limits and stop losses.

 

 

 

June’s Triple Witching option expiration week (or Quadruple if you prefer) has a history of choppy performance. The week has historically been rather volatile with frequent moves in excess of one-percent in both directions. This volatility has been evident this week. Add in a Fed meeting and the upcoming Brexit vote and it becomes clear why the market appears to be on edge.

 

Yesterday’s Fed announcement drew attention not for its lack of action, but because of the reduced growth forecasts that accompanied it and an apparent disconnect over inflation expectations. Reduced growth is not that large of a surprise especially considering the Fed’s recent track record of being overly optimistic. What is somewhat concerning is the Fed maybe missing the big picture when looking at inflation. It would not be the first time for this either. Longer-term expectations do not appear that stable.

 

 

 

In the short-term, energy and housing have been giving CPI and PCE (Fed’s preferred metric) a boost, but longer-term expectations are falling. Since peaking in April 2011, the University of Michigan’s Inflation Expectations survey has been in a steady down trend. It was at 4.6% then and the most recent reading was 2.4%. But, this is just a survey and can be dismissed. However, what cannot be ignored are the negative 10-year bond yields in Japan, Switzerland and now Germany. There has also been a meaningful drop in U.S. yields. Undoubtedly, some of this distortion is the result of central bank policy and a flight to safety, but it also seems to be a clear signal that longer-term inflation expectations are also moving lower.

 

There is plenty of research that concludes the lack of inflation, or worse deflation, is simply not good. One only needs to look up the Great Depression for further detail. The real issue is the nearly obvious fact that low interest rates and quantitative easing did not/does not work all that well. It may have staved off the Financial Crisis and kept economies from falling off a cliff, but it has failed to spark sustainable growth. Growth has stalled, corporate earnings are flat-lining and real wages are shrinking which is not the best recipe for continued stock market gains. Sideways to lower is more likely.

 

Next week’s Brexit vote is important for more than just the citizens and residents of Great Britain. Should they vote to leave the European Union, it is a vote to undue decades worth of work and cooperation and a blow to globalization. Will Great Britain be better off or worse should they leave? Only time will tell. If they are worse off, it will likely be business as usual for the rest of the world’s economies. However, if they are better off, it could mean a significant change in the global economy as other countries will likely follow suit and take similar isolationist moves.

 

 

Having already issued our Seasonal MACD Sell Signals for DJIA, S&P 500 and NASDAQ, we are largely out of harm’s way. Exposure to equities has been trimmed, and depending on personal risk tolerance, you are in cash, bonds and a handful of bearish positions or some combination thereof. Our Stock and ETF Portfolios are positioned with a combination a few select longs and a number of defensive positions.  

 

In all likelihood the worst case scenarios presented elsewhere will not unfold. End-of-Q2 portfolio window dressing and concerns over the Brexit vote will probably be the catalyst that keeps next week’s streak of market loses intact. DJIA has registered a loss in 23 of the last 26 weeks after June option expiration. Another weekly loss and the then known result of Brexit will likely have taken investor sentiment sufficiently bearish to setup a tradable rally into the first half of July just as the Presidential conventions kick off.

 

A fickle Fed, mixed economic data and a volatile political and geopolitical arena are likely to keep the market at bay for the remainder of the year. We expect the averages to fall short of new highs and drift lower through the later part of the summer and early fall, likely testing and potentially breaching the lows of last August or earlier this year. Any yearend rally is likely to be contingent upon who wins the White House. 

 

History suggests that a win by an untested, unorthodox and unfamiliar candidate as Mr. Trump will be a drag on the market as uncertainty will permeate The Street. Contrary to popular opinion and regardless of your political beliefs, the market is likely to rally more on a win by Mrs. Clinton because it knows what it’s dealing with – a continuation of much of the current administration’s policies.

 

In the last two days the CBOE Volatility index (VIX) spiked to its highest level since early February. This spike could be the result of another failed attempt by the market to break out to new highs, uncertainty about the Fed, interest rates, inflation and/or the growing possibility that the United Kingdom will leave the European Union.

 

The Fed’s two-day meeting concludes tomorrow and it is widely expected to do nothing. May’s jobs report was significantly weaker than expected and was accompanied by downward revisions to March and April numbers. When that data was released, the U.S. dollar tumbled and the CME Group’s FedWatch Tool, that calculates the probability of rate increases at upcoming Fed meetings, also tumbled. Today, the tool indicates just a 1.9% chance of a rate hike tomorrow. So there will most likely be no increase tomorrow.

