Welcome To The Strongest Quarter Every Four Years
Here comes the fourth quarter.  As I’m sure you’ve heard by now, this is the strongest quarter of the year.  Here are some stats to back that up.
Since 1950, the fourth quarter is up over 4% on average and higher 78% of the time.

More near-term, over the past 20 years we see similar results.  

With over half the day to go, the S&P 500 (SPX) is close to finishing slightly positive in the third quarter.  If that can happen, it’d be the seventh straight positive quarter.  

Yesterday, over at See It Market I broke down historical October returns.  Although October tends to be viewed negatively, historically it is an average month.  Here’s where things get interesting though.  If you look at the 2nd year of the Presidential Cycle (so this year), October is the strongest month.  In fact, the next three months are by far the strongest during the year.  

The Presidential Cycle looks at how stocks do each year of a President’s four-year term.  Jeff Macke of Yahoo actually liked that article so much he did this video on the results this morning.  Thanks, Macke!
This got me thinking, how does the fourth quarter do during the second year of the Presidential Cycle?  
Wouldn’t you know it, breaking down all 16 quarters during a four year Presidential Cycle since 1950 found that the fourth quarter of the 2nd year has the highest average return.  In other words, next quarter is the strongest quarter every four years.  

Taking a look at all the results and we see the past four have been positive with the smallest winner a nice +6% fourth quarter winner in 2006.  Other than down slightly in 1994 and a big drop in 1978, the other years saw very solid results.  

I agree with the near-term concerns and noted many here just last week.  Still, my advice is be aware that we are in an extremely bullish timeframe and the odds of eventually making new highs and having a solid quarter are pretty strong.  
Follow me on Twitter or StockTwits as I continue to monitor all of these developments.
Photo thanks to Joe Loong. Zoom Permalink

Welcome To The Strongest Quarter Every Four Years

Here comes the fourth quarter.  As I’m sure you’ve heard by now, this is the strongest quarter of the year.  Here are some stats to back that up.

Since 1950, the fourth quarter is up over 4% on average and higher 78% of the time.

image

More near-term, over the past 20 years we see similar results.  

image

With over half the day to go, the S&P 500 (SPX) is close to finishing slightly positive in the third quarter.  If that can happen, it’d be the seventh straight positive quarter.  

image

Yesterday, over at See It Market I broke down historical October returns.  Although October tends to be viewed negatively, historically it is an average month.  Here’s where things get interesting though.  If you look at the 2nd year of the Presidential Cycle (so this year), October is the strongest month.  In fact, the next three months are by far the strongest during the year.  

image

The Presidential Cycle looks at how stocks do each year of a President’s four-year term.  Jeff Macke of Yahoo actually liked that article so much he did this video on the results this morning.  Thanks, Macke!

This got me thinking, how does the fourth quarter do during the second year of the Presidential Cycle?  

Wouldn’t you know it, breaking down all 16 quarters during a four year Presidential Cycle since 1950 found that the fourth quarter of the 2nd year has the highest average return.  In other words, next quarter is the strongest quarter every four years.  

image

Taking a look at all the results and we see the past four have been positive with the smallest winner a nice +6% fourth quarter winner in 2006.  Other than down slightly in 1994 and a big drop in 1978, the other years saw very solid results.  

image

I agree with the near-term concerns and noted many here just last week.  Still, my advice is be aware that we are in an extremely bullish timeframe and the odds of eventually making new highs and having a solid quarter are pretty strong.  

Follow me on Twitter or StockTwits as I continue to monitor all of these developments.

Photo thanks to Joe Loong.

jlfmi:

The Most Important Trendline In Equity Land: New Highs-New Lows
The problem with trendlines is that they are usually subjective. Rarely are they cut-and-dry. And even when they are obvious, it has become more commonplace recently that breaks of trendlines, up or down, have been false moves. That’s not too surprising given the tremendous increase in traders and investors adopting technical analysis as well as widespread access to such resources. The more attention that is focused on a particular type of analysis, the harder it is to exploit such analysis. Thus, the exploiters become the exploitees. Whether it’s the algo-bots or simply the collective market forces that forbid the consensus of participants from profiting from “obvious” signals, trendline breaks are now very often fakeouts. As often as not, it seems, prices revert back to the primary trend in short order causing traders to…draw a new trendline. Thus, the subjectivity.
Therefore, our pick for the most important trendline to watch in the world of equities is not an equity, or equity index, at all. It is an indicator. Whereas equity trendlines are prone to false breaks of late, indicators often conform to truer, more reliable trendlines. But why would an indicator trendline be the most important? Considering this market environment is one characterized by divergences and weakening internals — perhaps moreso than any time since the 1998-2000 period — a focus on that dynamic seems more than appropriate.
The indicator we have selected for this distinction is the number of New 52-Week Highs minus New 52-Week Lows on the NYSE. We’ve discussed the weakening trend of New Highs several times over the past few months, including on September 10, September 2, July 25 and May 1. The reason we chose this particular indicator is due to A) the cleanliness of the trendline and B) the degree to which it has been helpful in the past.
As we have cautioned ad nauseam, the difficulty with divergences is the unpredictability in timing their impact. They can persist for a long time without serious consequences. One way to combat that unpredictability is by using a trendline, or similiar method, to detect when the indicator breaks down (or out). This can signify a point of impact.
For example, New Highs have been declining for some time so we need a way of determining when that trend will matter. Since they do not have much room to break down, as they are bound by zero, we use the spread between New Highs and New Lows. Looking at this indicator, we can see clear, distinct uptrends from cyclical lows to cyclical tops (by the way, we could use simply New Lows but we like the added information of having both series in the indicator).
This analysis was very helpful in identifying major turns in the past two cycles. On the chart, you can see that New Highs-New Lows made a series of higher lows from 1998 to 2000. During the sell off in September 2001, the indicator broke the uptrend, spiking lower. This was a head’s up that the major trend was broken. FYI, yes the large cap indexes clearly topped in 2000 and had already suffered major damage by September 2001; however, many small and mid caps held up fairly well in 2000 and early 2001 (of course, many of them suffered bear markets from 1998 to 2000). It wasn’t until until 2001 than many of them broke trend and began their descent into the real carnage of 2002.
Likewise, from 2004 to 2007, New Highs-New Lows formed a similar uptrend. The trendline break was a more timely one this time, occurring in July 2007, just off the top. It was again a head’s up that more serious damage was to come than the mild corrections of the years prior.
Currently, we see the same condition. While the NYSE New Highs have been steadily declining, the uptrend in New Highs-New Lows is still in force, stretching back to 2011 (and 2009 as well, but we like to start the trend over after the  indicator breaks out to the upside like it did in 2010.)
It has paid and will likely continue to pay to avoid becoming too bearish from a longer, cyclical-term perspective until this uptrend line breaks. It will likely do so into a “warning shot” sell off as in 2001 and 2007. That is, it will occur into a sharp pullback that, while perhaps too late to warn of that concurrent weakness, will provide a warning that the longer-term picture has changed, for the worse.
** FYI, despite the recent rise in New Lows, it does not appear as if the New High-New Low uptrend line will be threatened today, as the statistics currently stand.
________
More from Dana Lyons, JLFMI and My401kPro. Zoom Permalink

jlfmi:

