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Entering Weak Seasonal Period

Conclusion – Range Bound Until Broken

The characteristics we’ve written about the past two months for the U.S. stock market remain in place—a bull market until proven otherwise, with a fairly narrow range, and the NY Advance/Decline Line making another new high as recently as April 15.

Trading during the past two months has been confined to about 2040 on the low side and 2110 on the upper side of the S&P 500. There hasn’t been enough strength or weakness to break out in either direction, but eventually that will happen.

Large company stocks (S&P 500) are up only about 1.5% for the year, trailing small and mid-cap companies, which are up over 4%, and the Vanguard Total International Stock Index Fund, which is up over 8%.  In what may be a warning sign for later in the year, both the Dow Jones Transportation Average and Dow Jones Utility Average are down more than -5.3%.

The new high in the Advance/Decline Line suggests the ultimate price top is several months away.

The Worst Six Months – Coming Up

As has been documented in several prior studies, virtually the entire gain in the stock market since 1950 has taken place between November 1 and April 30. This seasonal phenomenon has been coined “Sell in May and Go Away.”

Below is a chart produced by our friends at Ned Davis Research, showing the results of a slightly optimized strategy of these dates from 1985 through today.

NDR Chart 13

One can see from the mode box that when the market is in the favorable period, the S&P 500 has compounded at just over 16% annually, yet when in the unfavorable period, the index has been virtually flat.

No indicator or method is perfect, though, and in the last three years, unfavorable market seasonality has failed to stop the uptrend in stocks.  In 2012, the S&P 500 (with dividends reinvested), gained 2.08% in the worst six months, gained 11.06% in 2013 and 8.12% in 2014. This is the kind of behavior that makes the naysayers shout out—“See, it doesn’t work anymore!”

This is where discipline and patience come into play.  I’m inclined to believe that sometime in the next six months, there will be a greater than -10% decline in U.S. stocks, but ultimately, we’ll just have to wait and see.  With recent softness in economic indicators and inflation readings, it appears unlikely that the Federal Reserve Board will raise interest rates until at least September, and given the unprecedented nature of the Fed’s quantitative easing program of the past number of years, there is no way to know how financial markets will react.

Portfolio Allocations

At present, the collective readings of our various stock market risk models continue to suggest mildly bullish exposure, and we are at 60% invested in our tactical equity allocations (the average was 70% for the first quarter).

Our high yield corporate bond model continues in positive mode, with high yield indexes reaching new highs this past week.  Despite improvement in Loomis Sayles Bond, our models for this fund remain mostly negative, so portfolios have no or only 1/3 exposure at present, with the rest in PIMCO Total Return, Loomis Sayles Limited Term  and money market.  Finally, our models for PIMCO GNMA and real estate remain positive.

Material of a Less Serious Nature

Best Friends – Ole and Sven

“Hello, is dis the Redwood Falls Sheriff’s Office?”

“Yes. What can I do for you?”

“I’m calling to report ‘bout my neighbor Ole Johnson. . .He’s hidin’ marijuana inside his firewood!  Don’t quite know how he gets it inside dem logs, but he’s hidin’ it dere.”

“Thank you very much for the call, sir.”

The next day, twelve of Redwood Falls finest Sheriff’s Deputies descend on Ole’s house.  They search the shed where the firewood is kept.  Using axes, they bust open every piece of wood, but find no marijuana.  They sneer at Ole and leave.

Shortly thereafter, the phone rings at Ole’s house.

“Hey, Ole! Dis here’s Sven. . .Did the Sheriff come?”

“Yah!”

“Did they chop your firewood?”

“Yah!”

“Happy Birthday, buddy!”

Sincerely,

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By Bob Kargenian | Monthly Updates

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