Wednesday, May 31, 2017

Summer Pullback?

Looking ahead to June:
  • Last 20 years: June ranks 9th in monthly performance with an average loss of 0.30%.
  • Last 20 years: The average daily trend for June looks a bit choppy on the chart below with weakness typically coming in the back half of the month.
  • Since 1950:  June ranks 10th in monthly performance with an average loss of 0.05%. 
  • Since 1950:  If the prior month is positive and the S&P is up YTD, June has an average gain of 0.54%.
  • Since 1950: If the S&P is up greater than 7.5% from January through May, June has an average gain of .98%.
  • Since 1950: If the S&P is up greater than 7.5% from January through May the S&P has never finished negative for the full year in 21 instances.  The average gain for the full year is 23.43%. 


The stats above have something for everyone.   The bullish case supports that momentum will continue with the potential for full year gains to be extremely healthy.  If the year starts strong like 2017 has, that gives the chance for a positive June a higher probability.  However, as we touched on last month, May begins a seasonally weak period and the average June is historically negative.  Something we will be watching is the FOMC rate decision meeting June 14th.  Currently there is an 88% chance of the Fed raising rates at the meeting.  This could bring an extra layer of volatility into the back half of the month (which would support the historical average daily trend of June shown above).  

The overall trend remains very strong as the S&P and Nasdaq continue to ride the high side of their monthly Bollinger bands.  The Nasdaq is the clear leader as it has risen 7 straight months and 10 out of the last 11.  The parallels to 2013 remain as the S&P and Nasdaq traded higher for 7 straight months from the end of 2012 to May 2013 and ultimately 12 out of 14 months.  

We also looked at how the Nasdaq has traded going out 1 to 6 months after a 7-month winning streak.  The data suggests momentum will continue at a higher rate than the whole sample. 

If we look at breadth and sentiment to gauge investor appetite and psychology there are two interesting blog posts I wanted to highlight.  The fat pitch has a well written study on washouts.

"Similarly, markets have a tendency to periodically "washout." One way that can be measured is by the percentage of stocks trading over their 50-dma; a washout would coincide with a reading under 30% (lower panel). It has now been 7 months since the last washout. These streaks have extended to 8 months only twice since 2004 - in February 2007 and June 2015, leading to declines in SPX of 7% and 12%, respectively. Even the powerful 2013-14 run did not go more than 6 months without a washout in breadth."

Ryan Detrick over at LPL Research touched on a recent gallup poll showing that we are nowhere near the euphoric stage that is characteristic of bull market tops.   Meanwhile the CNN fear and greed index remains in neutral territory even as we make new highs.

The trend remains friendly to the bulls and patience continues to be rewarded.  Heading into the summer months, and the historically weak June, maybe we have the proper setup for a short-term correction and a potential washout in breadth.  While we expect shallow pullbacks during this bull run, trying to time them will be extremely difficult.  With sentiment readings sitting in neutral and the data supporting strength for the remainder of the year, we feel confident in staying the course.

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.

Ryan on: Ryan Worch on LinkedIn, Ryan Worch on Twitter | Ryan Worch Bio