September offers the worst average stock-market performance of any month over the past 40 years. But the key word is “average,” as September looks to be fairly strong this year.
This should come as no surprise, as we’ve seen several of these time-based performance metrics fail since the financial crisis. The most notable? “Sell in May and go away,” which is a cute way to say that the summer months are usually not as strong as the winter months.
We ought to regard such historical tendencies more skeptically and pay closer attention to what is actually happening in the market.
Monday saw the Dow Jones Industrial Average jump nearly 260 points for its largest gain since March 1. The market seemed to let out a sigh of relief that North Korea was relatively quiet over the weekend, and the damage from Hurricane Irma, while huge, was not as colossal as feared.
Heading into the weekend, there was a somewhat negative divergence between big and small stocks, even those within the major big stock indexes. For example, the capitalization weighted SPDR S&P 500 Trust SPY 0.04799040191961608% SPDR S&P 500 ETF Trust U.S.: NYSE Arca 250.17 0.12 0.04799040191961608% /Date(1505337000000-0500)/ Volume (Delayed 15m) : 43032391 AFTER HOURS 250.16 -0.0099999999999909 -0.003997281848343127% Volume (Delayed 15m) : 15497416 P/E Ratio N/A Market Cap N/A Dividend Yield 1.891686453211816% Rev. per Employee N/A More quote details and news » exchange-traded fund (ticker: SPY) broke out to the upside from its August malaise and challenged its previous highs.
At the same time, the Guggenheim S&P 500 Equal Weight ETF RSP 0.010566356720202874% Guggenheim S&P 500 Equal Weight ETF U.S.: NYSE Arca 94.65 0.01 0.010566356720202874% /Date(1505337000001-0500)/ Volume (Delayed 15m) : 396971 AFTER HOURS 94.6 -0.0500000000000114 -0.05282620179609086% Volume (Delayed 15m) : 1128 P/E Ratio N/A Market Cap N/A Dividend Yield 1.3544638140517697% Rev. per Employee N/A More quote details and news » (RSP) seemed to be lagging significantly. The market seemed to skew toward the biggest of the big stocks, and that narrowness in leadership is often a harbinger of bad things to come.
Things changed with Monday’s jump higher. The gap between the two ETFs shrank quite a bit (see Chart 1).
While the SPY moved undeniably to new all-time highs this week, the equal-weighted RSP did manage to set a record-high close Tuesday for an arguable breakout. The real takeaway is that the unweighted RSP seems to be back in bullish form.
We can see a similar situation with the capitalization-weighted PowerShares QQQ Trust ETF QQQ 0.1367801942278758% PowerShares QQQ Trust Series 1 U.S.: Nasdaq 146.42 0.2 0.1367801942278758% /Date(1505336400255-0500)/ Volume (Delayed 15m) : 23057429 AFTER HOURS 146.45 0.0300000000000011 0.020489004234394207% Volume (Delayed 15m) : 5246503 P/E Ratio N/A Market Cap N/A Dividend Yield 1.033793197650594% Rev. per Employee N/A More quote details and news » (QQQ), which tracks the Nasdaq 100, and the First Trust Nasdaq-100 Equal Weighted Index ETF QQEW 0.09020386072523905% First Trust NASDAQ-100 Equal Weighted Index Fund U.S.: Nasdaq 55.48 0.05 0.09020386072523905% /Date(1505336400264-0500)/ Volume (Delayed 15m) : 23629 P/E Ratio N/A Market Cap N/A Dividend Yield 0.6503244412400865% Rev. per Employee N/A More quote details and news » (QQEW). The smaller components in both big stock indexes seem to be back in the hunt.
Add this to the continuing string of new highs in the New York Stock Exchange advance-decline line, and the breadth argument looks more bullish.
There is one more factor that turned around starting Monday. The banking sector, which broke down last week, rebounded sharply (see Chart 2). The trend is still to the downside since March, but from a technical point of view, a failed breakdown signal is often bullish. It is still a bit early to know if the breakdown has indeed failed, although heavy volume on this week’s advance so far is encouraging.
There is one more sector that may be telling us something positive: long-beleaguered energy—which shows signs of finally turning higher. While energy represents less than 6% of the Standard & Poor’s 500 index, its resurgence has wider implications for the economy.
The Energy Select Sector SPDR ETF XLE 1.253630943280844% Energy Select Sector SPDR ETF U.S.: NYSE Arca 66.23 0.82 1.253630943280844% /Date(1505337000000-0500)/ Volume (Delayed 15m) : 15428082 AFTER HOURS 66.26 0.0300000000000011 0.04529669334138608% Volume (Delayed 15m) : P/E Ratio N/A Market Cap N/A Dividend Yield 2.7126498565604713% Rev. per Employee N/A More quote details and news » (XLE) has made a fledgling breakout attempt through the trendline that guided it lower since December 2016 (see Chart 3). Perhaps it will join the ever-strong technology sector, the newly leading health-care sector outlined here Monday, and a possibly reversing financial sector.
Again, there are factors that work against a strong stock market, including the time of year and the lack of a serious correction in quite some time. Also, if the situation in North Korea tenses up again or tax reform dies in Congress, it is not hard to imagine stocks selling off. But for now, at least, the trend is up.
Getting Technical Mailbag: Send your questions on technical analysis to us at firstname.lastname@example.org. We’ll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.
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