A History of Julys
July 15th, 2010
As the broad markets are enjoying a very strong July thus far, we wanted to look at the history of July performance for the S&P 500. What we found is that July rallies are quite common but so are very sharp negative reversals.
We looked at performance from June closes to July closes, June closes to July highs, and July highs to July closes going back to 1990. Some of the findings were rather surprising and strongly argue for at least some measure of pull-back before the month is over.
· In every year of the sample (twenty years), July highs were equal to or higher than June’s close.
· Eleven of those twenty years saw July’s close below June’s close by an average of 2.57% with the largest negative reversal being 7.90% (2002)
· In six of the past fourteen years, there has been at least a 5% pull-back from July’s high to July’s close. The largest of which was 8.33% (2002)
· The average pull-back from July’s high to July close has been 2.85%.
· Average July performance for the past twenty years is +0.32%. Currently, the index is +6.25% for the month.
· July 2009’s performance was +7.41% which was the strongest July in the sample. Second strongest July was +6.80% (1997)
Based on July’s performance over the past twenty years, if the index was to match the strongest July (full month performance) in the sample, that would take the index to 1107. Further, if the index was to match the strongest move from June’s close to July’s high in the sample, that would take the index to 1117. We view those levels as key areas of resistance.
Conversely, if the index was to match the average performance for July over the past twenty years, (+0.32%), that translates into SPX 1033 (down -5.6% from its current level).
June 11, 2010: Dow 30
June 11th, 2010
· While the Dow Jones Industrial Average is often criticized for being too narrow of a market gauge to be relevant in any market analysis, it does provide a glimpse into prevailing market sentiment. And that sentiment, we believe, is acute uncertainty and lack of conviction.
· 2009 closed at 10,428.05 which was up 61.18% from the March 2009 low and up 18.8% for 2009. While that 18.8% may not seem like much, the first ten weeks of 2009 seemed like the financial world was in the process of outright collapse. If someone had said in January or February that the index would reverse and post an 18-19% gain for the year, it is doubtful if anyone would have taken that person seriously. As 2009 wrapped up, the broad market seemed to shift gears and begin to consider market risk again.
· 2010 has produced two separate periods of rallies up through 10,428 as well as two periods of declines that carried the index below 10,428. Further, the mystique around Dow 10,000 is alive and well.
· As we are closing in on the half-way point of 2010, it is noteworthy that there have been two days this year in which the index has spent a full trading day below 10,000. Sixteen days of 2010 have produced intraday dips below the 10,000 barrier.
· During April 26 to June 8, the Dow 30 declined by 13.3% which was the sharpest “correction” it has experienced since the current bull trend began in March 2009. On June 3, the index spiked up to 10,315. That rally took the index up through its 200 Day Moving Average (then at 10,299, now at 10,313) but sellers pounced as soon as the Average was breached.
· 10,331 is a 38.2% upside retracement of 2010’s range.
· We believe the current volatile consolidation below the Average and below the break-even level for 2010 suggests that sentiment leadership is in a state of transition.
· Technically, if the bull trend is to reassert itself in a sustainable fashion, the index will take out 10,331 and methodically push up through 10,508 which is a 50% upside retracement of 2010’s range. However, until that trend clearly develops, we continue to recommend an increasingly defensive/cautious approach.
We believe that likelihood of a downside resolution to the current consolidation is far greater than an upside resolution. Further, our work suggests that the index has near-term risk to the 8800-9000 area.
May 11, 2010: Macro Market Reflections
May 11th, 2010
· During the two weeks (ten trading days) from April 26 to May 10, investors were bluntly but vividly reminded about various areas of market risk. An errant trade in PG allegedly kicked off a firestorm of computer-driven selling. During that window, major averages declined as follows: Dow 30: -12.33%, S&P 500 -12.63%, Naz 100 -14.91%, and Ru 2000 -14.51%.
· On Friday, a recovery in response to a stronger-than-expected BLS Employment number drove some stabilization and the averages closed relative to their respective April 26 bull market highs as follows: Dow 30 -7.80%, S&P 500 -8.93%, Naz 100 -10.20%, and Ru 2000 -12.46%.
· Russell 2000 was the second weakest of the four averages on the way down but staged the weakest recovery by Friday’s close. Naz 100 has been the strongest since index since its May 9 low with 11.20% rally while the S&P 500 has been the weakest from its May 9 low with an 8.93% rally.
· Currently, the Russell 2000 is up 11.86% for 2010 and up 104% from its bear market low fourteen months ago. The index set its bull market high on April 26 (as did the other major averages) at 745.95. Beginning in August 2007, the 750 area began to emerge as an important technical area. On August 6 and again on August 16, the index traded down through 750 reaching a low of 736 on August 16. That low reversed into a seven-week, 15.8% rally.
· The 750 area attracted buyers again in November and December as the index bottomed at 734.40 on November 27. The following rally, however, was a far less intense 8.9% over a four-week period.
