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Aside from the games, shows,
restaurants and indulgences there was a great deal of knowledge to be won at this
year’s MoneyShow Las Vegas last week. On Tuesday I interviewed seven other
speakers. Lindsey Bell, Investment Strategist at CFRA, explained her firm’s
recent upgrade of the Health Care sector to overweight and the downgrade of
Energy to marketweight. Alexis Christoforous, Anchor and Reporter for Yahoo
Finance, discussed her more cautious outlook in the face of heightened
Craig Johnson, Managing Director
and Senior Technical Analyst at Piper Jaffray gave us a quick rundown of the
market’s technical outlook and he’s assessment of a range bound market in the near-term
and some insight into why the Advance-Decline is not as relevant since we went
to penny ticks from eighths and sixteenths when the New York Stock Exchange
(NYSE) switched to the decimal system in April 2001.
John Buckingham, Editor, The Prudent Speculator, provided some in
depth ideas on how to construct high income producing dividend stock portfolios
and several picks. The always effervescent Mark Skousen, Editor, Forecasts & Strategies, who also
teaches a course at Chapman University share his upbeat market outlook as some
of his favorite stocks and funds to buy now.
Jay Soloff, Editor, Options Profit Engine, discussed some
volatility trades and other options strategies and Tim Plaehn, Lead Investment
Research Analyst for income and dividend at Investors Alley related his latest
high income stocks and a bond ladder using the Invesco Investment Grade
Wednesday was my day. I gave an
interview on our latest Tactical Seasonal Switching Strategy MACD Sell Signal
from May 1, including out mantra of “Reposition in a May” versus the one-dimensional
“Sell in May and go away” mindset. Plus the host of portfolio moves we have
made following the sell signal. Then I gave my talk on my current tepid outlook
for the next several months and my updated rundown of what’s hot and cold on
the market’s calendar and what we have been recommending.
I closed out the show moderating
two panels that sandwiched my book signing. The two panels turned out to be
super interesting and quite lively. The first was focused on a new little-known
tax shelter called “Opportunity Zones” that were created in the new tax law
passed in December 2017. Similar to a “1031 Exchange” to defer capital gains
taxes on real estate, you can defer and get other benefits in Opportunity Zone
investments on any type of capital gain and any portion of it you choose.
Finally, I refereed a heated
debate entitled, “Massive Bubble vs. Market Boom? They Debate, You Decide”
between Jon Markman and Mike Larson. Jon was on the boom side and Mike was on
the bubble side. Perhaps most energetic was the audience with many pointed
questions, particularly on the China Tariffs and the health of the economy.
Silver has a strong tendency to peak or continue lower in May, bottoming in mid to late June. Traders can look to sell silver in mid-May and maintain a short position until on or about June 23. In the past 46 years this trade has seen silver (July contract) decline 30 times for a success rate of 65.2%. Prior to 2014, this trade had been successful for eight years in a row. Since 2014 this trade has failed to materialize three times. However, it has been successful in 10 of the last 13 years.
In the chart below, the 47-year historical average seasonal price tendency of silver as well as the decline typically seen from mid-May until the low is posted in late June or early July is shown. This May silver short trade captures the tail end of silver’s weak seasonal period (shaded yellow) that typically begins in late February or early March.
Even though it has only been a handful of weeks since these charts were last updated and presented, they do put the last few weeks of trading into a broader view. As of today’s close, DJIA is up 9.9% year-to-date. S&P 500 is even better at 13.7% while NASDAQ is still best at 17.9%. Yes, this is down from late-April/early-May highs, but still solid numbers when compared to this point in past pre-election years and especially all years. The recent pullback and the nascent recovery rally could gather further steam and run until early-July (and perhaps challenge old highs again), but from around mid-July until October seasonality becomes a headwind and more backing and filling is likely again.
Up until the end of April, S&P 500 was enjoying one of its best starts to a year since 1987. Daily gains were commonplace and spread throughout the trading week. However, Friday (or the last trading day of the week when Friday is a holiday) has enjoyed the greatest and most consistent gains so far this year (as of May 10, 2019 close). DJIA, S&P 500, NASDAQ and Russell 2000 have all averaged over 0.50% on the last trading day of the week. S&P 500 and Russell 2000 have been up 16 of 19 (84.2%) last trading days of the week. Even last Friday produced gains as tariffs were implemented. Should this track record of strength on Friday begin to fade, the overall market could soon follow as it would be a clear signal that risk appetite is declining.