The Most Important Trendline In Equity Land: New Highs-New Lows

The problem with trendlines is that they are usually subjective. Rarely are they cut-and-dry. And even when they are obvious, it has become more commonplace recently that breaks of trendlines, up or down, have been false moves. That’s not too surprising given the tremendous increase in traders and investors adopting technical analysis as well as widespread access to such resources. The more attention that is focused on a particular type of analysis, the harder it is to exploit such analysis. Thus, the exploiters become the exploitees. Whether it’s the algo-bots or simply the collective market forces that forbid the consensus of participants from profiting from “obvious” signals, trendline breaks are now very often fakeouts. As often as not, it seems, prices revert back to the primary trend in short order causing traders to…draw a new trendline. Thus, the subjectivity.

Therefore, our pick for the most important trendline to watch in the world of equities is not an equity, or equity index, at all. It is an indicator. Whereas equity trendlines are prone to false breaks of late, indicators often conform to truer, more reliable trendlines. But why would an indicator trendline be the most important? Considering this market environment is one characterized by divergences and weakening internals — perhaps moreso than any time since the 1998-2000 period — a focus on that dynamic seems more than appropriate.

The indicator we have selected for this distinction is the number of New 52-Week Highs minus New 52-Week Lows on the NYSE. We’ve discussed the weakening trend of New Highs several times over the past few months, including on September 10, September 2July 25 and May 1. The reason we chose this particular indicator is due to A) the cleanliness of the trendline and B) the degree to which it has been helpful in the past.

As we have cautioned ad nauseam, the difficulty with divergences is the unpredictability in timing their impact. They can persist for a long time without serious consequences. One way to combat that unpredictability is by using a trendline, or similiar method, to detect when the indicator breaks down (or out). This can signify a point of impact.

For example, New Highs have been declining for some time so we need a way of determining when that trend will matter. Since they do not have much room to break down, as they are bound by zero, we use the spread between New Highs and New Lows. Looking at this indicator, we can see clear, distinct uptrends from cyclical lows to cyclical tops (by the way, we could use simply New Lows but we like the added information of having both series in the indicator).

This analysis was very helpful in identifying major turns in the past two cycles. On the chart, you can see that New Highs-New Lows made a series of higher lows from 1998 to 2000. During the sell off in September 2001, the indicator broke the uptrend, spiking lower. This was a head’s up that the major trend was broken. FYI, yes the large cap indexes clearly topped in 2000 and had already suffered major damage by September 2001; however, many small and mid caps held up fairly well in 2000 and early 2001 (of course, many of them suffered bear markets from 1998 to 2000). It wasn’t until until 2001 than many of them broke trend and began their descent into the real carnage of 2002.

Likewise, from 2004 to 2007, New Highs-New Lows formed a similar uptrend. The trendline break was a more timely one this time, occurring in July 2007, just off the top. It was again a head’s up that more serious damage was to come than the mild corrections of the years prior.

Currently, we see the same condition. While the NYSE New Highs have been steadily declining, the uptrend in New Highs-New Lows is still in force, stretching back to 2011 (and 2009 as well, but we like to start the trend over after the  indicator breaks out to the upside like it did in 2010.)

It has paid and will likely continue to pay to avoid becoming too bearish from a longer, cyclical-term perspective until this uptrend line breaks. It will likely do so into a “warning shot” sell off as in 2001 and 2007. That is, it will occur into a sharp pullback that, while perhaps too late to warn of that concurrent weakness, will provide a warning that the longer-term picture has changed, for the worse.

** FYI, despite the recent rise in New Lows, it does not appear as if the New High-New Low uptrend line will be threatened today, as the statistics currently stand.

________

More from Dana Lyons, JLFMI and My401kPro.

Is The Weakness In Stocks The Start Of Something Bigger?
I noted on See It Market a week ago that the next few weeks are by far the worst from a seasonality point of view.  My favorite stat was this week is the 38th week of the year and going back to 1950, this is also the single worst week on average for the S&P 500 (SPX).  That is sure playing out so far this week once again.  
Still, what you need to know now is next week is the 39th week of the year and that one is the 10th worst week of the year.  Seasonality is still my biggest concern here.  

Here’s something else I found interesting on seasonality.  The average year since 1950 peaks on September 19 and doesn’t form a major low again till October 26.  Wouldn’t you know it, but this year we peaked on September 18.  Could it take another month till we can form a tradeable low?  History says that could be the play.  

Each data point on the blue line on the chart above presents the average for each day of the year since 1950.  
One of the big reasons so many are expecting a bigger pullback is we’ve gone so long without one.  Eventually it’ll happen.  In fact, the SPX has now gone 35 months without a 10% correction (on a closing basis).  


I’m not a fan of using things like above to trade on, because we’ve been hearing for over a year now we’re due for the elusive 10% correction.  In fact, we could double the current 35 months and still not be at the record of 84 months without a 10% correction.  
To me, I’d rather follow sentiment to get my clues as to what could happen next.  Besides seasonality as a worry, these next two charts also worry me.
First up, the average investor is rather bullish. Now it was just a week ago we were making new all-time highs, so this make sense.  Still, to see the average investor very bullish, that is always a concern from a contrarian point of view.  Think of it like this, if everyone is bullish, who is left to buy?
Here’s a chart of the American Association of Individual Investors (AAII) poll.  I like to use an 8-week moving average of the bulls to get a truer feel for things, as short-term this can be very volatile.  This shows us the bulls are up near the most bullish they’ve been the past few years.  Last time they were this bullish was late last year, right before a 6% drop to start 2014.  

Next up, one of my favorite sentiment indicators is the CBOE options equity put/call ratio.  To keep this simple, when this ratio trends lower - it has tended to be bullish for the SPX.  Think of it like this, when everyone is bearish and the p/c ratio is high, this is potential buying pressure once those bearish bets are unwound.  Once this happens, the ratio can move lower and with it we have a higher SPX.   The flipside is once it gets extremely low, everyone is a little too bullish.  
I used this indicator to spot the July weakness and it once again is flashing warning signs.  Looking at it now, the 21-day moving average has officially rolled higher over the past week.  As long as it keeps pointing higher, caution is my best advice.  

