September Small-Cap Rally Underway Prior to Labor Day we noted the tendency of small-cap stocks to outperform large-cap stocks beginning at the end of August and lasting until around mid-September. This small-cap advantage typically begins on or around the 18th trading day in August and lasts until around the 12th trading day in September. On average the Russell 2000 has outperformed the Russell 1000 by 0.7% during this time span with the Russell 2000 outperforming 70% of the time over the last 40 years. As of today’s close Russell 2000 is up 4.5% since the close of August 26 while Russell 1000 is up 3.3%. As a reminder, small-cap outperformance in September usually does not last much beyond the 12th trading day (September 18th, this year).
Resistance Is Futile At the end of last month we laid out the technical picture for the S&P 500. At the time, the market had settled into a range between 2815 and 2945 on the S&P 500. The S&P 2815 support level we have been tracking for a while (that sits at the intraday high back on November 7, 2018 where the market failed last fall before the 20% correction ran its course to the Christmas Eve low) held up rather well – unlike the ~2700 level last fall. Since then S&P has cleared the 2945 level, which was the intraday high on Friday August 2 that was the beginning of two back-to-back Down Friday/Down Mondays, which has a negative indication if not quickly reclaimed. We have been looking for the market to drift higher into mid-September with a struggle to break above 2945-2955 on the S&P, which is right at the 50-day moving average (DMA). Now that S&P has clear that level and with today’s late-day rally pierced the last line of resistance at the July 3 high/close of 2996, it looks like we will able make a run at the highs before turning lower the last week of September. October could likely see a retest of 2815 with the 2725 support level that was held in June also being in play. So we are sticking to our drill and will wait for our Best Six Months Seasonal MACD Buy Signal before jumping back in with both feet. NASDAQ’s similar resistance and support levels are shown below for perspective….
Small Cap Surge Thu, Sep 12, 2019 Small caps have been serial underperformers versus the large-cap S&P 500 over the last 12+ months, but they're having their day in the sun this week. Not only has the small-cap Russell 2,000 risen more than 1% for three consecutive trading days to start the week, but the index has also outperformed the S&P 500 by more than one percentage point on each of the last three days. If this is the start of a longer-term small cap resurgence, there is certainly a lot of runway left. Below is a chart of the ratio between the S&P 500 and the Russell 2,000 over the last 15 years. When the line is rising, the S&P is outperforming the Russell. When the line is falling, the Russell is outperforming the S&P. As you can see in the chart, the S&P has been outperforming the Russell for the last year, and the ratio got extended to the very top of its 15-year range at the start of September. Since peaking earlier this month, however, the ratio has fallen dramatically as small caps have started to outperform. Even after the recent small-cap outperformance, the ratio remains well above its long-term average.
Lowest Jobless Claims Since the 60's Thu, Sep 12, 2019 After Friday's weaker than expected Nonfarm Payrolls report, today's initial jobless claims release is setting a different tone for labor data. Initial jobless claims were expected to see a modest decline to 215K this week after rising for two straight weeks. Instead, claims came in well below estimates falling to 204K. Not only was this well below last week's upwardly revised 219K (the largest week-over-week decline since May 10th's 16K decline) and forecasts, but it was also the lowest print since April's 193K. Important to note, those April lows were the lowest readings in around 50 years. Although that low from only a few months ago was not taken out, jobless claims still appear healthy with this week's data bringing it back below the past few months' range. The overall claims reading is also now more within tangible reach of those aforementioned 50-year lows. Furthermore, SA jobless claims have now spent 236 consecutive weeks at or below 300K and 101 weeks at or below 250K; both the longest streaks on record. As we mentioned in a note last week, today's release was likely to see a move lower in the four-week moving average because a recent high of 221K from early August would be rolling off the count. Between that and the exceptionally low number this week, the four-week moving average experienced a 4.25K decline which was its largest decline since mid-July (-5.5K). We would caution though that one week does not necessarily make a trend. The average now sits at 212.5K, which is an improvement from August, but it is also not yet any sort of dramatic new low as with other reads on this indicator. The moving average is now back to where it was only in late-July/early August. Additionally, the moving average is actually 0.75K higher than it was for the current week last year. We have mentioned in recent weeks that due to seasonal effects we usually see the yearly low in NSA claims at this time of year. As a result, this would give a good read on how this year's lows stack up to prior years. The NSA number did not disappoint, dropping to 159.3K. Not only was this 3.3K lower than the comparable week last year, but was also the lowest reading for any given week of the current cycle. Even more impressive, this was the lowest reading for the NSA data in just under 50 years. The last time NSA initial jobless claims were at or below 159.3K was back on October 18th, 1969 when the number was 155K. That was also only a month after the indicator's all-time low of 133K.
