July 2018 Trading & Investment Strategy By: | June 28, 2018 | Email | Print

6/27/2018: Dow 24117.59 | S&P 2699.63 | NASDAQ 7445.08 | Russell 2K 1640.45 | NYSE 12412.07 | Value Line Arith 6287.67

 

Psychological: Determined. Early June tech and small-cap strength helped buoy investor sentiment even as the market weakened recently. According to Investor’s Intelligence Advisors Sentiment survey bulls are at 47.6%. Correction advisors are up modestly to 34.0% and Bearish advisors are just 18.4%. Q2 earnings season will either confirm the bullish case or it could start to poke holes in it.

 

Fundamental: Firm. U.S. unemployment at 3.8% is solid. Atlanta Fed GDPNow model is currently forecasting Q2 growth of 4.5%. Corporate earnings forecasts remain solid for the balance of 2018 and into 2019, but recent U.S. dollar strength and tariffs could erode those estimates. Emerging and Chinese markets merit close attention as weakness there could have some spillover effects. 

 

Technical: Divergent. NASDAQ and Russell 2000 were trading at new all-time highs earlier this month, but DJIA and S&P 500 were woefully lagging. As a result, NASDAQ and Russell 2000 charts are firmer. Recent weakness has caused DJIA to breakdown through its 200-day moving average; S&P 500 is trading between its 50- and 200-day moving averages while NASDAQ and Russell 2000 are still above their respective 50-day moving averages. The divergences between the major indexes are not a bullish indicator.

 

Monetary: 1.75-2.00%. June’s Fed meeting came and went with little drama. Just as widely expected, the Fed did raise its federal funds rate 0.25%. The Fed’s next meeting will end on August 1 and the current probability of a rate increase during this meeting is just 4.0% according to CME Group’s FedWatch Tool. Monetary policy is tightening, but rates still remain low for consumers and corporations within historical context.

 

Seasonal: Bearish. July historically is the best performing month of the third quarter however, the mostly negative results in August and September make the comparison easy. July begins NASDAQ’s worst four months and is the third weakest performing NASDAQ month since 1971, posting a 0.4% average gain. Midterm-year July rankings are something of a mixed bag, ranking #5 for DJIA and #6 S&P 500, averaging gains of 1.1% and 0.7% respectively (since 1950); while NASDAQ (since 1974) and Russell 2000 (since 1982) midterm Julys rank #12.

 

So far our June 21 NASDAQ Best 8 Months Sell Signal has turned out to be rather timely. From our November 28 Buy Signal to our June 21 Sell Signal NASDAQ gained 11.6%. Both NASDAQ and the Russell 2000 have given back sizeable ground since June 21. The Dow and S&P 500 have been in selloff mode a bit longer since June 13. 

 

As of yesterday’s close this June Swoon had brought the Dow and S&P 500 into negative territory for the month of June and put NASDAQ at a hair above flat. The Russell 2000 small cap proxy index, which was leading the market for most of this spring, held up better during the recent slide. 

 

We have been getting on the defensive since our May 2 Dow and S&P 500 Best Six Months Sell signal and it now looks like seasonal and geopolitical pressures are beginning to take a toll on the market. In yesterday’s blog post we noted the technical damage NASDAQ has suffered and how our defensive positions in Utilities, a top performing sector in the “Worst Six Months,” has been ripping lately. 

 

Other stocks from our Defensive Basket we released on June 14 in the other top performing Worst Six Months sector in Healthcare, Information Technology and Consumer Staples have also begun to move. Spice and seasonings concern McCormick (MKC) popped 8.4% today on its Q2 earnings beat.

 

As June and Q2 come to a close stocks are trying to mount a rally and July is the best month of the third quarter. It remains to be seen if NASDAQ’s perennial mid-year rally can materialize and lift all stocks. But if it does it will provide ample opportunity to unload underperforming and unwanted positions and firm up your summer portfolio defense.

 

You can see in the updated chart below of the S&P 500 4-Year Cycle Seasonal Patterns that the blue chip index failed at resistance (red-dotted line) and did not clear the March highs. Aside from the new Defensive Stock Basket we are solidly in risk off mode. The Best Months are over, summer is worse in midterm years and the rhetoric and developments in the geopolitical arena are conspiring to spook the market.

 

 

GE’s boot from the Dow doesn’t seem to be helping matters either. And as we enter deeper into the bearish season several matters could jolt market. Trump’s scheduled tête-à-tête with Putin and the ongoing trade and tariff battles are bound to give markets a scare. Then there is the pressure of rising oil prices and the sudden bout of cold feet we are hearing from the Fed as inflation begins to percolate. High market valuations may be succumbing to bearish seasonality and midterm politicking as the market is on the brink of a technical breakdown through support.