· In June 2008, the role of 750 appeared to change from support to resistance. After three weeks of trying to break out up through 750 in May-June 2008, the index reached 763.27 on June 5. The index declined 15.2% over the next six weeks. The August 15 peak was 764.38 and the September 19 peak was 761.78. From the September peak, the index declined 55.03% over the next six months.
We believe the index remains extremely vulnerable to a meaningful and sustained downside reversal. The market assigned a great deal of value to the 750 area (734-764) during August 2007 to September 2008. Based on the index’s price action beginning in September 2008, our view is that index is very near significant resistance. We recommend using this strength to dramatically reduce exposure to Ru 2000 names. Technically, we believe there is risk down to the 550-575 area.
March 2010 Market Wrap
April 7th, 2010
· Following February’s recovery from a meager sell-off attempt, March continued and extended the on-going bull trend as all four major averages (Dow 30, S&P 500, Naz 100, and Russell 2000) closed the month solidly in positive territory for the second straight month.
· All nine S&P sector indexes gained in March which brought eight of the nine sectors into positive territory for 2010. Three of the sectors were up over 10% for the year as the close of Q1.
· Beginning in March, Russell 2000 emerged as the best performing major average by posting a 7.97% gain with the Naz 100 being the second strongest index with a 7.68% gain for the month. That leadership position has been increasingly strong in the early days of April. The index is up 2.10% for April (+10.80% for 2010). The second strongest index is the S&P 500 which is +0.59% for April (+5.50% for 2010).
· All four major averages set new recovery highs in March by trading up through their respective January highs. April has extended those trends and current margins (at cycle highs set during April 6-7) above their respective January highs are: Dow 30 +2.41%, S&P 500 3.59%, Naz 100 +4.74%, and Russell 2000 +8.27%.
· Russell 2000 was the first index to eclipse its January peak which happened on March 2. That was followed by Naz 100 (March 9), S&P 500 (March 12) and Dow 30 (March 17).
Performance from the bear market lows through March 31 for the major averages and for the S&P sectors has been:
Dow 30: +67.8% S&P 500: +75.38% Naz 100: +92.21% Ru2000: +98.09%
Con. Disc: +108% Cons. Stpl: +44.57% Energy: +43.88% Fincls: +173.67%
Hthcare: +48.63% Industrls: +109.45% Materials: +90.93% Tech: +91.82%
Utilities: +33.29%
The Economy
· Final Q4 GDP came out on March 26 at +5.6%; below the consensus estimate of +5.9% and below the lowest estimate in the expected range of +5.7%-+6.0%. This was the lowest of the three estimates of Q4 growth. Advanced Q4 GDP was +5.7% which was followed by Preliminary Q4 GDP at +5.9%. Real GDP grew by 0.1% year-over-year in Q4 after falling by 2.6% in Q3 on a year-over-year basis. Advanced Q1 GDP comes out on Friday, April 30.
Employment
· On March 31, ADP reported March Employment of -23,000 (est. was +40,000). February Employment was revised from -20,000 to -24,000. The February revision took the job loss figure below January’s level which ended a streak of monthly improvements in the series at eleven. March was the twenty-sixth consecutive month of job loss. In the ADP press release, the following comment was included.
Since employment as measured by the ADP Report was not restrained in February by the effects of inclement weather, today’s figure does not incorporate a weather-related rebound that could be present in this month’s BLS data. In addition, today’s figure does not include any federal hiring in March for the 2010 Census. For both these reasons, it is reasonable to expect that Friday’s employment figure from the BLS will be stronger than today’s estimate in the ADP National Employment Report.
· On April 2, BLS reported Non-Farm payrolls for March at +162,000 (est. was +200,000). February was revised to show -14,000 jobs (previously reported at -36,000) and January was revised to show +14,000 jobs (previously reported at -26,000). Long-term Unemployment (those unemployed for six-months or longer) expanded by 6.75% over February’s level. Also, Involuntary Part-Time workers (part-timers who want to be full-time) expanded by 3% in March.
· Unemployment came in at 9.7% (est. was 9.7%).
What’s Next?
The promise of census hiring began to come through in March as approximately 48,000 of the 162,000 jobs added were temporary census workers. Temporary is an important part of that equation. While market participants have been enthusiastically cheering the string of less-bad employment-related news, consistent job growth has been the missing element and has also been one of the most relied-upon tenets of the bearish thesis.
As the 162,000 number crossed the tape (on a closed day for equities in observance of Good Friday), reaction in the futures market was surprisingly subdued. That response and the market’s response since suggests that investors are more than willing to “sell the news” of a strong jobs number. Lengthy anticipation of job growth has propelled market psychology, seemingly with each passing month, into a place of heavily-skewed optimism. In addition to the headline disappointment, it seems that investors are at least considering the idea that temporary job growth is just that….temporary
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