The Stock Market

     

 

 

The Details Plotted

In the last issue of Seasonal Insights I showed you the statistics associated with the popular truism “sell in May and go away” in the countries with the eleven largest stock markets. The comparison divided the calendar year into a summer half-year from May to October and a winter half-year from November to April. In all eleven countries, the winter half-year outperformed the summer half-year. As announced on that occasion, here are the details for all countries that were reviewed.

 

October meeting after not selling in May

 

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A Truism that is Demonstrably True

Most people are probably aware of the adage “sell in May and go away”. This popular seasonal Wall Street truism implies that the market’s performance is far worse in the six summer months than in the six winter months. Numerous studies have been undertaken in this context particularly with respect to US stock markets, and they  confirm that the stock market on average exhibits relative weakness in the summer.

 

Look at the part we highlighted – it is downright eerie, Mark Twain somehow knew! [PT]

 

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In Other Global Markets the “Turn-of-the-Month” Effect Generates Even Bigger Returns than in the US

The “turn-of-the-month” effect is one of the most fascinating stock market phenomena. It describes the fact that price gains primarily tend to occur around the turn of the month. By contrast, the rest of the time around the middle of the month is typically far less profitable for investors.

 

Good vs. bad seasonal timing…   [PT]

 

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Battle Over Trendline Support Continues

Here is a brief update of our recent series of observations on the stock market. First of all, the SPX has just tested its major trendline for the third time after making yet another lower high – it is back below the 38% retracement level after a failed attempt to break through the 50% level. The same applies to NDX, DJIA and NYA as well, but the RUT (Russell 2000) continues to outperform all the big cap and broad-based indexes noticeably.

 

SPX, daily: another downturn from a lower high, but the major trendline – and incidentally the 200-dma, which is situated very close to it – continues to hold so far. This chart, as well as those of the other major indexes, continues to look dangerous. The danger is mitigated by the outperformance of the RUT, as funds slosh around from one corner of the market to another (there doesn’t seem to be enough liquidity to keep all the plates in the air concurrently).

 

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A Well Known Seasonal Phenomenon in the US Market – Is There More to It?

I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.

 

Due to continual monetary inflation in the fiat money system and the “survivor bias” inherent in stock market index construction, nominal stock prices are rising 67% of the time. Nevertheless the long term uptrend in nominal prices is subject to countless recurring seasonal patterns. The market as a whole on average tends to generate the bulk of its gains only at certain times.  [PT]

 

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A “Typical” Correction? A Narrative Fail May Be in Store

Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will certainly point those out when we see them. Anyway, something else is evidently happening. Here is a chart of the SPX that shows the important trend-line which was so far successfully defended:

 

According to the “keep it simple” chart, this was just a run-of the mill correction, very similar to every other correction seen since the 2009 low. But is that really the case?

 

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SPX Trendline Battle, Relative Strength in RUT

We reviewed the daily charts after yesterday’s close and noticed that the Russell 2000 Index, the NYA and transportation stocks all exhibited relative strength (the same holds actually for the DJIA), particularly vs. the FANG/NDX group. This is happening just as the SPX is battling with an extremely important trendline. As we pointed out before, relative strength in the RUT in particular served as a short term reversal signal ever since the sell-off started in February. The question is if this signal will continue to work. Here is an updated chart:

 

The SPX, the RUT and the RUT-SPX ratio. Relative strength in the Russell persists, and it has acted quite firm over the past several days in the face of growing weakness in the big cap tech sector. On previous occasions this has indicated an imminent short term upside reversal. At the same time, the SPX is sitting on the decisive trendline recently discussed by Dimitri Speck in connection with “crash analogs”. Interestingly, the Modified Ned Davis Method flipped to a 50% net short position on the Russell last Friday – will it be whipsawed again?

 

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A Word on 1987 Analogies – Why Even Bother?

As our friend Dimitri Speck noted in his recent update, the chart pattern of the SPX continues to follow famous crash antecedents quite closely, but obviously not precisely. In particular, the decisive trendline break was rejected for the moment. If the market were to follow the 1987 analog with precision, it would already have crashed this week. Nevertheless, we wanted to show one more parallel in connection with the previously discussed “flight to fantasy” effect. As we mentioned when we posted this chart, the divergent DJIA/NDX peaks we could recently observe happened in 1987 as well. Here is a chart of the event:

 

Divergent highs and lows in the NDX compared to the DJIA in 1987. The similarity with the recent divergence at the peak – which took even almost the same time to develop (DJIA peak on Jan 26 vs. NDX on March 12) – is quite glaring. It is one of several reasons why we believe the January top in the major benchmark indexes may turn out to be a significant one, regardless of whether an 87-style crash wave develops.

 

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Anatomy of Waterfall Declines

In an article published in these pages in early March, I have discussed the similarities between the current chart pattern in the S&P 500 Index compared to the patterns that formed ahead of the crashes of 1929 and 1987, as well as the crash-like plunge in the Nikkei 225 Index in 1990. The following five similarities were decisive features of these crash patterns:

 

– a rally along a clearly discernible trendline on a linear chart

– an accelerated move toward a peak at the end of the advance

– an initial decline testing the trendline

– a counter-trend rebound

– a break of the trendline

 

After the trendline was broken, waterfall declines began in the three antecedents of 1929, 1987 and the Nikkei in 1990. In early March, I pointed out that the decisive development was the break of the trendline on the second test. What has happened since then?

 

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SPX, Quo Vadis? Considering the Crash Potential

In view of the fact that the stock market action has gotten a bit out of hand again this week, we are providing a brief update of charts we have discussed in these pages over the past few weeks (see e.g. “The Flight to Fantasy”). We are doing this mainly because the probability that a low probability event will actually happen has increased somewhat in recent days.

 

Robert Taylor and Deborah Kerr cast wary glances at their ancient (modern at the time) pre-Ogygian deluge Quotron. This sucker is going down honey!

 

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Divergences Continue to Send Warning Signals

The chart formation built in the course of the early February sell-off and subsequent rebound continues to look ominous, so we are closely watching the proceedings. There are now numerous new divergences in place that clearly represent a major warning signal for the stock market. For example, here is a chart comparing the SPX to the NDX (Nasdaq 100 Index) and the broad-based NYA (NYSE Composite Index).

 

The tech sector is always the last one to get the memo – we have dubbed this the “flight to fantasy” – and it is always seen near major market peaks. Incidentally, the Nasdaq was the last index to peak in 1987 as well (the DJIA topped out in late August of that year, the Nasdaq on October 5). So this is a well-worn tradition. The divergences that have been established between these indexes in the recent rebound from the early February are a big red flag in our opinion.

 

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Fake Responses 

One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.

 

As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]

 

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