Now I’d like to stress I do not think the bull market is over. We will probably make new highs again before this year is over, but the next month or so could be frustrating as sentiment is too bullish and seasonality isn’t on our side.  
The main reason I continue to think the bull market is alive and well is because earnings are making new highs and are expected to continue to grow for at least the next year.  I’ve found that SPX earnings and SPX price is 91% correlated since 1985.  Nothing wrong with this picture.  

Earnings data from of Brian Gilmartin of Trinity Asset Management
I discussed earnings as a reason to be bigger picture bullish last week on Fox Business.  You can watch that here.  
Don’t get too worried during this potential time of weakness, as it is normal and healthy.  Plus, some weakness could get all the crash calls out there and that is needed to refresh the fear before a major bottom can form.  Use it as a time to add to your positions.  
Follow me on Twitter or StockTwits as I continue to monitor all of these developments.
Picture courtesy of vperkins. Zoom Permalink

Is The Weakness In Stocks The Start Of Something Bigger?

I noted on See It Market a week ago that the next few weeks are by far the worst from a seasonality point of view.  My favorite stat was this week is the 38th week of the year and going back to 1950, this is also the single worst week on average for the S&P 500 (SPX).  That is sure playing out so far this week once again.  

Still, what you need to know now is next week is the 39th week of the year and that one is the 10th worst week of the year.  Seasonality is still my biggest concern here.  

image

Here’s something else I found interesting on seasonality.  The average year since 1950 peaks on September 19 and doesn’t form a major low again till October 26.  Wouldn’t you know it, but this year we peaked on September 18.  Could it take another month till we can form a tradeable low?  History says that could be the play.  

image

Each data point on the blue line on the chart above presents the average for each day of the year since 1950.  

One of the big reasons so many are expecting a bigger pullback is we’ve gone so long without one.  Eventually it’ll happen.  In fact, the SPX has now gone 35 months without a 10% correction (on a closing basis).  

image

I’m not a fan of using things like above to trade on, because we’ve been hearing for over a year now we’re due for the elusive 10% correction.  In fact, we could double the current 35 months and still not be at the record of 84 months without a 10% correction.  

To me, I’d rather follow sentiment to get my clues as to what could happen next.  Besides seasonality as a worry, these next two charts also worry me.

First up, the average investor is rather bullish. Now it was just a week ago we were making new all-time highs, so this make sense.  Still, to see the average investor very bullish, that is always a concern from a contrarian point of view.  Think of it like this, if everyone is bullish, who is left to buy?

Here’s a chart of the American Association of Individual Investors (AAII) poll.  I like to use an 8-week moving average of the bulls to get a truer feel for things, as short-term this can be very volatile.  This shows us the bulls are up near the most bullish they’ve been the past few years.  Last time they were this bullish was late last year, right before a 6% drop to start 2014.  

image

Next up, one of my favorite sentiment indicators is the CBOE options equity put/call ratio.  To keep this simple, when this ratio trends lower - it has tended to be bullish for the SPX.  Think of it like this, when everyone is bearish and the p/c ratio is high, this is potential buying pressure once those bearish bets are unwound.  Once this happens, the ratio can move lower and with it we have a higher SPX.   The flipside is once it gets extremely low, everyone is a little too bullish.  

I used this indicator to spot the July weakness and it once again is flashing warning signs.  Looking at it now, the 21-day moving average has officially rolled higher over the past week.  As long as it keeps pointing higher, caution is my best advice.  

image

Now I’d like to stress I do not think the bull market is over. We will probably make new highs again before this year is over, but the next month or so could be frustrating as sentiment is too bullish and seasonality isn’t on our side.  

The main reason I continue to think the bull market is alive and well is because earnings are making new highs and are expected to continue to grow for at least the next year.  I’ve found that SPX earnings and SPX price is 91% correlated since 1985.  Nothing wrong with this picture.  

image

Earnings data from of Brian Gilmartin of Trinity Asset Management

I discussed earnings as a reason to be bigger picture bullish last week on Fox Business.  You can watch that here.  

Don’t get too worried during this potential time of weakness, as it is normal and healthy.  Plus, some weakness could get all the crash calls out there and that is needed to refresh the fear before a major bottom can form.  Use it as a time to add to your positions.  

Follow me on Twitter or StockTwits as I continue to monitor all of these developments.

Picture courtesy of vperkins.

Why The US Dollar Is In A New Bull Market
I was reading Forbes magazine the other day and noticed a full page add on a new book by Steve Forbes talking about the coming destruction of the US Dollar.  This book just came out in May and here’s the cover.  

The contrarian in me sees things like this and wonders if it could be a bullish signal.  The reason being once everyone agrees on something, it is probably wrong.  If everyone is bearish, who is left to sell is one way to look at this scenario.  
The only problem with the destruction of the US Dollar premise is the US Dollar is all of a sudden the strongest currency in the world.  We’ve heard these arguments many times before.  Gold bugs have noted all the reasons the US Dollar was toast, yet all of a sudden the US Dollar is the one currency everyone wants to own.  How about that?  
Remember, historically the US Dollar and the price of gold have traded inversely.  So a higher trending US Dollar isn’t good for gold and other metals.
Two years ago I saw Peter Schiff give a very interesting presentation in New Orleans on why gold was going to soar and the US Dollar was going to break to new lows.  There was nothing wrong with his reasoning, the only problem is he’s been very wrong and hasn’t switched his stance.  Noticed him just the other day on CNBC saying the exact same things as he did two years ago.  
I mentioned recently my problem with blindly sticking with a thesis that is wrong.  We’re all wrong eventually, but to just stick to your guns when it continues to move against you is a great way to lose a lot of money.
The US Dollar Index (DX-Y.NYB) hasn’t been down on a weekly basis in 10 weeks.  This index compares the US Dollar versus six other large foreign currencies.  What we’ve seen from the US Dollar recently isn’t just amazing strength, it is the best rally in more than 30 years.  Again, something has changed here, we need to listen.  
Here are the longest weekly streaks without a loss.

The facts are a higher currency suggests higher interest rates are coming.  I know everyone is worried about higher rates, but historically higher rates have been a good thing, not a bad thing for the economy.  Also, a stronger currency increases the odds of foreign investment.  Those things don’t sound too bad to me.  Is the US Dollar telling us something?  I sure think so.  
Quantitative easing (QE) is used to jump start an economy and in turn it tends to put downward pressure on the home currency.  With Japan and the European Union both looking at starting new rounds of QE and the US about to end their QE in October - there are some solid fundamental reasons to think that the US Dollar should stay strong.
Lastly, here’s a bigger-term picture of the US Dollar.  It is breaking out of a very nice multi-year bottoming pattern that should only increase the odds of future strength longer-term.  

