Interim Update—Can Seasonality Save The Stock Market?

There’s been considerable damage to the stock market in the past several weeks (and the bond market as well). I didn’t want to wait until our full monthly update to communicate, as stocks broke support this past week and could be at a major tipping point. I’m not known for being brief, but this will be. We’ve got quite a bit of insurance right now. Read on.

Stocks Break Support

The 4200 level on the S&P 500 had been tested several times in the past month (see chart below, courtesy of www.stockcharts.com).  It finally gave way last week.  The uptrend from last October’s lows has been broken.  As shown with the circles, stocks are making lower highs and lower lows.  That’s the definition of a downtrend.

Below the 4100 level, I believe anything is possible.  It has never felt like a new bull market, given the lack of participation of broad indexes, and the concentration of gains in a handful of large companies.  Here’s the caveat.  The historical strongest time of the year for stocks begins right now.  Last week, both the S&P 500 and Nasdaq 100 indexes lost at least -2.50%, and the IJR Smallcap 600 was down -2.27%.  According to analyst Tom Bowley at Stockcharts.com, last week was the worst historical week of the year, going back to 1950 with the data.  But, look at the period dead ahead:

Here are the annualized returns by calendar day of the S&P 500, based on data since 1950:

• October 28th:  +126.68%
• October 29th:  +77.49%
• October 30th:  +55.50%
• October 31st:  +15.80%
• November 1st:  +42.60%
• November 2nd:  +71.58%
• November 3rd:  +95.26%
• November 4th:  +52.85%
• November 5th:  +72.97% 

This also begins the best three-month stretch of the year, from November through January.  Will seasonality be enough to reverse this downtrend?  I don’t know.  Stocks are oversold, and some breadth indicators such as the McClellan Oscillator are showing positive divergences with price, while others such as the number of stocks making new lows were mostly expanding last week as prices dropped to new price lows.  In addition, 75% of stocks in the S&P 500 and S&P 1500 are trading below their 200-day moving averages.  

One interesting tidbit I noticed is that open-end high yield bond funds went up about 0.31% for the week, which is highly unusual during a week when stocks lost more than -2%.  

Below is one of the intermediate trend models we follow.  The chart is courtesy of Ned Davis Research, at www.ndr.com.  It turned negative on September 20, and since then, the S&P 500 Index is down -6.4%.  There is no such thing as a perfect model, or perfect indicator.  At present, four of our intermediate stock market models are negative, and all of our bond models are negative.

When in this mode since 1981, the S&P 500 has fallen at an annualized pace of -14%.  

I can only tell you this.  Not all SELL signals turn into significant intermediate declines.  However, virtually EVERY intermediate decline has been preceded by intermediate term SELL signals.  That’s where we are now.

At present, our Moderate Tactical portfolios are holding about 74% in cash and ultra-short bond funds, with yields at 5% or a bit above, and Conservative Tactical portfolios are at 81% cash and ultra-short bond funds.  I’ve no idea if things will get worse from here, but if they do, we have plenty of insurance in our tactical portfolios.

It may be appropriate that Halloween is Tuesday.  Trick or Treat?  

Sincerely,

Bob Kargenian, CMT

President

TABR Capital Management

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