Superstitious or not, Friday 13th in September is historically bullish Since 1930, the S&P 500 has traded a grand total of 150 Friday 13th across all twelve months. The overall track record is 81 up days and 69 down days with a bearish average loss of 0.04% on all Friday 13th. The worst Friday 13th loss was 6.12% in October 1989. This day is often referred to as “Black Friday.” Digging deeper into the data reveals that this upcoming September Friday 13th has been up 8 times, down four times with an average gain of 0.07%. Depending on which metric chosen, November is either the worst or in a virtual tie for worst month for Friday 13th. October has a similar average loss, but with two additional up days. June is the best month for Friday 13th, up 11 times in 13 with an average gain of 0.55%.
Investors Keep Thinking Positive Thu, Sep 12, 2019 As the S&P 500 broke and held above its August range in the past week, sentiment has shifted more positive. The percentage of investors reporting as bullish in AAII's weekly survey rose from 28.64% last week up to 33.13%. That is the highest since August 1st when 38.44% reported bullish sentiment. With two consecutive weeks of improvements, bullish sentiment is now well off of its lows from the second week of August (21.66%) and is back within a normal range relative to its historical average, but is also still below that average of 38.11%. This week marks the sixth straight week with below average bullish sentiment. Inverse to bullish sentiment, bearish sentiment is now the lowest that it has been since the first week of August. It has also been above its historical average of 30.36% for six straight weeks now. From mid-May to early July there was actually a longer streak of above-average bearish sentiment that lasted for 8 consecutive weeks. With bearish sentiment falling 8.26 percentage points this week to 31.25%. This was the largest drop since June 13th's 8.38 percentage point decline. Although most of the loss in bearish sentiment went to bulls, a predominant share of investors remain neutral. Ticking up to 35.63% this week, neutral sentiment remains above its historical average (31.52%) as it has for five weeks in a row and 31 of the total 36 weeks this year. This was also the first time that neutral sentiment has outweighed both bulls and bears since the end of July.
Copper Unconsolidated Fri, Sep 13, 2019 In last night's Closer, we noted the recent price action of copper. Over the past several months, copper had been consistently moving lower in a solid downtrend, but that downtrend has been broken this week. Finishing up about 1% in yesterday's session, copper had its first close above resistance which would suggest a further move higher. We're seeing additional gains today as the commodity continues to break out. Over the next few weeks, copper bulls will look for a series of higher highs and higher lows that would eventually form a new uptrend.
Betting Markets and the Election Fri, Sep 13, 2019 One way to keep track of the evolving Presidential primaries and general election news is the website electionbettingodds.com which shows what the betting market is predicting for upcoming election outcomes. In the charts below, we show the current probabilities of a primary and general election win for each of the various candidates (officially announced and otherwise) with a 1% or higher chance of winning. Elizabeth Warren now has a commanding lead in the Democrats' primary with a 34.9% chance of victory with Biden and Sanders in second and third. Where things get more interesting is to figure out which candidates have the best chance of winning the general election assuming they win their primary. For example, President Trump's odds of winning his primary are 88.1%, but his odds of winning the general election for the Presidency are priced at 43.7%. By dividing that 43.7% by the 88.1% chance of primary victory we can get to a 49.6% general election pricing assuming the candidate wins their primary. This conditional probability probably shouldn't be taken too seriously, but it's got some interesting results. Among candidates polling over 5%, Beto O'Rourke has the highest odds (80%) of a general election win if he takes the primary while other Democratic hopefuls Andrew Yang and Bernie Sanders are priced at 60%+ odds. Biden's general election odds are at 55% if he wins the primary, while Warren -- the current front runner -- is at 49.9%. Notably, although Trump is close at 49.6%, no Republican has a conditional priced probability over 50% to win the general. All of that said, these conditional relationships can be very unstable and are complicated to arbitrage, so we probably shouldn't place too much faith in the detail of their message, but it's still interesting to see that markets are implicitly optimistic about the electability of a candidate like Sanders or Yang relative to more mainstream candidates like Warren, Harris, or Biden.