Bull markets aren’t obvious when they start and sometimes they take a long time to notice.  For me, to see books coming out talking about the destruction of the US Dollar, coupled with a major bottoming pattern taking place, this could be the start of a great bull market for the US Dollar.  
Follow me on Twitter or StockTwits for more updates on this development.
Photo courtesy of Ray Mahoney.   Zoom Permalink

Why The US Dollar Is In A New Bull Market

I was reading Forbes magazine the other day and noticed a full page add on a new book by Steve Forbes talking about the coming destruction of the US Dollar.  This book just came out in May and here’s the cover.  

image

The contrarian in me sees things like this and wonders if it could be a bullish signal.  The reason being once everyone agrees on something, it is probably wrong.  If everyone is bearish, who is left to sell is one way to look at this scenario.  

The only problem with the destruction of the US Dollar premise is the US Dollar is all of a sudden the strongest currency in the world.  We’ve heard these arguments many times before.  Gold bugs have noted all the reasons the US Dollar was toast, yet all of a sudden the US Dollar is the one currency everyone wants to own.  How about that?  

Remember, historically the US Dollar and the price of gold have traded inversely.  So a higher trending US Dollar isn’t good for gold and other metals.

Two years ago I saw Peter Schiff give a very interesting presentation in New Orleans on why gold was going to soar and the US Dollar was going to break to new lows.  There was nothing wrong with his reasoning, the only problem is he’s been very wrong and hasn’t switched his stance.  Noticed him just the other day on CNBC saying the exact same things as he did two years ago.  

I mentioned recently my problem with blindly sticking with a thesis that is wrong.  We’re all wrong eventually, but to just stick to your guns when it continues to move against you is a great way to lose a lot of money.

The US Dollar Index (DX-Y.NYB) hasn’t been down on a weekly basis in 10 weeks.  This index compares the US Dollar versus six other large foreign currencies.  What we’ve seen from the US Dollar recently isn’t just amazing strength, it is the best rally in more than 30 years.  Again, something has changed here, we need to listen.  

Here are the longest weekly streaks without a loss.

image

The facts are a higher currency suggests higher interest rates are coming.  I know everyone is worried about higher rates, but historically higher rates have been a good thing, not a bad thing for the economy.  Also, a stronger currency increases the odds of foreign investment.  Those things don’t sound too bad to me.  Is the US Dollar telling us something?  I sure think so.  

Quantitative easing (QE) is used to jump start an economy and in turn it tends to put downward pressure on the home currency.  With Japan and the European Union both looking at starting new rounds of QE and the US about to end their QE in October - there are some solid fundamental reasons to think that the US Dollar should stay strong.

Lastly, here’s a bigger-term picture of the US Dollar.  It is breaking out of a very nice multi-year bottoming pattern that should only increase the odds of future strength longer-term.  

image

Bull markets aren’t obvious when they start and sometimes they take a long time to notice.  For me, to see books coming out talking about the destruction of the US Dollar, coupled with a major bottoming pattern taking place, this could be the start of a great bull market for the US Dollar.  

Follow me on Twitter or StockTwits for more updates on this development.

Photo courtesy of Ray Mahoney.  

Does The Russell 2000 Death Cross Mean A Crash Is Coming?
Have you heard the news yet?  The Russell 2000 (RUT) is set to complete a very bearish Death Cross any day now.  This technical pattern happens when the faster moving 50-day moving average moves beneath the slower moving 200-day moving average.  The thinking is this is a warning of an impending huge and fast drop in prices.  The opposite (and bullish) pattern is called a Golden Cross.  Here’s what the almost completed Death Cross looks like.  


This week, I’ve seen this mentioned all over CNBC, all over Twitter, and even Reuters was talking about it.  Here’s what you need to know about this ominous event, it isn’t really bearish.  That’s right, turns out not all Death Crosses (and Golden Crosses) are created equal.  
In early April, I took at look at the Golden Crosses that had just occurred in the SPDR Gold Trust (GLD) and the iShares Barclays 20+ Year Treasury Bond Fund (TLT).  Noted the results were bullish for the TLT and bearish for the GLD.  Many gold bugs didn’t like hearing this, but if you’ve watched the price of gold this year, once again it played out nicely to fade the Golden Cross.  The flipside is bonds have done great, just as the Golden Cross predicted.  
This brings us to the current Death Cross in the RUT.  Since December 1988 the RUT has seen 19 Death Crosses.  Here are the returns after.


Now compare that to the results after a Golden Cross.


Very near-term we do see some underperformance after a Death Cross, but once you get out to three months the returns are actually better after a Death Cross than after a ‘bullish’ Golden Cross.  Not what most would have expected I’m guessing.  
Here are all the Death Crosses, calendar days till there was a Golden Cross, and the return till the Golden Cross.  Had you shorted the last Death Cross in 2011 you’d have been down nearly 19% by the time it reversed.  Had you shorted all 19 signals you’d have lost 5.55% on average and only made money 4 times!





                                          


That sure doesn’t look as bearish as everyone makes it out to be now does it?  Here are the returns after the Golden Crosses.  

                                          
The average return is a little bit better, but not really by that much.  The recent Golden Cross in February 2012 is the longest in terms of length and the +39% gain is the best ever.  You have to hand it to the bull market recently, it is definitely a record breaker in a lot of ways.  This is just another.
So there you go.  Could this pending Death Cross be bearish?  Sure, this could mark the beginning of a big downtrend, but don’t be fooled into thinking it is this clear-cut bearish signal, as that simply isn’t true.  
Photo thanks to Doug88888.   Zoom Permalink

Does The Russell 2000 Death Cross Mean A Crash Is Coming?

Have you heard the news yet?  The Russell 2000 (RUT) is set to complete a very bearish Death Cross any day now.  This technical pattern happens when the faster moving 50-day moving average moves beneath the slower moving 200-day moving average.  The thinking is this is a warning of an impending huge and fast drop in prices.  The opposite (and bullish) pattern is called a Golden Cross.  Here’s what the almost completed Death Cross looks like.  

image

This week, I’ve seen this mentioned all over CNBC, all over Twitter, and even Reuters was talking about it.  Here’s what you need to know about this ominous event, it isn’t really bearish.  That’s right, turns out not all Death Crosses (and Golden Crosses) are created equal.  

In early April, I took at look at the Golden Crosses that had just occurred in the SPDR Gold Trust (GLD) and the iShares Barclays 20+ Year Treasury Bond Fund (TLT).  Noted the results were bullish for the TLT and bearish for the GLD.  Many gold bugs didn’t like hearing this, but if you’ve watched the price of gold this year, once again it played out nicely to fade the Golden Cross.  The flipside is bonds have done great, just as the Golden Cross predicted.  

