How U.S. Stocks Pause in the Most Historically Unfavorable Month

09/13/2018 3:08 pm EST


Marvin Appel

President, Signalert Asset Management LLC

The S&P 500 Index peaked on August 29 and has been treading water since then. (See chart below.) This is not surprising or worrisome. SPDR S&P 500 (SPY) touched its upper Bollinger band then pulled back to the middle band which we projected would be a support area.

Technology stocks are all the rage, but can you believe that in the past three months the beleaguered Consumer Staples Select Sector SPDR ETF (XLP) has actually outperformed the mighty Technology Select Sector SPDR Fund (XLK), 6.7% to 3.6%?

I interpret this as a rising tide of caution regarding the strong summer rally we have enjoyed so far, reflecting profit-taking from technology and re-allocation to defensive stocks.

As long as SPY remains above its middle Bollinger band, its uptrend remains solidly in effect. However, I would not be surprised to see SPY fall below its middle Bollinger band some time before the end of September, given that this month has on average seen losses in the S&P 500 Index.

Our U.S. equity timing model remains on Hold but is expected to switch to Buy starting in October, when seasonality becomes more favorable. We plan to ride out whatever volatility the market may throw our way in September, and to take our full equity allocations for clients when our model switches to Buy.

chart 1
Figure: SPY, its MACD and the a-d line all peaked in late August. MACD is on an unconfirmed sell signal, not worrisome at this time.

MACD comment

Since SPY is in an uptrend, you should use the slow (19-39 day) MACD to look for possible sell signals.

Moreover, you should not sell on the first crossing of MACD from above to below its signal line. Such an initial crossing is called an “unconfirmed” sell signal. In the presence of a prevailing uptrend, you should wait for a confirmation of the sell by a second crossing from above to below the signal line at the very least.

Additional confirmation could include bearish chart formations such as a negative divergence or a falling double top in MACD and price. In the SPY chart, we had a negative divergence between the price of SPY and its MACD, but that bearish formation was cancelled when MACD made its new high in August.

Emerging markets continue to break down

The chart of the iShares Emerging Markets Index ETF (EEM) looks almost the mirror image of the SPY chart over the past five months.

Instead of making new highs recently, EEM touched a new low this week.

And while SPY formed a potentially bearish negative divergence that did not lead to any decline, EEM has formed two potentially bullish positive divergences that were followed by breakdowns to new lows.
The most recent positive divergence occurred in July and August, and was nullified when MACD made a new low in September to confirm the new price low. EEM is now in a potentially strong support area around 41.6, and I don’t expect the damage to extend for now. However, except for covered call writing, I would stay clear of EEM.

chart 2

High yield bonds remain stable

Our high yield bond models remain on Buy signals. Since February, iShares iBoxx $ High Yield Corporate Bond ETF (HYG) (price-only) has been in a sideways trend. (See chart below.)

Since the spread between high yield bond yields and Treasury note yields is relatively tight by historical standards, I do not foresee any price gains in high yield bonds. (In fact, HYG has formed a negative divergence with its MACD.) However, given the favorable economic climate I do expect high yield bond prices to be stable, meaning that investors should be able to profit from interest income for many months to come.

Corporate high yield and floating rate bond funds remain my favored areas of the bond market.

chart 3

—Marvin Appel

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View a video interview with Marvin Appel and Dan Gramza on 2018 investing opportunities here.

Recorded: July 25, 2018 at TradersExpo Chicago.
Duration: 6:30.

View a video interview with Marvin Appel and John Bollinger on Bollinger Bands, when they are most useful for traders and about systematic investing pioneered by Dr. Appel and his father Gerald Appel here.

Recorded: July 25, 2018 at TradersExpo Chicago.
Duration: 4:31.

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