Topping Signs? A Seasonal Look for Traders

07/07/2017 2:57 am EST

Focus: STRATEGIES

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

The Down Friday/Down Monday that occurred at the end of May has been completely ignored by the market, thus far, writes Jeffrey Hirsch, editor-in-chief of The Stock Trader's Almanac and Almanac Investor.

The market may hold out through the typical NASDAQ Midyear Rally through mid-July or even until later this summer, but all of our 5 Market Disciplines are tuckered out and signaling a market retreat in the near term.

Psychological: Frothy. 

According to the most recent Investors Intelligence Advisors Sentiment survey bulls climbed to 54.9% from 51.5% in the prior week, bears slipped to 18.6% and correction declined to 26.5%. 

Considering DJIA, S&P 500 and Russell 2000 have effectively gone nowhere since March 1, a few percentage points in nearly four months for S&P 500, bullish sentiment this high is excessive and arguably rather overoptimistic. 

At some point, the market’s patience is likely to run out while it waits for tax reform, healthcare overhaul, defense and infrastructure spending and many other campaign promises that have not yet been delivered.

Fundamental: Fuzzy. 

Atlanta Fed’s GDPNow model keeps lowering its GDP forecast for Q2 and the IMF also lowered its growth forecast for the U.S. for 2017 and 2018. 

Healthcare overhaul has not gotten done which is calling into question whether or not other major policy initiatives will ever get done. 

Not to mention the need for a federal budget and the looming federal debt ceiling. It would appear there is a larger than usual number of things Congress could mess up this year.  

Technical: Topping? 

Weekly NYSE Advance/Decline negative three weeks in a row, new NYSE Weekly Highs fading and new NYSE Weekly Lows expanding and major indexes taking turns at fractional new all-time highs all adds you to a stalled rally at best or a significant top at worst. 

NASDAQ led the charge higher since March 1, but it has faltered and is on the verge of closing below its 50-day moving average. If NASDAQ fails to find support, it will likely pull the rest of the market lower with it. 

Monetary: 1.00-1.25%. 

At its June meeting, the Fed went ahead and raised its key lending rate. Based upon CME Group’s FedWatch Tool, the Fed is most likely done increasing rates until December. Have they sufficiently reloaded for the next economic downturn? 

Probably not, but within historical context, they are still highly accommodative leaving room for further improvement in the labor market and perhaps even nudging inflation a bit higher. The flattening yield curve is worth keeping an eye on.

Seasonal: Neutral. 

July is the best month of the third quarter for the DJIA and S&P, but performance for the other two months, August and September, makes comparisons easy. Recent “hot” Julys in 2009 and 2010 have boosted July’s average gains since 1950 to 1.2% and 1.0% respectively. 

In post-election years, July is #1 for DJIA and S&P 500 and #2 NASDAQ, Russell 1000 & 2000, but many of the past “hot” post-election-year Julys were preceded by weak Junes. This has not been the case this year.

chart 1

Market psychology is fading and reminds us of the summer of 2015. In the accompanying chart courtesy of our friends at Investors Intelligence, back in 2015 the difference between bullish advisors and bearish had been in a downtrend as the market moved virtually sideways in a topping process from March to July. 

Then the bottom fell out in late-August and stayed down through September until blowing through that low in February 2016 creating a Ned Davis Research defined bear market bottom (DJIA 13% decline after 145 calendar days, peak to trough) with DJIA and S&P 500 down over 14% and NASDAQ down over 18% at the time.

After the close on June 9, we issued our Seasonal MACD Sell signal for NASDAQ. That Alert marked the beginning of the “Worst Four Months,” July through October. 

And even though DJIA has climbed to new all-time highs this month (1), it has essentially done very little since March 1 when it closed at 21115.55. Nearly four months later, DJIA is barely over 1% higher. In the four months leading up to March 1, DJIA gained better than 17% (Nov 1 through March 1). 

DJIA appears to be stalling and both the faster and slower moving MACD indicators (2) have issued recent sell signals in confirmation. 

chart 2

Further evidence of a waning rally can be seen in DJIA’s recent weekly performance. DJIA’s best weekly advance was the last full week in May. Weekly gains have been tapering off since then. 

The Down Friday/Down Monday that occurred at the end of May has been completely ignored by the market, thus far. Historically, sometime during the 90 calendar days after a Down Friday/Down Monday occurrence, DJIA has registered a meaningful decline.

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