This brings us to the current Death Cross in the RUT.  Since December 1988 the RUT has seen 19 Death Crosses.  Here are the returns after.

image

Now compare that to the results after a Golden Cross.

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Very near-term we do see some underperformance after a Death Cross, but once you get out to three months the returns are actually better after a Death Cross than after a ‘bullish’ Golden Cross.  Not what most would have expected I’m guessing.  

Here are all the Death Crosses, calendar days till there was a Golden Cross, and the return till the Golden Cross.  Had you shorted the last Death Cross in 2011 you’d have been down nearly 19% by the time it reversed.  Had you shorted all 19 signals you’d have lost 5.55% on average and only made money 4 times!

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That sure doesn’t look as bearish as everyone makes it out to be now does it?  Here are the returns after the Golden Crosses.  

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The average return is a little bit better, but not really by that much.  The recent Golden Cross in February 2012 is the longest in terms of length and the +39% gain is the best ever.  You have to hand it to the bull market recently, it is definitely a record breaker in a lot of ways.  This is just another.

So there you go.  Could this pending Death Cross be bearish?  Sure, this could mark the beginning of a big downtrend, but don’t be fooled into thinking it is this clear-cut bearish signal, as that simply isn’t true.  

Photo thanks to Doug88888.  

The major buy signal no one is talking about
I like to look at various cycles in my work and one you’ve probably heard of is the Presidential cycle.  This looks at what the S&P 500 (SPX) does every four years of a President’s term.  In general, the second year (where we are now) of the cycle tends to be the worst and the third year tends to be the strongest.  You’ve probably heard that many times before.
Well, we are currently in the second year of Obama’s second term.  So really, this can also be looked at as year six of his term.  Doing this shows much different results than what the average second year of all terms have done, as year six is actually extremely bullish.
Here are all the sixth years of the Presidential cycles going back to 1950. Each one is positive and the average return is 23.24%.  

Now take a look at the chart above.  The average year six bottoms right around now and has a furious rally into the end of the year.  Did history just repeat?  Each data point on the orange line on the chart above presents the average for each day of the year from the years 1958, 1986, 1998, and 2006 (all sixth years of the Presidential cycle).
Lastly, please note that year six for Nixon would have been ‘74 (Ford) when the SPX dropped nearly 30%.  Also year six for JFK would have been ‘66 (Johnson) when the SPX dropped nearly 20%.  Including those years would have given much different results, but I’m only looking for returns of the same President in office during year six.   Permalink

The major buy signal no one is talking about

I like to look at various cycles in my work and one you’ve probably heard of is the Presidential cycle.  This looks at what the S&P 500 (SPX) does every four years of a President’s term.  In general, the second year (where we are now) of the cycle tends to be the worst and the third year tends to be the strongest.  You’ve probably heard that many times before.

Well, we are currently in the second year of Obama’s second term.  So really, this can also be looked at as year six of his term.  Doing this shows much different results than what the average second year of all terms have done, as year six is actually extremely bullish.

Here are all the sixth years of the Presidential cycles going back to 1950. Each one is positive and the average return is 23.24%.  

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Now take a look at the chart above.  The average year six bottoms right around now and has a furious rally into the end of the year.  Did history just repeat?  Each data point on the orange line on the chart above presents the average for each day of the year from the years 1958, 1986, 1998, and 2006 (all sixth years of the Presidential cycle).

Lastly, please note that year six for Nixon would have been ‘74 (Ford) when the SPX dropped nearly 30%.  Also year six for JFK would have been ‘66 (Johnson) when the SPX dropped nearly 20%.  Including those years would have given much different results, but I’m only looking for returns of the same President in office during year six.  

Why Boring Is Bullish
The past few weeks have been some of the least volatile in history.  For instance, we just went 14 straight days without a move up or down 0.50% on the S&P 500 (SPX), the longest such streak since 1969.  That one ended yesterday, but today is right back to a flattish day again.
Fellow Yahoo Finance Contributor Charlie Bilello noted two days ago that the standard deviation over the previous 10 trading days had been near one of the lowest over the past 15 years.  In other words, we are seeing a historically boring time.  Here’s the great chart Charlie used.

I wanted to dig in some and see what exactly this means, if anything.  So here’s what I did.  Going back to 1970, I took the difference of the highest and lowest trade on the SPX over 10 days.  Then divided that number by the close on that particular day.  This way it would account for intra-day volatility as well.  
For instance, you could have 10 really volatile days in a row, but they all close flat.  That probably wouldn’t do justice to what you just experienced if you only looked at the closes.  By including the intra-day moves, I feel, gives a better representation for just how volatile things really have been.  Below is what I found.  

Doing this showed that two days ago came in at just a 1.05% move over the previous 10 days.  This was the lowest since August ‘93 and was actually the 6th lowest since 1970!  Ha, yeah things are pretty slow out there.  
Next, I looked at all the instances that came in with less than a 1.40% return.  Once there was a signal there had to be at least 31 calendar days go by to take the next signal.  Did it this way to ignore clusters.  Although rare, when these happen they usually happen multiple times over a few weeks.  I only wanted to take the first result of each cluster.  This found just 18 previous signals.  Here are the returns after.  



An 89% chance of a higher SPX in three months?  Not too bad.  Here are the longer-term at-any-time returns on the SPX to compare.  Hint - better across the board when we have a super boring 10 days like we just did.  

Lastly, here are all the signals.  

Check out the six month returns.  Higher six months later the past 10 times in a row.  Not bad.  
So there you go, boring is bullish.
Photo courtesy of Potential Past.    Zoom Permalink

Why Boring Is Bullish

The past few weeks have been some of the least volatile in history.  For instance, we just went 14 straight days without a move up or down 0.50% on the S&P 500 (SPX), the longest such streak since 1969.  That one ended yesterday, but today is right back to a flattish day again.

Fellow Yahoo Finance Contributor Charlie Bilello noted two days ago that the standard deviation over the previous 10 trading days had been near one of the lowest over the past 15 years.  In other words, we are seeing a historically boring time.  Here’s the great chart Charlie used.

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I wanted to dig in some and see what exactly this means, if anything.  So here’s what I did.  Going back to 1970, I took the difference of the highest and lowest trade on the SPX over 10 days.  Then divided that number by the close on that particular day.  This way it would account for intra-day volatility as well.  

For instance, you could have 10 really volatile days in a row, but they all close flat.  That probably wouldn’t do justice to what you just experienced if you only looked at the closes.  By including the intra-day moves, I feel, gives a better representation for just how volatile things really have been.  Below is what I found.  

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Doing this showed that two days ago came in at just a 1.05% move over the previous 10 days.  This was the lowest since August ‘93 and was actually the 6th lowest since 1970!  Ha, yeah things are pretty slow out there.  