 

So, stick to the drill and keep your powder dry. Raise some cash. Continue to weed out losing or lagging positions, pick up some more defensive holdings and wait for that fatter pitch we anticipate later in Q3 or early Q4 as we hit the sweet spot of the 4-Year Cycle.

 

 

Even before we issued our NASDAQ Seasonal Sell Signal on June 21, DJIA had begun to weaken and was heading towards its 50-day moving average. DJIA continued to weaken and closed below its key 200-day moving average this Monday (1). This was the first time since June 27, 2016 that DJIA closed below its 200-day moving average. Currently, DJIA is on track for its fourth consecutive close below its 200-day moving average. This has not occurred since early 2016 when DJIA was in the throes of a Ned Davis defined bear market. Both the faster and slower MACD indicators applied to DJIA (2) are currently negative and trending lower confirming the recent swing in the market’s trend.

 

 

DJIA logged its fifth Down Friday/Down Monday (DF/DM) of 2018 (3) during its first 8-consecutive trading day losing streak since March 2017. Historically, a DF/DM warning has been followed by additional losses sometime during the next 90 calendar days in the vast majority of occurrences while 8-day losing streaks have also been challenging to recover from. Tariffs, midterm elections and what the Fed will do with interest rates are some of the major reasons causing market volatility to spike.

 

While S&P 500 (4) and NASDAQ (5) gained ground for four straight weeks, DJIA struggled to keep pace declining twice in the same period. This divergence in June is not uncommon as technology and small-caps shares have historically enjoyed greater gains in June.

 

Market breath remains generally positive with NYSE Weekly Advancers out numbering NYSE Weekly Decliners in three of the last four weeks (6). Two weeks ago when breath wasn’t positive, S&P 500 and NASDAQ still posted weekly gains. New Highs and New Lows (7) are no longer trending in a positive direction instead New Lows are expanding and New Highs are shrinking. This week’s stats could keep this poor trend in place.

 

30-year Treasury bond yields (8) continue to linger just above 3% suggesting long-term growth and inflation are likely in check. The 90-day Treasury yield appears to be plateauing right around 1.90%. Whether or not 90-day Treasury yield holds near current levels will largely depend upon what the Fed does in the short-term.

 

 

 

 

July begins NASDAQ’s worst four months and is the third weakest performing NASDAQ month since 1971, posting a 0.4% 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 second best performing first trading day of all twelve months with DJIA gaining a cumulative 1139.97 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 advance of 0.44%. S&P 500 has advanced 85.7% of the time (average gain 0.42%). NASDAQ has been slightly weaker at 71.4% (0.21% average gain). No other day of the year exhibits this amount of across-the-board strength which makes a case for declaring the first trading day of July the most consistently 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, NASDAQ and Russell 2000 have recorded net losses on the day after.

 

 

Midterm-year July rankings are something of a mixed bag, ranking #5 for DJIA and #6 S&P 500, averaging gains of 1.1% and 0.7% respectively (since 1950); while NASDAQ (since 1974) and Russell 2000 (since 1982) midterm Julys rank #12. NASDAQ has only advanced in three of the last eleven midterm Julys with an average loss of 2.2%. Russell 2000 has advanced only twice in its last nine with an average decline of 4.5%.

 

As of today’s close, the slower moving MACD “Sell” indicator applied to NASDAQ has 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 US Tech (IYW), 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) and iShares Core US Aggregate Bond (AGG) using applicable buy limits. SPDR Utilities (XLU) and SPDR Consumer Staples (XLP) can also be considered on Dips. 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 and small-cap positions could also be trimmed.

 

 

 

 

Over the past five weeks since last update, S&P 500 climbed 1.6% through yesterday’s close. Russell 2000 soared 5.6% over the same time period. Overall, the entire Stock Portfolio climbed 0.8%. Mid-caps performed best gaining 1.3%. Large-caps added 1.0% and Small-caps climbed 0.6%. This laggard performance was primarily the result of the large cash balance that was held in the portfolio for most of the month.

 

Last week’s basket of Defensive Stocks has been added to the Stock Portfolio absorbing about half of the hypothetical cash balance. These stocks are all shaded in grey. The majority of the positions were added on the open on June 15 as most opened below their buy limit. The entire basket was up an average 0.9% using closing prices from June 20. NJ Resources (NJR) was the best performing, up 5.6%. The worst performing position was Intel (INTC), down 3.1%. All 21 stocks can still be considered at current levels or on dips.