Compared to typical May trading over the recent 21-year period, this May has veered off course earlier than usual. On the first trading day of the month, the Fed harshly squashed budding hopes of an interest rate cut and the viewed was confirmed on the second trading day leading to DJIA, S&P 500 and NASDAQ losses on the first and second instead of typical mild average gains. The market did enjoy a brief rally on the third, but it came to a crashing halt as attentions shifted back to trade negations with China. The implementation of 25% tariffs last Friday was initially overlooked, but the realities of the increasing probability of an extended and tumultuous negation process with China (not to mention another flare-up in the Mideast tensions) are hitting the market today. Should the S&P 500 finish the day down more than 1.9%, it will be the second worst day of the year. Only January 3, 2019 was worse, off 2.5%. If mid-May strength fails to materialize, the second half of May could be worse than the first half.
Trading around May option expiration is mostly a mixed bag. DJIA has been down nineteen of the last thirty-seven May expiration days with an average loss of 0.12%. The full-week has a bearish bias for DJIA and S&P 500 with records of 20 declines and 17 advances over the past 37 years. More recently, DJIA has suffered declines in eight of the past ten expiration weeks.
Today we are not going to bother debating whether one should actually sell in May or not. Instead, let’s focus on some tactical adjustments that can be made in portfolios to take advantage of what actually does work during the “Worst Six Months” while either shorting or outright avoiding what does not work all that frequently.
In the following table, the performance of the S&P 500 during the “Worst Six Months” May to October is compared to fourteen select sector indices or sub-indices, gold and the 30-year Treasury bond. Nine of the fourteen indices chosen are S&P Sector indices. Gold and 30-year bond are continuously-linked, non-adjusted front-month futures contracts. With the exception of two indices, 1990-2018, a full 29 years of data was selected. This selection represents a reasonably balanced number of bull and bear years for each and a long enough timeframe to be statistically significant while representing current trends. In an effort to make an apple-to-apple comparison, dividends are not included in this study.
Using the S&P 500 as the baseline by which all others were compared, five indices and the 30-year Treasury bond outperformed during the “Worst Six Months” while nine others and gold underperformed based upon “AVG %” return. At the top of the list are Biotech and Healthcare with average gains of 8.69% and 4.85% during the “Worst Months.” However, before jumping into Biotech positions, only 24 years of data was available and in those years, Biotech was up just 54.2% of the time from May through October. Some years, like 2014, gains were massive while in down years losses were frequently nearly as large. Although not the best sector by AVG %, Consumer Staples advancing 79.3% of the time is the closest thing to a sure bet for a gain during the “Worst Months.”
Over the last twenty-four years on the Friday before Mother’s Day the Dow Jones Industrials have gained ground sixteen times. On the Monday after, DJIA has advanced seventeen times. Average gain on Friday has been 0.19% and a respectable 0.49% on Monday. However, in four of the last seven years, the Monday following Mother’s Day has been down.
Tough day for the market as seasonal weakness ran into more geopolitical
maneuvering on the China trade front. This pushed the S&P 500 to test the
first level of technical support. As illustrated in the chart here S&P
broke below the 2875 support level intraday before closing above it. This level
coincides with the old January 2018 highs and a host of other technical levels
on the chart. The next level of support is 2815 at last November 7th’s
intraday high. Below that is 2775. But let’s not panic just yet. This sort of
weakness in May is not uncommon. And the market had been on a tear. Perhaps it’s
time for a pause and the Trump/China trade talk rhetoric is just the catalyst.
A full blown trade war with China is not in anyone’s interest.
President Trump’s negotiating style may be unsettling to the market at times,
but neither country is likely to stand on ceremony to save face at the risk to
their respective economies and markets. With the market at new highs and up
big the first four months this year it is even more prone to short-term
weakness in May.
Our overall outlook for the year remains bullish as it has
been since our Annual
Forecast in December that was followed by a bullish January
Indicator Trifecta. The historical strength of Pre-Election Years, which
has been self-evident thus far this year, is supported by resilient economic
and corporate readings, a dovish Fed clearly done with raising interest rates
for the time being and a White House that is supportive of Wall Street. But, as
you can see in the chart of Pre-Election Year Seasonal Patterns below, the Dow
(black dotted line) and S&P (green dotted line) are already at historical
average gains for the Pre-Election year and NASDAQ is way ahead of the pace up
more than 20% for 2019 to date.
Ostensibly, the S&P and NASDAQ are on the brink of
clearing the last levels of resistance. But the Dow is struggling and Russell
2000 is well off the pace. S&P and NASDAQ made new all-time highs last month,
but are straining to hold those levels and there is chatter in technical
analysis circles about a bearish double top forming on the S&P and NASDAQ.
Also evident in the chart here is the weakness often experienced in the latter
part of May. So while we remain bullish on the year, we do expect the market to
be weaker during the May soft patch and backing and filing during the Worst 4