SEASONAL PATTERNS START TO GET INTERESTING -- LOOKING AT SMALL-CAP PERFORMANCE FOR YEAREND -- SEASONAL PATTERNS STAND OUT FOR THREE SECTORS -- NATURAL GAS TESTS SUPPORT AGAIN -- AIRLINE INDEX BOUNCES OFF SUPPORT -- DELTA AND UNITED LEAD AIRLINES

SEASONAL PATTERNS START TO GET INTERESTING... Link for today's video. StockCharts users can analyze seasonal patterns using the Seasonality Tool. This tool creates a histogram chart showing the percentage of times a security gained and the average gain/loss overall. Before getting into the current seasonal patterns, note that this is just one tool in the analysis toolbox. Moreover, it is an indicator of past tendencies and chartists should also take into account current trends and setups. And finally, there is a midterm election this year (4-Nov) and this could create extra volatility over the next four weeks.

Chart 1 shows the S&P 500 over the last twenty years and four periods stand out. First, the S&P 500 tends to rise in the March-April period and the average gain exceeded 1.5% each month. Second, July is by far the weakest month as the S&P 500 lost an average of .1%. Third, even though S&P 500 advanced 55% of the time in August and 60% of the time in September, the average gains were actually losses (-.9 and -.4%, respectively). Combined with neutral tendencies in May-June, it appears that the May to September period has been the most bearish for the S&P 500. This fits with the six month cycle, which runs bullish from November to April and bearish from May to October. The final standout period is yearend because the S&P 500 shows a tendency to rise from October to December and the average monthly rise is 1.6%. We are heading into that period now and October has gotten off to a good start.

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Chart 1

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Chart 2

Chart 2 shows the seasonal patterns over the last six years, which covers the current bull market. There are five takeaways here. First, February, March and April have been strong. Second, the S&P 500 advanced just 67% of the time in April, but the average gain was quite large (1.9%). Third, May, June and August have been weak. Fourth, the index was up 83% of the time in October and the average gain was 3.4%. Keep in mind that October is still a work in progress because the current month has yet to close. And finally, the index has risen each of the last five Decembers with an average gain of 1.9%. This December will be the sixth December. Overall, October and December are the best months during this bull market.

LOOKING AT SMALL-CAP PERFORMANCE FOR YEAREND... To get an overall seasonal perspective, I created an excel spreadsheet showing seasonal patterns for eight stock indices. On average, March and December are the strongest months, and July is the weakest month. The Nasdaq 100, for some reason, does not show a strong bullish tendency in November and December. In contrast, small-caps and microcaps show a strong bullish tendency in December.

Chart 3

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Chart 4

Chart 4 shows a seasonal chart for the Russell 2000 relative to the S&P 500. October is the weakest month because the Russell 2000 outperformed just 35% of the time with an average loss of .7%. Performance has a tendency to start turning around in November as the Russell 2000 outperformed 63% of the time. December is the best month because the Russell 2000 outperformed 74% of the time and by the largest amount. The Russell 2000 gained an average of 2% more than the S&P 500. The average December gain for the Russell 2000 was 3.6% and the average gain for the S&P 500 was just 1.6% (3.6 - 1.6 = 2).

SEASONAL PATTERNS STAND OUT FOR THREE SECTORS... I also created an excel table for some seasonal perspectives on the nine S&P 500 sectors. The S&P 500 data goes back 20 years and the sector data goes back 18 years. Even though the broader market has a bullish bias heading into yearend, three sectors stand out because they have the strongest bullish bias. The S&P Consumer Discretionary Sector ($SPCC) has the strongest bullish tendency over the last two months because the sector gained 82% of the time in November and December. In a bit of a surprise, the S&P Utilities Sector ($SPU) showed a strong bullish tendency in December by advancing 88% of the time. And finally, the S&P Materials Sector ($SPM) performed well in November-December because the sector advanced 75% of the time. Chartists should keep these seasonal tendencies in mind when looking at the charts over the next few months.

Chart 5

NATURAL GAS TESTS SUPPORT AGAIN... Natural Gas held up much better than oil over the last few weeks, but the ETF fell from consolidation resistance and is poised for an important support test. Note that I am using the futures chart for analysis because these prices come directly from the trading pits (so to speak). Chart 6 shows December Natural Gas (^NGZ14) breaking down in early July and moving below 4 by the end of July. NatGas then moved into a consolidation with a slight rise over the last two months. Technically, a consolidation after a decline is a bearish continuation pattern and a break below 3.9 would signal a continuation lower. Despite my bearish bias, chartists should also prepare for the unexpected. As long as NatGas holds support, a strong break above the resistance zone would be bullish. After all, winter is coming. Chart 7 shows December Light Crude (^CLZ14) for reference.

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Chart 6

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Chart 7

AIRLINE INDEX BOUNCES OFF SUPPORT... Chart 8 shows the DJ US Airline Index ($DJUSAR) hitting a support zone near its summer lows and bouncing over the last few days. Also note that Airlines should benefit form lower energy prices. Overall, the index surged to a new 52-week high in early June and then moved into a large consolidation. A consolidation after an advance is usually a bullish continuation pattern. This means a break above 205 would be quite bullish for the group. Short-term, notice that the index forged a three candlestick reversal at support. There was a long black candlestick on Wednesday, an indecisive candlestick on Thursday and a long white candlestick on Friday. This reversal reinforces support in the 180 area and increases the chances of a resistance challenge. Chart 9 shows the seasonal patterns for the index over the last fifteen years. Notice that the index has risen 93% of the time in October and the average gain is 6.4%.

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Chart 8

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Chart 9

DELTA AND UNITED LEAD AIRLINES... Chart 10 shows Delta Airlines (DAL) reversing off the 35 area for the third time since early July. Notice that this area also marks a 62% retracement of the April-June advance. Also notice that the decline from June to October looks like a big flag or falling wedge correction.

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Chart 10

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Chart 11

Chart 11 show United Continental Holdings (UAL) breaking out to a 52-week high in early September and then falling back with a flag in September. The stock reversed near the 62% retracement last week and broke the flag trend line with a surge above 47. The gap and breakout are valid as long as 46 holds.