 

 

 

As of the market’s close today, the slower moving MACD indicator applied to NASDAQ remains positive. NASDAQ’s strong momentum has led to a string of new all-time highs and correlating positions still held in the ETF Portfolio continue to perform. With NASDAQ’s gain today, a one-day decline of over 2.3% (179.36 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. We will also review current holdings in the Stock Portfolio and take action where needed.

 

 

These 21 stocks were selected from the top performing sectors for the “Worst Six Months.” The sectors we focused upon were Healthcare, Information Technology, Consumer Staples and Utilities. Due to their defensive nature and interest rate sensitivity, many consumer staples and utilities stocks are currently not in favor and many do not exhibit the technical strength we frequently require. But, this also means many of these stocks are not trading at 52-week or all-time highs and have more attractive valuations than other corners of the market. In a bid to potentially further reduce risk; this basket is comprised mostly of large-cap stocks with valuations in excess of $5 billion. Only four mid-cap trade ideas survived the screening process.

 

We first sifted through the universe of nearly 8,000 U.S. traded stocks for those with a market cap of at least $1 billion and average daily volume of 100,000 shares or more on average over the past twenty trading sessions. Then we winnowed the list down to only those stocks with relatively low price-to-sales and price-to-earnings ratios. From there we searched for stocks that were exhibiting consistent and/or growing revenue and earnings trends.

 

We then dug into numerous individual company charts before settling on these final 21 stocks. Our underlying theme was to find reasonably priced stocks within the four sectors that have exhibited the most consistent returns during the “Worst Six Months.” Yields for this basket of stocks range from a low of 1.75% by Church & Dwight (CHD) to a high of 5.48% by Southern Co (SO). The entire basket average yield is 2.81%.

 

We will look to add these 21 stocks, in the table below, near current levels. We will allocate a hypothetical $2000 from the cash position in the portfolio to each position. For each stock we have provided the ticker, name, sector, PE, price-to-sales ratio, market value, a dividend yield and a suggested buy limit and stop loss. 

 

 

 

As of the market’s close today, the slower moving MACD indicator applied to NASDAQ was positive. With NASDAQ’s modest loss today, a one-day decline of over 3.2% (245.48 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. We will also review current holdings in the Stock Portfolio and take action where needed.

 

 

June offers one high-probability seasonal trading opportunity. This trade is based upon the NYSE ARCA Natural Gas index (XNG) and takes advantage of seasonal weakness in natural gas stocks beginning in mid-June through the end of July. XNG enjoyed a rally from early April until late May, but is now beginning to show signs of waning upward momentum.

 

 

First Trust ISE-Revere Natural Gas (FCG) has been following a similar pattern as XNG, rallying from early April into mid-May. Its 50-day moving average bullishly crossed above its 200-day moving average in mid-May just as FCG topped out. Stochastic, relative strength and MACD indicators applied to FCG are all negative. FCG could be shorted on any rally up to resistance around $22.76 or on a breakdown below support at $21.90. If shorted, an initial stop loss at $24.05 is suggested.

 

 

Natural gas supply is plentiful and inventories are building. This is likely to pressure its price and the shares of the companies that explore, develop and produce it could suffer as well. Mild weather conditions are also dampening demand as air conditioners remain on light duty and their associated electrical demand remains subdued. 

 

 

In accordance with our Seasonal Sell Signal Alert for DJIA and S&P 500, long positions in SPDR Consumer Discretionary (XLY), SPDR Financial (XLF), SPDR DJIA (DIA) and SPDR S&P 500 (SPY) were all closed out of the portfolio using their respective average prices on May 3. Selling this early in May ultimately proved ill-advised as the major indexes went on to log respectable full-month gains. However, because technology and small-cap positions remained in the ETF Portfolio, these positions did benefit nicely.

 

In preparation for the end of NASDAQ’s “Best Eight Months,” stop losses have been raised significantly for IYW, 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.

 

Defensive positions in XLV, XLU, TLT, AGG and XLP are on Hold. When we issue NASDAQ’s Seasonal Sell signal we will reevaluate these positions and may increase the size of these positions.

 

Short trade ideas, IYT and XLB are around unchanged as of yesterday’s close. XLB was shorted yesterday when it traded above $60.40 intraday. SPDR Financials (XLF) has been rallying, but has not yet traded at or near $29.26, the price we would like to short it at. IYT and XLB short positions are on Hold.