Homebuilder Sentiment Reaches 11-Month High Tue, Sep 17, 2019 Treasury yields have started to move higher from the record low levels reached in August, but sentiment among homebuilders remains strong as even at these levels interest rates are making housing much more affordable. The latest release of sentiment from the National Association of Homebuilders (NAHB) came in stronger than expected, rising from 67 up to 68 versus estimates for a reading of 66. At the current level of 68, sentiment is the highest it has been since last October, just before the market swooned in Q4. Looking at the internals of this month's report, strength was pretty broad-based. In terms of the headline index's components, Future Sales was the only one that declined, and the magnitude of that drop was only modest. Present Sales increased from 73 up to 75, while Traffic was unchanged right at the neutral mark. The chart below shows the regional breakdown of homebuilder sentiment going back to 2005. Sentiment in the Midwest was unchanged at 59 and is now the region of the country where sentiment is the weakest. That tag previously belonged to the Northeast, but after this month's 8 point jump, sentiment in that region of the country is tied for its highest level since the Financial Crisis. Sentiment in the South and West saw smaller improvements in sentiment this month, but builders in those regions are still much more optimistic than they are in the Midwest and Northeast.
Broader Transports Still Outperforming YTD Wed, Sep 18, 2019 With shares of FedEx (FDX) on pace for their second worst earnings reaction day since at least 2001, the Dow Transports, an index in which FDX has a weighting of over 8% (after today's decline), is down close to 2%. Historically, the Transports have been considered a leading indicator of the economy, so the weakness in FDX, and by extension, the Dow Transports, is resulting in heightened concerns over the state of the economy. Looking at the chart below, the picture for the Transports doesn't look pretty. The timing of today's decline couldn't have been worse as it came just as the Transports were attempting to break above the highs from July, but now it just looks like the second lower high this year. Following today's declines, the Dow Transports are up 14.7% YTD which is about five percentage points behind the performance of the S&P 500. Given the changes in the US economy over time, we've been skeptical of the continued predictive ability of the Transports, but even putting that aside for a moment, a broader look at Transports shows a less pessimistic picture. The chart below shows the performance of the stocks in the S&P 1500 index on an equal-weighted basis so far in 2019. By this measure, today's decline comes after the index made a higher high, and while it's back below those former highs today, with a gain of 20.5% YTD, this broader look at transports is still outperforming the S&P 500 on a YTD basis. It may not be a great picture for this group of transport stocks, but it doesn't really look bad either.
The Fed Hits It Down The Middle “History does not repeat itself, but it rhymes.” Mark Twain As expected, the Federal Reserve’s (Fed) policy committee cut its policy rate by 25 basis points (.25%) to a target range of 1.75%–2%. This comes on the heels of the first rate cut in more than 10 years at the end of July. This cut is somewhat more controversial, however, because the overall U.S. economic data has been improving, and there’s been a tick higher in inflation. One of the most important questions heading into this meeting was how many voting Fed members would support additional rate cuts. There were two dissenting voting members at the July rate cut, and once again there were two votes opposed to today’s cut—but unlike last time, there was also one dissenter who favored a larger 50 basis point (.50%) cut. Materials in the economic projections indicated 10 of 17 participants (which includes non-voting members) did not believe additional cuts would be needed over the remainder of the year, although evolving economic conditions could certainly lead to a shift. As the quote from Mark Twain suggests, by looking back at history we can potentially find clues as to what might happen in the future. Looking back at the previous two recessions (2001 and 2008), the Fed cut rates 50 basis points (.50%) to kick off the new cycle of rate cuts. We looked back at what the Fed said at the time, and policymakers didn’t foresee a recession; the larger .50% cut might have been their way of showing how worried they really were at the time. In other words, maybe the Fed knew there potentially was trouble under the surface. Compare this with three consecutive 25 basis point (.25%) cuts in the 1995/1996 and 1998 rate cut cycles, which led to continued equity gains and avoided recessions. Given we foresee one more cut this year, could it be another three cuts of 25 basis points (.25%) and then an economic acceleration? “Here’s the catch. When the first two cuts in a new cycle of rate cuts are only 25 basis points, this could be the Fed’s way of truly viewing the cuts as insurance,” explained LPL Financial Senior Market Strategist Ryan Detrick. “In fact, the past five cycles of cuts that started with two 25 basis point cuts saw the S&P 500 Index move higher 6 and 12 months later every single time.” As shown in the LPL Chart of the Day, Stocks Have Historically Done Well If The First Two Fed Rate Cuts Are 25 Basis Points, the S&P 500 was up an average of 9.7% six months after the second of two 25 basis point cuts to kick off a new cycle of rate cuts. Going out a year, the S&P 500 had gained a very impressive average of 16.7%.