 

Prior to today’s FOMC meeting, there have been 67 scheduled meetings since January 2008. Of those previous 67 meetings, S&P 500 finished the announcement day down 26 times and up 41. The worst S&P 500 decline of 2.94% was on September 21, 2011 and the best day was a 5.14% gain on December 16, 2008. S&P 500 average gain on all 67 days is a respectable 0.5%. Considering the recent history of FOMC meeting announcement days, there is a clear bullish bias.

 

 

In the above chart S&P 500 performance 30 trading days before and 30 trading days after the last 67 FOMC meetings has been plotted alongside the last 30 trading days performance. The baseline is all 67 meetings with all positive announcement days and all negative announcement days grouped separately for comparison. S&P 500 has followed the path of “Up” announcement days prior to the last few trading sessions which suggests further weakness could follow tomorrow’s announcement. 

 

Regardless of what the Fed does or does not do, the Brexit vote on June 23, 2016 is also likely to keep the market on edge. One of many potential negative outcomes is a stronger U.S. dollar as a result of a weaker euro and a weaker pound. The reason for this is the euro and pound are apparently being supported by the union. A stronger U.S. dollar would dampen commodity prices, U.S. exports would become more expensive and overseas corporate earnings would shrink.

 

 

In the nearly four weeks since last update, S&P 500 was up 1.5% and Russell 2000 gained 4.3% as of yesterday’s close. The Almanac Investor Stock Portfolio’s sizable cash position and short positions held its performance in check. Overall, the Stock Portfolio inched a meager 0.04% higher over the same time period. Large-cap positions, up 1.7%, in the portfolio were responsible for the majority of the overall gain. Small-cap contributed to the advance climbing 0.3% higher. Mid-caps however, were a drag, down 1.8%. Sunoco Lp (SUN) accounted for the bulk of Mid-Cap losses.

 

The basket of Select Seasonal Shorts on April 21 are all still profitable, just not as much as last update. Late May and early June strength did take a bite out of gains and three out of the five short positions were stopped out. Knight Transportation (KNX), Methanex Corp (MEOH) and Invesco LTD (IVZ) were all closed out of the portfolio when they closed above their respective stop losses over the past couple of weeks. All were profitable and MEOH was best returning 9.7% in about a month. Remaining short positions, Virtus Investment (VRTS) and Lindsay Corp (LNN) are on Hold. 

 

A quick scan of the 15 remaining positions held in the portfolio finds just four that are currently in the red, Sunoco Lp (SUN), CVS Health Corp (CVS), Hanesbrands Inc (HBI) and Starbucks (SBUX). SUN was downgraded to underperform from hold last week by a sizable firm accounting for the majority of its recent losses. Prior to this, SUN appeared to be merely treading water even as other energy concerns were rallying with crude oil. Sell SUN despite it’s sizable dividend, as further weakness is likely. For tracking purposes, SUN will be closed out using its average price on June 15. CVS, HBI and SBUX are on Hold.

 

Even prior to yesterday’s NASDAQ Seasonal Sell Signal triggering, the Stock Portfolio was largely defensively positioned. There was an ample cash position and a few outright short positions. In response to that signal, please note stop losses for several positions have also been increased. All other positions not previously mentioned are on Hold. Later this month we anticipate offering up a second basket of stocks to short as well as possibly a basket of new defensive longs for consideration.

 

 

 

As of today’s close, both the faster and slower moving MACD indicators applied to NASDAQ have turned negative. At this time we are issuing our official MACD Seasonal Sell signal for NASDAQ. 

 

NASDAQ’s “Best Eight Months” have come to an early end. As a result, Sell SPDR Technology (XLK), iShares Russell 2000 (IWM) and PowerShares QQQ (QQQ). For tracking purposes, these positions will be closed out of the ETF Portfolio using tomorrow’s average price.

 

Also, at this time we will officially add to existing positions in iShares 20+ Year Treasury Bond (TLT), iShares Core US Aggregate Bond (AGG) and AdvisorShares Ranger Equity Bear (HDGE) using tomorrow’s average price. New buy limits appear below in the updated ETF Portfolio.

