SPY FALLS TO FIRST TEST, SEASONALITY CHARTS AND SUMMER, BONDS COULD BENEFIT FROM DOLDRUMS, JULY TOUGH FOR SMALL-CAPS, LT TREND SYSTEM REMAINS BULLISH, REFINERS CONSOLIDATE WITHIN UPTRENDS
SPY FALLS TOWARDS FIRST TEST... Link for today's video. The major index ETFs are down across the board with the Nasdaq 100 Equal-Weight ETF (QQEW) getting hit the most. Small-caps and large-caps are also down with the Russell 2000 iShares (IWM) and S&P 500 SPDR (SPY) down around 2% at midday. Chart 1 shows SPY falling to the midpoint of its range since March. This month's lower high and four-day decline are certainly short-term bearish, but SPY has yet to break below a prior low to reverse the bigger uptrend. The April-June lows mark the first significant support zone in the 205-207 area. The indicator window shows the Commodity Channel Index (CCI) moving below -100 to become short-term oversold. A move into the support zone and short-term oversold conditions would put SPY at interesting juncture. Chart 2 shows IWM hitting a new high last week and falling back to a resistance zone, which may act as first support.
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Chart 1
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Chart 2
SEASONALITY CHARTS REFLECT SUMMER DOLDRUMS ... The next group of charts focuses on seasonality and looks at performance for particular months throughout the year. Obviously, the main focus will be on July because it is just a few days away. As with sentiment and cycles, seasonality is just an indicator that tells us the historical tendencies over a period of time. It is also just an indicator that comes secondary to price. In other words, the trend trumps the seasonal tendencies. The power comes when the trend and the seasonal tendencies align.
Chart 3 shows the 20-year seasonal pattern for the S&P 500. The number at the top of each histogram bar shows the percentage of months when the S&P 500 closed positive. The number at the bottom is the average gain or loss over this 20 year period. Notice that this "20" year period is really just 19 years for July, August, September, October, November and December. This is because we are in the 20th year and we have yet to get price data for these future months.
As the chart shows, the historical tendency is for July to close higher 42% of the time and lower 58% of the time. This makes July the month most likely to close lower, but the chance of a lower close is just a little greater than 50%. Despite more declines in July, the S&P 500 sports an average gain of .2%, which is the sixth lowest.
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Chart 3
Things look a little different when we look at seasonal performance during the current bull market as chart 4 focuses on the last seven years. Notice that July closed higher 67% of the time over the last six years. Remember, 2015 is the seventh year and July is still to come. The years for this seasonal chart are listed at the top. Notice that August has been quite hit-and-miss during this bull market with a 50% chance of an advance. The average move, however, is net negative and this means August has been a difficult month. Taking these two charts together, it seems that the dog days of summer just may live up to expectations.
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Chart 4
SHOWING SEASONAL DETAILS ON A SHARPCHART... Chart 5 shows a monthly S&P 500 chart with July marked by the blue dotted lines. July was up 8 times (42%) and down 11 times (58%). There are 19 occurrences shown on this chart and the 20th July is next month.
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Chart 5
BONDS HAVE BENEFITTED FROM SUMMER DOLDRUMS... Chart 6 shows a seasonality chart for the 30-year Treasury Bond ($USB). Treasuries were hammered over the last few months as the long bond fell around 10% from its early April high to its late June low. The trend is down, but the seasonal patterns are turning more positive in July and August. Notice that July was up 63% of the time and August was up 74% of the time, which is the best month of all. This makes sense because bonds are viewed as safe-havens that often benefit from weakness in stocks.
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Chart 6
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Chart 7
Chartists can also show seasonal patterns for relative performance. Chart 7 shows the seasonal patterns for the bond-stock ratio ($USB:$SPX). Notice that bonds outperformed stocks 68% of the time in July and 63% of the time in August. These are by far the best months for this ratio. Also notice that bond outperformance has been quite strong in August with a performance differential of +2.9% (on average).
JULY HAS BEEN TOUGH FOR SMALL-CAPS... Chart 8 shows the Russell 2000 relative to the S&P 500 and three months stick out: April, July and October. In particular, the Russell 2000 has outperformed the S&P 500 only 32% of the time in July and the performance differential is -1.6% (on average). July has been the worst month for relative performance since 1996.
Chart 8
SMALL-CAP OUTPERFORMANCE CONTINUES... The price charts tell us a different story right now because the Russell 2000 hit a new high last week and has outperformed the last eight months. Chart 9 shows the $RUT:$SPX ratio in the top window. The Russell 2000 easily outperformed from 1999 to 2006 as the ratio moved from .31 to .59 in seven years. The ratio is still moving higher, but at a slower pace defined by the rising channel. Notice that the ratio bottomed in September 2014 and started rising again over the last eight months. Even though the seasonal patterns suggest a potential hiccup in July, the overall trends are bullish for small-cap performance as long as the September low holds on the ratio chart.
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Chart 9
LONG-TERM TREND SYSTEM REMAINS BULLISH... So what about the long-term trend for the S&P 500? Chart 10 shows monthly prices with the 12-month EMA, the Percentage Price Oscillator (1,12,1) and the Commodity Channel Index (12). This is a simple trend-following model using two indicators for confirmation. CCI is bullish when it exceeds +50 and remains bullish until it crosses below -50. The PPO(1,12,1) is bullish when positive and bearish when negative. The S&P 500 is deemed bullish when both turn bullish and remains bullish until both turn bearish. Using monthly closing prices allows chartists to filter out the noise and focus on the trend.
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Chart 10
As this chart shows, there have been just seven signals in the last 22 years and the S&P 500 is currently bullish. The trend would reverse when CCI(12) moves below -50 and PPO(1,12,1) turns negative. Nobody knows when this will happen or if the signal will result in a whipsaw. I just need a signal that tells me when to turn bearish on stocks and this signal has yet to trigger.
REFINERS CONSOLIDATE WITHIN UPTRENDS... Refiners are part of the Energy SPDR (XLE) and the Oil & Gas E&P SPDR (XOP), but they don't always match the profile of a big integrated oil company, oil service company or an oil equipment company. Refiners have held up better than most energy-related stocks over the past year and many hit new highs earlier this year. The next charts will spotlight five big refiner stocks that appear to be consolidating within uptrends. Breakouts from these consolidations would signal a continuation of the prior advance and open the door to new highs.
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Chart 11
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Chart 12
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Chart 13
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Chart 14
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Chart 15
VIDEO DETAILS... Link for today's video.
