Monday, February 27, 2017

Assessing the current market and a look ahead to March

  • The last 20 years the average March has been bullish with an average gain of 1.85% and typically trends higher all month.  It ranks as the 3rd best month of the year.
  • Since 1950 March ranks as the 4th best month with an average gain of 1.25%.
  • If we get a positive January and February (like we have in 2017), March returns are better with an average gain of 1.5%.
  • The full year average gain is roughly 20% when January and February were positive.
  • Also, the average drawdown in March is much less severe when January and February are positive.

The weekly blog from Fat Pitch had a number of stats about the current market.  The most interesting looked at the average yearly gain in the S&P 500 when January and February were both positive.  "The third long term study relates to seasonality. Specifically, with two days left in February, the SPX has risen almost 6% YTD. In the 27 prior instances since 1945 that SPX has been up in both January and February, it has closed up for the full year all 27 times. The average full year gain was 24%; in only 2 cases was full year gain less 10% (from CFRA)."

Below we ran our own study below that looked at every March period since 1950 when January and February were positive.  It then calculates the yearly gain for the full year when these conditions were present.  Our work confirms the CFRA numbers. 

The above data is consistently positive.  A few factors we track that could derail the market's current momentum would be: sentiment, breadth, VIX, and length of the current move.  Sentiment in and of itself shouldn't be used to identify tops but once you couple it with a bigger move and a deterioration in breadth it can help identify turning points.  Since 2009, there have been 19 "small-ish" corrections ranging from 4% to 9%.  The average number of trading days between one of these pullbacks lasted 46 days.  The current uptrend has lasted 77 days since the last pullback of at least 4%.

That could be a signal of things being a bit overdone and perhaps this move soon exhausts itself.  Out of the 19 streaks only 4 have lasted longer than the current market move with the longest lasting 140 days.  If we look at a simple breadth measure of number of 52-week new highs in the S&P 500 (Middle Chart in orange) we can see how breadth peaked in December.  Various other breadth measures also confirm the lack of participation as the general market continues to make new highs.
To add to this, the market remains overbought as the RSI shows in the bottom panel.

The 2nd chart below from Nautilus Research looks at the forward returns of the S&P over the last 20 years after being up for 5 weeks in a row while also reaching a multiyear high (this current streak is the 15th such instance).  The results back up the idea that we could be due for some weakness in the near-term,

Overall, the market continues to drive higher and climb the wall of worry.  The stats favor a bullish tone for the month of March and the rest of the year for that matter.  However, looking at the average drawdowns and with breadth starting to lag the current momentum, we wouldn't be surprised to see a small pullback along the way.  We remain bullish and contend that any pullback/correction will most likely be shallow and short.  Unless circumstances change dramatically, the overall market remains strong.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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