FEBRUARY IS THE SECOND CRUELEST MONTH -- SIX MONTH CYCLE REMAINS BULLISH UNTIL MAY -- PRESIDENTIAL CYCLE TURNED BEARISH TO START THE YEAR -- A GOOD JANUARY REALLY DOES BODE WELL FOR THE YEAR -- SPAIN AND ITALY LEAD EUROPEAN SHARES LOWER

FEBRUARY IS THE SECOND CRUELEST MONTH... Link for todays video. Historical tendencies and overbought conditions suggest that the market is due for a rest, perhaps even this month. Historically, monthly returns for the S&P 500 are the strongest in December and January, and the weakest in September and February. Looking at monthly returns for the S&P 500 since 1970, the average advance for December is 1.76% and the average return for January is 1.41%. As the table below shows, these are the two best months of the year. Most recently, the S&P 500 was up .71% in December 2012 and 5.04% in January 2013, which was the best January since 1980. Even though a strong January bodes well for the entire year, note that the average advance for February is a mere .09%. The historical tendency is for the market to rest in February and then resume its advance in March-April.

Chart 1

SIX MONTH CYCLE REMAINS BULLISH UNTIL MAY... The six month cycle and the presidential cycle are two of the most well known cycles in the stock market. The six month cycle runs bullish from November to April, which is now, and bearish from May to October. This is where Wall Street coined the phrase sell in May and go away. Chart 2 shows this six month cycle over the last ten years. It does not work every time, but the historical record since 1950 shows a strong outperformance during the bullish phase and underperformance during the bearish phase. Currently, the six month cycle remains bullish until the end of April. This dovetails rather nicely with the historical performance for March and April, which are the fifth and third best months of the year. The average gain for March is 1.12% and the average gain for April is 1.30%. Performance drops off significantly in May, June, July and August. See www.stocktradersalmanac.com for more details or order the Stock Traders Almanac from our bookstore

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Chart 2

PRESIDENTIAL CYCLE TURNED BEARISH TO START THE YEAR... The presidential cycle runs bearish during the first two years of the presidential term and turns bullish during the last two years. As with all cycles, this cycle does not work every time, but the long-term data supports the historical tendency for stocks to underperform during the first two years and outperform during the last two years. On average, Marshall Nickles and Nelson Granados of Pepperdine University found that the S&P 500 tends to bottom 1.87 years into the presidential term, which is around the midterm elections. Chart 3 shows the S&P 500 with the presidential cycle overlaid. After a bullish two years, this cycle turned bearish in January and will remain bearish until January 2015. I would not recommended an investment strategy based on one cycle or data point, but chartists can combine studies to enhance a strategy. Based on the two cycles and the monthly performance table, stocks could stall or correct in February and then continue higher into March and April. The six-month and presidential cycles will both be bearish in May. The average monthly returns for May, June, July and August are less than .50%, and this also supports a market lull beginning in May.

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Chart 3

A GOOD JANUARY REALLY DOES BODE WELL FOR THE YEAR... There is one more historical tendency to consider. The table below shows the years when the S&P 500 was up in January. Since 1970, January has been a positive month 26 times (out of 43 years). Of those 26 positive readings, the S&P 500 extended its gains on 22 occasions by advancing from February to December. The red boxes on the table below shows the four misses. Notice that the S&P 500 was up over 13% in January 1987, but finished the year with a 2.03% gain. This means the S&P 500 was down from February to December. Overall, 22 of 26 shows strong historical tendency for a strong year when January finishes positive.

Chart 4

SPAIN AND ITALY LEAD EUROPEAN SHARES LOWER... Just when you thought it was safe to jump in, European shares and the Euro were hit with a bout of selling pressure. Italy and Spain are the main culprits, but French and German equities are getting hit hard as well. Weakness across the pond is getting the blame for todays selling pressure in US stocks. Never mind overbought conditions and the historical tendencies for February. Chart 5 shows the DJ Italy Stock Index ($ITDOW) falling over 6% in the last four days. This sets up the first test as broken resistance in the 127.5 area turns first support. Chart 6 shows the DJ Spain Index ($ESDOW) falling over 8% with a move below 300. This index is also setting up its first support test in the 290-295 area. Both indices were ripe for a pullback, but the depth and speed of this decline should raise some eyebrows.

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Chart 5

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Chart 6

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Chart 7

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Chart 8

Chart 7 shows the DJ France Index ($FRDOW) falling over 2.5% on Monday. As with the S&P 500, the index was up sharply since mid November and ripe for a pullback or correction. Broken resistance turns first support in the 236-239 area. Chart 8 shows the DJ Germany Index ($DEDOW) falling over 2%. Broken resistance and the June trend line mark first support in the low 270s. Notice that I am using these Dow Jones country indices to track the European markets during the day. These indices track the main country indices quite well and allow us to see real time developments. Click here for a full list of Dow Jones indices.

DOLLAR ETF BOUNCES OFF SUPPORT... The US Dollar Fund (UUP) may have a bearish head-and-shoulders working, but confirmation was put on hold as the ETF bounced off support on Monday. I first highlighted this pattern in the market message on January 25th. While the pattern remains a possibility, a clear break below neckline support is required for confirmation. Chart 9 shows UUP dipping below 21.6 on Friday, but surging right back above this key level on Monday. While this move is enough to reinforce support and set a bear trap, note that the trend since mid November remains down. A break above the mid January high at 21.90 is needed to forge a meaningful breakout.

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Chart 9

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Chart 10

Chart 10 shows a long-term view of the US Dollar Index ($USD). After a breakdown in August-September, the index consolidated with a triangle. A break below 79 would signal a continuation lower and clear the way for a serious decline. Long-term resistance is set at 81.