Next, I looked at all the instances that came in with less than a 1.40% return.  Once there was a signal there had to be at least 31 calendar days go by to take the next signal.  Did it this way to ignore clusters.  Although rare, when these happen they usually happen multiple times over a few weeks.  I only wanted to take the first result of each cluster.  This found just 18 previous signals.  Here are the returns after.  

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An 89% chance of a higher SPX in three months?  Not too bad.  Here are the longer-term at-any-time returns on the SPX to compare.  Hint - better across the board when we have a super boring 10 days like we just did.  

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Lastly, here are all the signals.  

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Check out the six month returns.  Higher six months later the past 10 times in a row.  Not bad.  

So there you go, boring is bullish.

Photo courtesy of Potential Past.   

This Bullish Technical Pattern Says September Isn’t So Scary
Yes, September is historically very bearish.  Also, we’ve seen a huge uptick in bullish sentiment recently, which could be a near-term contrarian warning.  But at the same time, the overall price action continues to look very strong.  In the end, price is what pays.  
Although I am concerned about seasonality and bullish sentiment, price action suggests remaining bullish here is the best play.  
First off, the S&P 500 (SPX) is up five weeks in a row.  This is just the 10th time this has happened since the bull market started in 2009.  It is also the longest winning streak since eight in a row late last year.  
What is interesting about being up five weeks in a row is the returns after being up five straight weeks are actually rather strong.  Don’t sell everything just because we’re ‘up a lot’ is my warning here.  

Now here’s something that is very rare and could be another sign the bulls are still in firm control.  Last month, the SPX had what technicians call a bullish engulfing pattern.  This is a bullish pattern and one that I am a big fan of.  Here’s the definition from Investopedia.

These patterns tend to flush out the weak hands, which leads to higher prices.  You can look at them on an intraday or daily chart, but to see one happen on the more significant monthly chart is very meaningful to the bigger overall trend.

Here’s where things get interesting, this pattern is extremely rare.  I was very surprised to find that this pattern had happened just seven other times going back 30 years.  
Here is what happened after each occurrence.

Now here are the average returns after the previous seven monthly bullish engulfing patterns.  If you want to compare these returns to the at-any-time returns, I included those as well.  







A skeptic would say only seven instances could make the returns very random and I’d agree.  Nonetheless, I’d rather know than not know.  To me this bullish technical pattern suggests September, and probably the rest of this year, could be one for the bulls.  
Photo thanks to Marcia Furman.   Permalink

This Bullish Technical Pattern Says September Isn’t So Scary

Yes, September is historically very bearish.  Also, we’ve seen a huge uptick in bullish sentiment recently, which could be a near-term contrarian warning.  But at the same time, the overall price action continues to look very strong.  In the end, price is what pays.  

Although I am concerned about seasonality and bullish sentiment, price action suggests remaining bullish here is the best play.  

First off, the S&P 500 (SPX) is up five weeks in a row.  This is just the 10th time this has happened since the bull market started in 2009.  It is also the longest winning streak since eight in a row late last year.  

What is interesting about being up five weeks in a row is the returns after being up five straight weeks are actually rather strong.  Don’t sell everything just because we’re ‘up a lot’ is my warning here.  

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Now here’s something that is very rare and could be another sign the bulls are still in firm control.  Last month, the SPX had what technicians call a bullish engulfing pattern.  This is a bullish pattern and one that I am a big fan of.  Here’s the definition from Investopedia.

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These patterns tend to flush out the weak hands, which leads to higher prices.  You can look at them on an intraday or daily chart, but to see one happen on the more significant monthly chart is very meaningful to the bigger overall trend.

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Here’s where things get interesting, this pattern is extremely rare.  I was very surprised to find that this pattern had happened just seven other times going back 30 years.  

Here is what happened after each occurrence.

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Now here are the average returns after the previous seven monthly bullish engulfing patterns.  If you want to compare these returns to the at-any-time returns, I included those as well.  

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A skeptic would say only seven instances could make the returns very random and I’d agree.  Nonetheless, I’d rather know than not know.  To me this bullish technical pattern suggests September, and probably the rest of this year, could be one for the bulls.  

Photo thanks to Marcia Furman.  

All You Need To Know About The August Jobs Report
The monthly jobs report for August comes out tomorrow before the open.  The consensus is for a gain of 235,000 jobs added.  Here are some stats I found interesting.
* More than 200,000 jobs have been created for six straight months.  If it happens again tomorrow it would be the longest streak since seven in a row back in ‘97.
* The all-time record for consecutive months over 200,000 jobs in a row is 15 in ‘83/’84.  14 straight occurred in the early ’40s and again in ‘76/’77.  
* The current 12 month average of 214,000 jobs created is the highest since April 2006.
* The current six month average of 244,000 jobs created is the highest since, once again, April 2006.
* August has seen an increase in jobs each of the past three years.  If it can make it to four, it’d be the longest streak since the mid-90s.
* The 235,000 jobs expected would be the most jobs produced in any August since 1998.
Turns out the summer months historically are rather slow for jobs growth, not a huge surprise.  What is worthwhile though is August is by far the weakest month since 1990.


The unemployment rate is expected to come in at 6.2%, which would match what we saw in July.  What matters here is the recent trend is moving lower.


Here’s a really interesting chart which shows various unemployment rates based on levels of education.  Not surprisingly, the more educated someone is, the better chance they’re employed.  


Lastly, here’s one of my favorite charts.  Starting in February 2008 (when the recession started) just 639,000 jobs have been created.  In fact, this was actually still negative until this past May.  

So what’s it gonna be tomorrow?  I’ll say 241,000 jobs created and 6.1% unemployment.  Yes, that is a total guess, probably like the rest of the economists out there.  
Photo courtesy of photologue_np.   Zoom Permalink

All You Need To Know About The August Jobs Report

The monthly jobs report for August comes out tomorrow before the open.  The consensus is for a gain of 235,000 jobs added.  Here are some stats I found interesting.

* More than 200,000 jobs have been created for six straight months.  If it happens again tomorrow it would be the longest streak since seven in a row back in ‘97.

* The all-time record for consecutive months over 200,000 jobs in a row is 15 in ‘83/’84.  14 straight occurred in the early ’40s and again in ‘76/’77.  

* The current 12 month average of 214,000 jobs created is the highest since April 2006.

* The current six month average of 244,000 jobs created is the highest since, once again, April 2006.

* August has seen an increase in jobs each of the past three years.  If it can make it to four, it’d be the longest streak since the mid-90s.

* The 235,000 jobs expected would be the most jobs produced in any August since 1998.

Turns out the summer months historically are rather slow for jobs growth, not a huge surprise.  What is worthwhile though is August is by far the weakest month since 1990.

