Although our trek through Provence, the Cote D'Azur, and France's Château Country over the past couple weeks left little time for big-picture analysis of the stock market, the time spent on planes, trains, and automobiles returning to our side of the Atlantic certainly did. And while my list of topics to discuss in future morning missives is long at the moment (including: Has a new secular bull begun?, The 3 ways to beat the stock market, The importance of D.R.P. (having a definable, repeatable, process), Diversification is for dummies, The Economic model isn't happy, Absolute return strategies are really bond funds in drag, and Target Date Funds are for fools), probably the most timely topic for this morning is the state of the stock market cycles.
"September is the Cruelest Month"
While October is technically the worst month for the stock market on a statistical basis due to the propensity for stocks to have crashed during the month, September is actually the month that investors should fear the most. According to Mark Hulbert, since 1896 (when the Dow Jones Industrial Average was created), the venerable index has lost an average of 1.07% during the month of September. And since 1929, the Dow has lost an average of 1.3% each time September rolled around. For the record, the average gain for all other months is 0.71%. And for those keeping score at home, that's a spread of 1.78 percentage points, which, statistically speaking, is meaningful.
Hulbert also points out that during each of the last nine decades, September's rank relative to other months in terms of performance has never been higher than ninth. Ughh.
So, with Syria, the Fed talking taper, and the U.S. slated to run out of money again as early as next month, my friends in the bear camp are currently pretty excited about their prospects for the rest of the month. And since sometimes market traditions tend to become self-fulfilling prophecies, I thought it would be a good idea to check in with our cycle composite to see if there is hope for the bulls.
Since this is the ninth time this year that we've done a review of the cycle composite, I'm going to dispense with all the disclosures/disclaimers that I don't use cycle work in a vacuum but do feel it is an important input into our models. And to review, the cycle composite is a combination of the one-year seasonal, the four-year Presidential, and the 10-year decennial cycles - all going back to 1928. So, with that out of the way, let's get to it, shall we?
Question 1: Is The Market In Sync With The Cycle Projections?
The first thing we do each month is to get a feel for whether or not the cycle projections are "on" or not at the present time. Looking at last month, the cycle composite didn't do so well. In sum, the composite called for a modest rally and instead we got a modest decline. As such, we'll have to say that the composite is a bit out of whack with the price action at the present time.
But from a longer-term point of view, the market (as defined by the S&P 500) is staying pretty close to where the composite projection says it should be in 2013. And in looking at the market versus the projections since 2009, I'll say that the S&P is fairly close to where the cycles say it should be. However, we should note that the cycles have been calling for a stronger rally than we've actually seen this summer. Although it is a safe bet that all the "taper talk" may have been a factor.
Question 2: What Does September Look Like?
Next, let's take a look at what the cycle projections are calling for during the month of September:
- One-Year Cycle: The bottom line is the picture painted by the one-year seasonal cycle is not pretty as after the first week or so, the cycle suggests it will be all downhill.
Four-Year Cycle: Ditto for the four-year Presidential cycle - only worse. This cycle basically points straight down for the entire month. The only appropriate adjective to be used here is ugly.
10-Year Cycle: The saving grace appears to be the 10-year cycle, which looks a bit different from the one- and four-year cycles. In short, the 10-year suggests the month will be more of a sideways affair. However, the bad news is: (a) the month is projected to end lower and (b) there is no real rally projection to speak of during the entire month.
Cycle Composite: Given that two of the three component cycles are down and down hard, it isn't surprising to see that the cycle composite also paints a less than optimistic picture of the month of September.
The good news is (a) the cycle composite can remain "out of sync" for extended periods of time and (b) the composite is only one of ten inputs in our market environment model. However, it is important to note that this particular input will have an overall negative bias this month. Again, this analysis should NEVER be used in a vacuum and is NOT a reason to be negative toward stocks overall. But, should the market continue to struggle in the near-term, you should know that such action would be pretty "normal" for this time of year.
So... as a risk manager, my take is that while the bulls could always get something going should the situation in Syria subside quickly, the cycles suggest that it might be a good idea to be careful out there for a while.
Click Here For More of Dave M's "Daily State of the Markets" Commentary
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. Syria/Geopolitical Issues
2. The State of Fed/Global Central Bank Policies
3. The Outlook for the U.S./Global Economy
4. The Level of Interest Rates
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Neutral
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 12 months)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Near-Term Support Zone(s) for S&P 500: 1630
- Near-Term Resistance Zone(s): 1660, 1680
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator: Neutral
- Price Thrust Indicator: Negative
- Volume Thrust Indicator: Neutral
- Breadth Thrust Indicator: Neutral
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Moderately Positive
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- Overbought/Oversold Condition: The S&P 500 is neutral from a short-term perspective and is high neutral from an intermediate-term point of view.
- Market Sentiment: Our primary sentiment model is positive .
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
Weekly State of the Market Model Reading: Neutral - This tells us to be cautious at this time and stay focused on the price action.
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
Turning To This Morning...
While President Obama continues to push for a military response (posturing perhaps?), the latest spin out of Syria is that the country's military used chemical weapons without approval from higher ups. In other news, Japanese stocks spiked overnight on improved data and the selection for the 2020 Olympics. China surged as well on word that banks may be able to raise capital in fresh ways soon. Finally, stocks are modestly lower in Europe this morning and our futures are pointing to a modest uptick.
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: +2.48%
- Hong Kong: +0.57%
- Shanghai: +3.41%
- London: -0.36%
- Germany: -0.11%
- France: -0.45%
- Italy: +0.23%
- Spain: -0.66%
Crude Oil Futures: -$0.56 to $109.97
Gold: -$0.01 to $1386.40
Dollar: higher against the yen, euro and pound.
10-Year Bond Yield: Currently trading at 2.913%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +3.31
- Dow Jones Industrial Average: +29
- NASDAQ Composite: +10.52
Thought For The Day...
Each of us has a fire in our hearts for something. It's our goal in life to find it & keep it lit. -Mary Lou RettonLooking for Guidance in the Markets?
The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.
The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.
The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.
The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.
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Mission Statement
At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.
Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
Positions in stocks mentioned: none
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