Smaller Than Expected Drop in Philly Fed Thu, Sep 19, 2019 Economists were expecting overall sentiment in the September Philadelphia Manufacturing report to decline this month, but the actual drop wasn't as large as expected. At a level of 12.0, the General Business Conditions index dropped from 16.8 but was better than consensus expectations of 10.5. At current levels, the overall reading of the Philly Fed is pretty much right in the middle of its range from the past few years. Not too hot and not too cold! While the headline index of the report showed a modest loss, underneath the surface it was a pretty strong report. The table below shows the m/m change in each of the report's subcomponents. While the headline index declined 4.8 points, the only other component that was lower on a m/m basis was New Orders as the remaining eight all improved relative to August. The last time we saw such strong breadth was back in March 2016 coming out of the oil-induced slow down, and the only month where breadth in the report was stronger was back in August 2009. While New Orders was the only sub-component of the Philly Fed report that declined this month, the losses were modest, and the actual level of 24.8 is still relatively strong compared to other readings in the last two years. Finally, one component which was very strong this month was Inventories. September's reading of 21.8 was the highest in the history of the survey (dating back to 1980). Claims Still Low Thu, Sep 19, 2019 Last week, seasonally adjusted jobless claims saw a large move back below the past several months' range when the headline reading fell to 204K. This was the lowest print since April when it was at a 50 year low. This week, although still near the lows of the past few months, there was a small uptick to 208K on top of an upward revision of last week's print (revised to 206K). Despite this increase, this week's data was still better than expectations as forecasts were calling for a much larger increase to 213K. Also on the bright side, claims have now been at or below 250K and 300K for record streaks of 102 and 237 consecutive weeks, respectively. Despite last week's revision and this week's higher claims number, the four-week moving average actually ticked down to 212.25K. But it was a tiny decrease of just 0.75K from last week which brings the average to its lowest level since the final week of July when it was at 212K. Given these small fluctuations, the average continues to show minimal improvements as it has been flat in the past year. Last week, non-seasonally claims came in at their lowest level since the 1960's. This week, claims rose from that 160.3K reading up to 172.1K. As a result of seasonal factors, last week likely marked this year's low for NSA claims. It can be taken as a positive sign, though, that this week's reading of 172.1K, although higher week-over-week, was down versus the same week last year. In addition to initial jobless claims showing improvements over the past couple of weeks, so has continuing claims. Falling to 1661K this week, continuing claims are at their lowest levels since April. Much like seasonally adjusted initial jobless claims, continuing claims have finally begun to grind lower after remaining relatively flat, if not sloping upwards, over the past year.
What If September Is Up? Well, when the worst month of the year is up, it’s not so bad. October is slightly better when September is up. But Q4 and the rest of the year are generally more positive. In the tables below September is ranked by largest gain for DJIA and S&P 500 since 1949 and NASDAQ since 1971. Q4 remains about average, but full year gains are above average. So if September can eke out a gain then watch out for Octoberphobia, but fear not the full year.
Housing Indicators Off the Charts Wed, Sep 25, 2019 It's been a very strong couple of weeks for housing-related indicators as recent reports on Building Permits, Housing Starts, Existing Home Sales, and New Home Sales have all exceeded forecasts. Using data from our Economic Indicators Database, we found that it isn't often that all four indicators come in better than expected in the same month. Going back to the start of 2006, there have only been 12 months in a total of 165 where all four indicators exceeded forecasts. While similar scenarios have been relatively uncommon in the past, more recently, we have seen an uptick in the number of occurrences. Of the 12 occurrences, six of them have occurred in since the middle of 2016, and before that, there was a five year stretch without a single occurrence. In addition to these four housing-related indicators all beating expectations this month, they have also done so by a wide margin. Of the four indicators we looked at, the reported readings exceeded consensus expectations by a total of 397K. The chart below shows the total spread between the actual readings in the four housing indicators noted and total expectations and have colored the months in red where the total spread was equal or above this month's total. Again, of the 165 prior months for which we have data on all four indicators, only five saw a higher spread between the actual reported readings and expectations. Between the positive breadth and the wide margins between the actual and estimated readings, strength of the type we saw in August data doesn't come around too often.
