Positive Market Seasonality is Upon Us

As we enter the last couple months of 2014 we find markets once again at/near all time highs.  The Nasdaq, which last hit 5K in 2000 before a dramatic decline is now just 8% away and the Russell 2K, left for dead and supposedly leading the markets lower is only 3.5% away from an all time high.  Back in September the index was falling precipitously and was clearly the one to sell.  The recent expansion in breadth has given new life to the small caps.  The SPX 500 is now up about 9.5% YTD, and after a nasty 6.5% drop in early October miraculously finished higher by 2.3%

The new month offers up some positive seasonality.  The Nov-Apr period is historically the strongest of the year, as it contains many of the extended holidays and traditionally heavier money flows.  The current earnings season has been a mixed bag but has mostly been a bit better than expectations.  Earnings growth is currently running ahead of expectations but we have some big energy names coming out over the next few weeks which may see some disappointment.  That said, other groups such as retail, technology, staples, consumer and durables have been putting up decent numbers.

Volatility has made a sharp retreat from multi year high levels just seen a couple weeks ago.  Sentiment reached some rarely-seen extremes, the selling intensified as the news of ebola and other things made the market look like death warmed over.   But the rubber band was stretched back and once it snapped the indices were off and running.  We have never seen a 200 handle move in the SPX 500 in just 13 trading days but there we have it.  There was plenty of fuel there for a big rally but I really could not see this one happening. 

We bought some SPY 190 calls with Oct 31 expire on Oct 17 for about 1.67 and were content selling them a couple days later for a near double.  Sadly not in the play on expiration, those calls closed north of 11! 

So, where do we go from here?  Well, as you might expect sentiment has shifted sharply in the bullish direction, so much so I expect the market to pull back some.  But with the table set for a move higher I don't expect any move down will be too long or deep as the indicators have all moved into the bullish camp.  The put/call ratios are racing lower, the VIX is still trending lower and has not made a definitive turn yet, sentiment polls are not wildly bullish and money flows are strong.  A higher high, higher low on the daily chart tomorrow is a bullish tell and higher prices could be on the way.  The chart below indicates the rally is long in the tooth but is not exhaustive.  That said, we would be cautious buying too much here until a pullback to the 1970-1980 area (circled on the chart).