 

This NASDAQ Seasonal Sell Signal is a reminder to tighten stop losses and/or take profits on technology related positions as NASDAQ’s seasonally favorable period has come to an end. Russell 2000 exhibits a similar pattern to NASDAQ. In tomorrow’s regularly scheduled Alert, we will update holdings in the Stock Portfolio and take appropriate action based upon today’s Sell Signal.

 

 

 

Both the faster and slower moving MACD indicators applied to NASDAQ remain positive, but have begun to weaken, setting up nicely for a sell signal. The slower MACD indicator is pointed out with a red arrow in the following chart. With NASDAQ’s additional loss today, a one-day decline of about 2.8% (about 138 points) would be needed to turn NASDAQ’s MACD Sell indicator negative. This is about 60% of what was required two days ago on Tuesday. The pace of NASDAQ gains continues to moderate. 

 

 

The Russell 2000 has been leading the major U. S. averages since the May lows, but appears to be stalling at projected monthly resistance (red dashed line). Even if it continues higher through monthly resistance, Russell 2000 is likely to stall around 1200, its highs from last November/December. Although we do not officially track the Russell 2000 MACD Indicator for our seasonal switching strategy, it is also positive, yet weakening like NASDAQ (red arrow in next chart). 

 

 

When NASDAQ’s MACD Sell indicator becomes negative, we will issue our NASDAQ Seasonal MACD Sell signal and begin clearing out remaining technology and small-cap positions held in the Almanac Investor ETF Portfolio and present some potential short stock trades later this month.

 

 

After a rocky start to the year stocks found support in mid-February and have gained some traction over the past few months. But they have yet to take out the highs of last year and appear poised for a soft patch this summer and fall. So with the S&P 500 in the black for the first four and five months of this election, it is basically a Wall Street vote for Clinton. 

 

It’s not just the old tongue-in-cheek Harry Truman line, “If you want to live like a Republican, vote Democratic.” It’s traders and money managers bidding up the market as they feel Clinton is the more likely winner and they have a better handle on what to expect as she is likely to continue many Obama policies, Trump on the other hand is having difficulty transitioning to a general election rhetoric and continues to lag in republican leadership support and fundraising. Meanwhile, the Dems seem to be solidifying the party and rallying around Clinton. The devil Wall Street knows vs. the devil they don’t.

 

Although weaker in recent times, election years are traditionally up years. Incumbent administrations shamelessly attempt to massage the economy so voters will keep them in power. But, sometimes overpowering events occur and the market crumbles, usually resulting in a change of political control. A surge by Trump on the national stage and with republican leadership and fundraisers could overpower the current bullish tone on The Street. While we expect a soft patch over the summer and leading up to the election, the year as whole should be mildly positive. Next year is a different story.

 

The table below presents a positive picture for the last seven or eight months of election years and the entire year following gains in the first four and five months of the year. We have highlighted in grey the last three down election years, when the first four and five months were also down.

 

 

Years when the incumbent party was defeated are noted by and asterisk. Several of those years had market gains in the first four and five months and/or the year. These years were plagued by some upheaval. In 1952 popular incumbent Truman chose not to run. Johnson chose not to run in 1968, Bobby Kennedy and Martin Luther King, Jr. were assassinated, third party candidate George Wallace, a violent Democratic convention and Vietnam conspired to oust the Dems. Ford lost to Carter in 1976 on the bitter heels of Watergate. The 1980 Iran Hostage Crisis, a bad economy with high unemployment and high inflation and third party candidate John Anderson paved the way for Reagan to sweep Carter. Bush’s broken campaign promise of “Read my lips, no new taxes” and third party candidate Ross Perot handed the White House to Clinton in 1992.

 

However, since 1948, investors have barely been bruised during election years, except for a brief span early in the year—until 2000 and then again in 2008. In both years a bubble burst: technology and internet stocks in 2000 and credit in 2008. Barring another massive regulatory failure, financial crisis, political miscalculation or exogenous event, the last seven months of 2016 should be positive, notwithstanding a summer and/or fall swoon.

 

As of the market’s close today, both the faster and slower moving MACD indicators applied to NASDAQ are positive. The slower MACD indicator is pointed out with a blue arrow in the following chart. With NASDAQ’s modest loss today, a one-day decline of about 4.6% (about 228 points) would be needed to turn NASDAQ’s MACD Sell indicator negative. This is about two-thirds of what was required last week on Thursday as NASDAQ’s pace of gains has moderated. When NASDAQ’s MACD Sell indicator becomes negative, we will issue our NASDAQ Seasonal MACD Sell signal and begin clearing out remaining technology and small-cap positions held in the Almanac Investor ETF Portfolio.