Financials Hold on to Broad Gains in September Thu, Sep 26, 2019 In spite of the relative weakness we have seen in equities over the last week, US stocks are still poised to finish off September and the entirety of Q3 in the black. While overall breadth among industries was more positive several days ago, there are still four sectors where every industry is still in the black on a month to date basis. As shown in the graphic below, all of the industries within the Energy, Financials, Real Estate, and Utilities sectors remain in the black for the month of September. To be fair, Energy and Real Estate each only have two industries in their respective sectors, so for these two sectors, it isn't quite as impressive. Within the Financials sector, though, all five are still up on the month while all three industries in the Utilities sector are also up MTD. In the Energy sector, even with this month's gains of over 4%, both industries in the sector are poised to finish Q3 with a decline. Utilities have been big winners so far this quarter, but Electric Utilities have been the clear leader with an eye-popping gain of 10.2% this quarter.
DJIA, S&P 500 Up 8 of Last 10 Years Day before Rosh Hashanah Although not an official market holiday, Rosh Hashanah is observed by many New York area schools and many Jewish colleagues will also spend time observing the holiday with family and friends. Their absence can dampen trading volumes as positions are squared ahead of the holiday. This year Rosh Hashanah begins at sunset on Sunday, September 29. So Friday, September 27 is the last trading day before Rosh Hashanah. Over the last 23 years the day before Rosh Hashanah has been up more than 50% of the time, but there have been some large declines that result in average losses across the board while Rosh Hashanah (or the next trading day) has recorded average gains. More recently DJIA and S&P 500 have been up 8 times in the last 10 years (NASDAQ up 7 of 10) on the day before.
Fruitful to Sell Rosh Hashanah Happy Jewish New Year to you all! I took the above picture of pomegranates last year in Tel Aviv’s Carmel Market during my adventure through Israel with my family in celebration of my eldest son’s bar mitzvah. As the High Holidays approach you may remember the old saying on the Street, “Sell Rosh Hashanah, Buy Yom Kippur.” It gets tossed around every autumn when the “high holidays” are on the minds of traders as many of their Jewish colleagues take off to observe the Jewish New Year and Day of Atonement. The basis for this, “Sell Rosh Hashanah, Buy Yom Kippur,” pattern is that with many traders and investors busy with religious observance and family, positions are closed out and volume fades creating a buying vacuum. Even in the age of algorithmic, computer, and high frequency trading these seasonal patterns persist as humans still need to turn the machines on and off and feed them money or take it away – and these algorithms and trading programs are written by people so the human influence is still there. Holiday seasonality around official market holidays is something we pay close attention to (page 88 Stock Trader’s Almanac). Actual stats on the most observed Hebrew holidays have been compiled in the table here. We present the data back to 1971 and when the holiday falls on a weekend the prior market close is used. It’s no coincidence that Rosh Hashanah and Yom Kippur fall in September and/or October, two dangerous and sometimes opportune months. Perhaps it’s Talmudic wisdom but, selling stocks before the eight-day span of the high holidays has avoided many declines, especially during uncertain times. While being long Yom Kippur to Passover has produced 59% more advances, half as many losses and average gains of 7.0%. This year the high holidays commence on Sunday eve, September 29, and end October 9 with Yom Kippur right in time for Octoberphobia. The current news flow already has folks selling ahead of the Jewish High Holidays, setting up the market for further declines in notoriously volatile October.
Typical October Trading: Greatly Improved Recently October’s long-term track record is littered with sizable declines however, over the last 21-years the month has improved significantly. In this more recent time period October is the second-best month for DJIA and S&P 500 and the best month for NASDAQ. Yes, the month suffered a double-digit loss in 2008, but it also advanced double-digits in 2011. In the chart above, October’s strength over the last 21-years is clear. Aside from a brief bout of weakness on trading days five through seven, the market’s direction is higher. One exception appears to be the Russell 2000, small-cap index which spends the majority of the month in the red.
Two Months of Gains for Global Manufacturing PMI Thu, Oct 3, 2019 The weak US ISM Manufacturing reading earlier this week has sent the US equity market sharply lower over the last two days. At the same time, though, we're starting to see a pick-up in the Global Manufacturing PMI reading from Markit. Weak global manufacturing has been one of the best bear cases over the last year. But last month this reading ended a 15-month streak of MoM declines, and now it's up two months in a row. While it's still below the 50 level that marks the dividing line between growth and contraction, the recent strength is not to be overlooked.