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The unemployment rate is expected to come in at 6.2%, which would match what we saw in July.  What matters here is the recent trend is moving lower.

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Here’s a really interesting chart which shows various unemployment rates based on levels of education.  Not surprisingly, the more educated someone is, the better chance they’re employed.  

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Lastly, here’s one of my favorite charts.  Starting in February 2008 (when the recession started) just 639,000 jobs have been created.  In fact, this was actually still negative until this past May.  

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So what’s it gonna be tomorrow?  I’ll say 241,000 jobs created and 6.1% unemployment.  Yes, that is a total guess, probably like the rest of the economists out there.  

Photo courtesy of photologue_np.  

Bears At Their Lowest Level Since 1987.  Now What?
The big news today isn’t coming from the economy or world events, it is the fact the number of bears in the US Advisors’ Sentiment Report came in at their lowest level since February 1987 at just 13.3%.
This matters because many use this poll as a contrarian indicator.  The thinking goes if there are no bears left, then we could be near a major peak as there is no one left to buy as everyone is bullish.  Lastly, this poll looks at what newsletter writers are thinking.  

Then the fact the last time the bears were beneath 14% was in 1987 and you have all the ingredients for an intriguing headline as well.  Now before you go out and sell all your stocks, remember the S&P 500 (SPX) gained +16.6% the six months after the late February signal in 1987.  Sure, we had the one-day crash of 20% later in October, but there were some spectacular gains to be had for a long time first.
My point is it is so hard to truly quantify exactly what this means or when it truly becomes bearish.  Sure, it is a major concern, as too many could be getting excited right at the wrong time.  The best time to have been buying was probably a month ago when everyone was in a panic that the long-awaited 10% correction was finally coming.  
Going back to 1970, I looked at all the times the Bears dropped beneath 14%.  Most of these happened in clusters, so I took just the first signal and there had to be at least two months go by without another signal for the next one to count.  Again, this is done just to remove clusters.

Pretty weak returns across the board.  Flat a year later isn’t going to do much for the bulls.  
Now considering September seasonality is a worry, combined with the crowd getting a little to bullish, it all could make the next few weeks a bit tougher to see big gains.  
I’ll leave you with this thought.  Technically, I continue to see very few problems with the market.  One of my favorite indicators is the cumulative advance/decline issues at the NYSE.  When you have many issues advancing, this usually means the overall market will follow suit.  Not much wrong with this picture.  

Now does this negate the bullish sentiment and weak seasonality?  I have no clue, but I think it suggests we won’t have a massive drop in September like we saw in ‘11 (-7%) and ‘08 (-9%).  
Photo courtesy of Jeff Block.   Permalink

Bears At Their Lowest Level Since 1987.  Now What?

The big news today isn’t coming from the economy or world events, it is the fact the number of bears in the US Advisors’ Sentiment Report came in at their lowest level since February 1987 at just 13.3%.

This matters because many use this poll as a contrarian indicator.  The thinking goes if there are no bears left, then we could be near a major peak as there is no one left to buy as everyone is bullish.  Lastly, this poll looks at what newsletter writers are thinking.  

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Then the fact the last time the bears were beneath 14% was in 1987 and you have all the ingredients for an intriguing headline as well.  Now before you go out and sell all your stocks, remember the S&P 500 (SPX) gained +16.6% the six months after the late February signal in 1987.  Sure, we had the one-day crash of 20% later in October, but there were some spectacular gains to be had for a long time first.

My point is it is so hard to truly quantify exactly what this means or when it truly becomes bearish.  Sure, it is a major concern, as too many could be getting excited right at the wrong time.  The best time to have been buying was probably a month ago when everyone was in a panic that the long-awaited 10% correction was finally coming.  

Going back to 1970, I looked at all the times the Bears dropped beneath 14%.  Most of these happened in clusters, so I took just the first signal and there had to be at least two months go by without another signal for the next one to count.  Again, this is done just to remove clusters.

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Pretty weak returns across the board.  Flat a year later isn’t going to do much for the bulls.  

Now considering September seasonality is a worry, combined with the crowd getting a little to bullish, it all could make the next few weeks a bit tougher to see big gains.  

I’ll leave you with this thought.  Technically, I continue to see very few problems with the market.  One of my favorite indicators is the cumulative advance/decline issues at the NYSE.  When you have many issues advancing, this usually means the overall market will follow suit.  Not much wrong with this picture.  

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Now does this negate the bullish sentiment and weak seasonality?  I have no clue, but I think it suggests we won’t have a massive drop in September like we saw in ‘11 (-7%) and ‘08 (-9%).  

Photo courtesy of Jeff Block.  

Welcome To September, The Worst Month Of Them All
September is the worst month of the year, as I’m sure you’ve heard many times by now.  Let’s take a look and see just how bad it really is.  
Going back to 1950, September is down -0.47% and up just 45% of the time.  Both of those are the worst for any month.  

Going back 50 years we see similar weakness.


Even more recently, going back to 1980, September is the only month with a negative return.


Now we just had the best August since 2000 at up +3.77%.  Does this mean anything?  Turns out, a big August is usually bearish, as six of the past seven times September was lower after a 3% August pop.

Take another look at the years above.  I noticed the years 1987 and 2000 and it got me thinking a little more.  August made new all-time highs those years also, just like 2014.  August was up more than 3% both of those years as well, just like 2014.  
My pal Jon Krinsky of MKM also noticed this, but he dug in a little deeper and found that since 1928 when August was up more than 3% and also made a new all-time high, September was up just one time out of nine occurrences.  That right there is one to remember.       

Let’s turn gears and take a look at the CBOE Volatility Index (VIX).  Going back to 1990, September is the second most bullish month for the VIX, as it gains about 8% on average - only July is better.  Remember, a higher VIX historically results in lower stock prices.   

Besides volatility, it is worth noting that gold historically has done well in September.  This month is the top month going back to 1970.

Back to equities now.  What about the Presidential Cycle?  This is year two of that cycle and again September doesn’t do much to get the bulls excited.

I’ve noted before this is the second year of the second term.  So we can call this year six.  Here is what happens that year.  A little better, but just four instances.

So with all of this, it is all but certain we drop in September, right?  Maybe not, as recently September has actually done pretty well.  The past five years September is up four times and has a very respectable +2.11% average return.  

Even going out 10 years, September has been up a very impressive eight times and is up about a percent on average.  The big thing to be aware of here is the two times it was down saw losses of nine and seven percent.  So when September has been down lately, it is really down.  