 

 

Although we do not officially track the Russell 2000 MACD Indicator for our seasonal switching strategy, it is also still positive (blue arrow in next chart). Since the May lows Russell 2000 has been the strongest performer, but it has run into projected monthly resistance (red dashed line). Before resistance, Russell 2000 did break out above its late April highs. Even if it continues higher through monthly resistance, Russell 2000 is likely to stall around 1200, its highs from last November/December.

 

 

 

Beef prices tend to form a seasonal high in March as packers have purchased inventory ahead of the summer grilling season. Then as grill masters supplement steaks and burgers with pork ribs, chicken and other delicacies, beef consumption starts to decline in the hot weather. But beef supplies also begin to dwindle as feed lots are short on inventory. 

 

Live Cattle prices typically hit a seasonal low in mid- to late June and then begin to rise before the school season begins as federal government subsidies for school lunch programs kick in for beef purchases. Consumption continues to increase through the winter and holiday season, generally keeping cattle futures prices higher through mid-February.

 

Our top longer-term seasonal play for live cattle is to go long the April 2017 contract near the usual June low on or about June 20 and hold it for 160 days until early. Over the past 46 years this trade has been positive 30 times for a success rate of 65.2%. Prior to the last two year, the previous four years were stellar. 2010 registered the largest gain in this trade’s 46-year history and those four years combined account for more than half the historic gains. Last year, this trade did not work as prices were retreating from multi-year highs.

 

 

The weekly chart below depicts the Live Cattle continuous futures contract with iPath Bloomberg Livestock Sub-TR ETN (COW) overlaid as a solid black line to illustrate how the two instruments trade nearly in tandem. Traders may want to look at futures and options strategies, but others may find COW an adequate trading vehicle.  In any event, beef is likely poised for its typical seasonal move up from an early summer low to a mid-winter peak.

 

 

COW is thinly traded averaging just about 6,000 shares per day on average over the past three months, but volume does pickup when Live Cattle (or lean hogs) begin to move. As of April 29, 2016, COW was 52.01% Live Cattle and 47.99% Lean Hogs. Caution should be taken with COW. This Exchange-Traded Note, like other unsecured debt securities with no principal protection, carries inherent risk, primarily issuer credit risk, and the risks with COW may be greater. PLEASE READ THE PROSPECTUS, CONSULT YOUR FINANCIAL ADVISOR AND CONDUCT YOUR OWN DUE DILIGENCE. COW could be considered on dips below $23.75. If purchased, a stop loss of $22.50 is suggested. This trade will be tracked in the Almanac Investor ETF Portfolio.

 

 

 

In addition to Live Cattle seasonal strength beginning in June, Cocoa, Wheat and Sugar also begin seasonably favorable periods in the month. Outside of the futures market, iPath Pure Beta Cocoa ETN (CHOC), Teucrium Wheat (WEAT) and iPath Bloomberg Sugar ETN (SGG) correlate well. However with the exception of WEAT, all have traded less than 40,000 shares per day on average over the past three months and holdings are generally meager presenting further liquidity concerns. PowerShares DB Agriculture (DBA) is a good alternative as it provides exposure to eleven different commodities: Feeder Cattle, Cocoa, Coffee, Corn, Cotton, Lean Hogs, Live Cattle, Soybeans, Sugar, Wheat and Kansas Wheat. DBA has assets of $862 million and trades better than 500,000 shares per day on average, offering plenty of liquidity relative to other choices. DBA could be considered on dips below $22.00. If purchased, a stop loss of $20.85 is suggested. This trade will also be tracked in the ETF Portoflio.

 

 

In response to last Friday’s jobs report, the U.S. dollar weakened briskly. A weaker dollar tends to support commodities and there is a spike on DBA’s chart that corresponds with the dollar’s drop on that day. DBA’s chart is bullish with Stochastic, relative strength and MACD indicators confirming strength. In addition, there is a golden cross (50-day moving average rising above 200- day moving average) in early May. If economic data holds up and the dollar weakens then further upside is likely.

 

With the first five months of 2016 officially in the record books we have updated our 1-Year Seasonal Pattern Charts of Eighth Years, Election Years and 2016 year-to-date below. DJIA’s chart also includes Incumbent Party Wins and Losses and years when No Sitting President was running. The key takeaways from these charts are the market generally performs better when the incumbent  party wins and there have only been two losses in the last seven months of election years since 1952. This second point is not as easy to see as steep losses in 2008 have a sizable impact on the charts. Nonetheless, the market does frequently make a bottom in May and rally to finish the election year.

 

 

 

Although the “Best Six Months” for DJIA and S&P 500 have officially come to an end, NASDAQ’s “Best Eight Months” (November through June) is still in progress. As of the market’s close yesterday, both the faster and slower moving MACD indicators applied to NASDAQ were positive. With NASDAQ’s modest gain today, a one-day decline of over 6.6% (about 330 points) would be needed to turn NASDAQ’s MACD Sell indicator negative. When NASDAQ’s MACD Sell indicator becomes negative, we will issue our NASDAQ Seasonal MACD Sell signal and begin clearing out remaining technology and small-cap positions held in the Almanac Investor ETF Portfolio.

 

 

 

June and July tend to offer only a few high-probability seasonal trading opportunities in typical years. As a result, there are just three seasonal sector setups in the Stock Trader’s Almanac 2016 for June and July. The first takes advantage of seasonal weakness by natural gas stocks beginning in mid-June through the end of July. This trade is based upon the NYSE ARCA Natural Gas index (XNG). Unlike last year, XNG has been in an uptrend since its double bottom in January and February and is setting up nicely for a possible short trade.

 

First Trust ISE-Revere Natural Gas (FCG), a current long holding in the ETF Portfolio has also enjoyed a solid move higher over the same time period. However, the rally appears to be losing some steam as FCG has run into resistance at its still falling 200-day moving average. Before going short we will first need to close out the existing long FCG position. Sell FCG long position. For tracking purposes it will be closed out of the portfolio using its average price on June 3. FCG could be shorted near resistance around $25.05 or on a breakdown below $22.35 with corresponding negative MACD, Stochastic and relative strength indications. If shorted, set an initial stop at $25.95.

 

 

The next two seasonalities actually begin in July. Based upon the Dow Jones Transportation index, the transports are seasonally weak from mid-July through mid-October. Last month, we shorted iShares Transports (IYT) and thus far, this trade has been unrewarding. Continue to Hold the short IYT position.

 

July’s last seasonal opportunity is based upon the PHLX Gold/Silver index. Over the past fifteen years this index has produced an average gain of 11.8% from its end of July lows to its late December highs. The index is comprised of 30 precious metal mining company stocks. Obviously, moves higher by physical gold and silver would benefit the companies that mine the metals, but the stocks can also rise in anticipation of higher precious metals prices and during periods of uncertainty. Market Vector Gold Miners (GDX) is the ETF of choice for this trade. It has more than $7 billion in assets and has traded more than 80 million shares on average over the past three months. Because seasonal strength does not typically begin until late-July, we will be patient and look to add GDX to the ETF Portfolio on dips below $20.96. If purchased set an initial stop loss at $18.86 and take profits at the auto-sell price of $24.27.

 

 

 

In preparation for the end of NASDAQ’s “Best Eight Months,” stop losses have been raised significantly for XLK, IWM and QQQ. See table below for exact values. When we issue our NASDAQ Seasonal Sell signal, we will close these positions out of the portfolio.

 

In addition to FCG we will also closeout the position in United States Natural Gas (UNG) as seasonal strength in natural gas typically comes to an end in early June. Sell UNG. For tracking purposes UNG will be closed out of the portfolio using its average price on June 3.

 

Defensive positions, HDGE, TLT and AGG can be considered near current levels or on dips. When we issue NASDAQ’s Seasonal Sell signal we will reevaluate these positions and possibly officially increase the size of these positions.

 

Recent short trade ideas, IYT, XLF and XLB are all modestly in the red as of yesterday’s close. IYT and XLB were both shorted on May 6. Continue to Hold IYT, XLF and XLB.

 

As the possibility of a June or July rate increase increased, the U.S. dollar strengthened and precious metals weakened. ProShares UltraShort Silver (ZSL) was added to the portfolio on May 11 when it traded below its buy limit. ZSL has also closed above the threshold to switch to a 5% trailing stop loss. As a reminder, ZSL stop loss calculation is based upon its daily closing price. Its stop loss, as of yesterday’s high close appears in the table below.