Lastly, a fun fact is September is home to the worst 5-day return going back to 1950.  September 19-24 returns an average of -1.04%, which again is weaker than any other five day combination.   
After slicing and dicing things many different ways, history says be on your toes this month.  Do we have to crash and burn, of course not.  In fact, I still see many reasons to expect higher prices in September.  But the reality is September is a month to be very leery of from a seasonality point of view.  
Photo courtesy of Gary Burke.  

Permalink

Welcome To September, The Worst Month Of Them All

September is the worst month of the year, as I’m sure you’ve heard many times by now.  Let’s take a look and see just how bad it really is.  

Going back to 1950, September is down -0.47% and up just 45% of the time.  Both of those are the worst for any month.  

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Going back 50 years we see similar weakness.

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Even more recently, going back to 1980, September is the only month with a negative return.

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Now we just had the best August since 2000 at up +3.77%.  Does this mean anything?  Turns out, a big August is usually bearish, as six of the past seven times September was lower after a 3% August pop.

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Take another look at the years above.  I noticed the years 1987 and 2000 and it got me thinking a little more.  August made new all-time highs those years also, just like 2014.  August was up more than 3% both of those years as well, just like 2014.  

My pal Jon Krinsky of MKM also noticed this, but he dug in a little deeper and found that since 1928 when August was up more than 3% and also made a new all-time high, September was up just one time out of nine occurrences.  That right there is one to remember.       

Let’s turn gears and take a look at the CBOE Volatility Index (VIX).  Going back to 1990, September is the second most bullish month for the VIX, as it gains about 8% on average - only July is better.  Remember, a higher VIX historically results in lower stock prices.   

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Besides volatility, it is worth noting that gold historically has done well in September.  This month is the top month going back to 1970.

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Back to equities now.  What about the Presidential Cycle?  This is year two of that cycle and again September doesn’t do much to get the bulls excited.

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I’ve noted before this is the second year of the second term.  So we can call this year six.  Here is what happens that year.  A little better, but just four instances.

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So with all of this, it is all but certain we drop in September, right?  Maybe not, as recently September has actually done pretty well.  The past five years September is up four times and has a very respectable +2.11% average return.  

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Even going out 10 years, September has been up a very impressive eight times and is up about a percent on average.  The big thing to be aware of here is the two times it was down saw losses of nine and seven percent.  So when September has been down lately, it is really down.  

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Lastly, a fun fact is September is home to the worst 5-day return going back to 1950.  September 19-24 returns an average of -1.04%, which again is weaker than any other five day combination.   

After slicing and dicing things many different ways, history says be on your toes this month.  Do we have to crash and burn, of course not.  In fact, I still see many reasons to expect higher prices in September.  But the reality is September is a month to be very leery of from a seasonality point of view.  

Photo courtesy of Gary Burke.  

A 60% Drop in Stocks, Really?

Yesterday, CNBC noted that two experts were warning of the coming 60% crash.  Now at first I’m thinking, here we go again.  We’ve heard these warnings time and time again, only for them to be wrong every time.  None the less, I clicked on the link and saw the two experts were David Tice and Abigail Doolittle.  

Here’s what you need to know, they’ve both been bearish for years now.  Mr. Tice is the founder of the Prudent Bear Fund and Ms. Doolittle has been noting bearish technical patterns in the face of a huge bull market for years.

Trust me, I’m wrong a lot also.  You trade long enough, we are all wrong plenty of times.  What aggravates me though is how dangerous it is to simply stick to a position.  If your wrong, so what?  Close the trade and find another one.  Being stubborn and sticking to a bad trade or wrong thesis is one of the most dangerous things you can do and is one of the best ways to lose money.  

One of the keys to being successful over time is being able to adapt.  

I call it being a chameleon trader.  The chameleon is one of the most adaptive animals ever.  If they need to turn red to hide, they turn red.  They have no agenda, just adapt and survive.  Adapt or Die is another favorite market saying of mine.

As traders, I think this is very similar.  If the environment changes, you need to change as well - and fast.  Although I’ve been called a perma-bull many times, in late June I started seeing a lot warnings.  Eventually we had the 4% dip (and much larger in small caps)  and pure fear came into the market. That was a clue we were about to rally once again.  Fortunately for me, it all worked out this time.  But my main point is don’t have a bias, just trade what your indicators tell you.  And if you are wrong, accept it.  Don’t be a hero.  

Here’s a CNBC spot I did with Ms. Doolittle back in May ‘13.  The SPX is up a cool +25% since then and she has a lot of the same bearish arguments.  Sure, it’ll be right eventually, but my big takeaway is be very careful who you listen to, as they might have an agenda under the surface you don’t know about.

The Nasdaq-100 Hasn’t Been Red For Two Weeks, Now What?

The market makes a habit of fooling the masses.  That is how it works, always has and always will.  Seriously, how many have sat on the sidelines just the past 12 months focusing on the scary headlines.  This time a year ago all the rage was the coming ‘87 like crash.  

For this reason, I do my best to avoid any emotion in my trading and use quantified data and sentiment instead.  Last year, nearly all the studies I did suggested a big second-half rally was coming.  This wasn’t a popular call at the time to say the least.  But, by looking at past history, it helped show a guide for what might happen.  Many a year ago were saying margin debt was high and we were due for an ‘87 like crash because of this.  As you know now, that didn’t happen.  

Here’s a great example of how digging a little bit deeper can show surprising results.  

The PowerShares 100 Trust (QQQ) hasn’t been red since August 12.  First off, the QQQ is an ETF based on the Nasdaq-100.  So these are the largest stocks listed on the Nasdaq in a one nice big basket.  

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The current streak is 10 trading days in a row the QQQ hasn’t closed negative.  I find a few things interesting about this.  Two weeks ago all the talk was how that 10% dip we hadn’t seen in three years was coming.  Sentiment had moved to a full blown panic in a lot of cases on just a 4% S&P 500 (SPX) dip.  

Also we heard a lot how weak breadth was in the QQQ.  Facebook (FB) was about the only stock leading it anymore.  Breadth looks at how many stocks are going up along with the Index.  It measures internal strength.  Well, all we’ve done since these warnings is see one of the best streaks in the history of the QQQ.

Here’s where the current streak ranks all-time.

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Now for the best part.  I went back and looked at the top three streaks and found what the QQQ did after 10 straight days without being red.  The results were what I’d call surprising.  Most would probably guess the near-term is weak.  None the less, the returns are simply stellar.  

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Significantly better results across the board on all timeframes.  How about that?  Sure, there are just three occurrences and you could argue this is totally random.  Still, to me, this much strength usually results in more strength.  

Here are the three times it made it to 10 days and the returns after.

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So today if you see a talking head on tv or social media say the QQQ has gone two weeks without being red and this is bearish, you can know that the quantified data simply doesn’t back that up.

Continue to dig deeper in your analysis and always question conventional wisdom.  Thanks for reading.