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David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980... More
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Daily State of the Markets
  • The Cycles Say "Beware!" (Or Do They?) 0 comments
    Apr 22, 2014 8:20 AM

    Daily State of the Markets
    Tuesday, April 22, 2014

    Raise your hand if you find yourself longing for the good 'ol days of 2013 right about now. You remember, right? The days when stocks marched merrily higher on the back of an improving economy, record earnings and a Fed that was about as friendly as they have ever been. The days when QE-infinity both here and in the land of the rising sun meant free money for those that could pull off the "carry trade." And the days when the grass definitely looked greener on the other side of the economic fence.

    Unfortunately, those days are apparently over. Unfortunately, reality has set in and a lot of folks think that stocks got ahead of themselves in 2013. Unfortunately all good things (specifically QE and the Fed's ZIRP) must come to an end. And unfortunately, while no one really expected the heady gains of 2013 to continue unabated, admit it; you were secretly hoping they would.

    No, in 2014 investors are focused on the idea that this bull market is aging, that the central bankers of the world will have to stop the printing presses at some point, and that growth rates around the globe just aren't as strong as they have been in the past.

    Oh, and then there is the fact that year two's of the Presidential cycle have been pretty darned crummy. Ughh.

    The Presidential Cycle Says Beware

    Don't look now fans, but it's almost that time of year again. Yep, that's right; there are just 7 more trading days before the month of May begins. And in short, this means that there are just 7 more trading days before the "Sell in May and Go Away" season officially commences.

    Lest you've forgotten, until last year, selling in or around May 1 each year had been a very profitable strategy for many, many years. And given that this year is year number two in the Presidential cycle, a great many analysts have been looking for this trade to be effective once again this year.

    History shows that in year two of a President's term, the S&P 500 has actually fallen by a median of -1.5 percent. However, it is during the second and third quarters of these years that things tend to get ugly as meaningful corrections have had a nasty habit of appearing.

    The Cycle Composite Says Beware

    Given that the four-year Presidential Cycle makes up one-third of the cycle composite we use in our work (the other cycles included in the composite are the 1-year and the 10-year), it isn't exactly surprising to see the composite pointing primarily down over the coming five months.

    In fact, according to the cycle composite, the market should begin going down... wait for it... today. Yep, that's right, the cycles say that the market should peak on April 21 and then move steadily lower - in an annoyingly choppy fashion - until October. Joy.

    Below is an image of the cycle projection from April 21 through September:

    S&P 500 Cycle Projection: April 21 - October 2, 2014

    I know what you're thinking: That surely doesn't look like much fun!

    Couple this with the fact that the cycles have been pretty spot-on for several years running and you've got a reason to run out and start buying some vol (NYSE: VXX), raising some cash, selling some covered-calls, or putting on some hedges with an inverse ETF or two (NYSE: SDS).

    But Wait, There's Good News!

    However, there is one fact that has been almost entirely overlooked by the media.

    You see, while 2014 is indeed year two of the Presidential Cycle, it is also - and this is the good part - the sixth year of the current President's term.

    Why should you care about such things, you ask?

    Although the occurrences are limited, since JFK's Presidency, which began in 1961, the average return for the S&P 500 in the sixth year of a president's term has been 18.3 percent (median 14.6 percent). And last time I checked, +18.3 percent beats the pants off of a decline of -1.5 percent.

    So, while this bull is growing old and the historical odds would seem to favor the bears for the next few months, there is clearly more than one way to look at history. Here's hoping Ms. Market proves the consensus wrong again in 2014!

    Looking for a disciplined approach to managing stock market risk on a daily basis? Check Out My "Daily Decision" System. Forget the fast money and the latest, greatest option trade. What investors need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets.

    Turning to This Morning...

    M&A deals in the drug sector (aka "drug deals") are in focus on an otherwise quiet morning. Earnings continue to capture traders' attention and there will be some housing data available for review at 10:00 am eastern. European bourses are up nicely while Asian markets were mixed. Futures in the U.S. are pointing to a mixed open at the present time.

    Pre-Game Indicators

    Here are the Pre-Market indicators we review each morning before the opening bell...

    Major Foreign Markets:
    - Japan: -0.85%
    - Hong Kong: -0.13%
    - Shanghai: +0.35%
    - London: +0.98%
    - Germany: +1.32%
    - France: +0.91%
    - Italy: +0.65%
    - Spain: +0.89%

    Crude Oil Futures: -$0.48 to $103.89

    Gold: +$1.70 at $1290.20

    Dollar: higher against the yen, lower vs. euro and pound

    10-Year Bond Yield: Currently trading lower at 2.727%

    Stock Futures Ahead of Open in U.S. (relative to fair value):
    - S&P 500: -1.54
    - Dow Jones Industrial Average: -3
    - NASDAQ Composite: +3.65

    Thought For The Day...

    A daughter is one of the most BEAUTIFUL gifts this world has to give. -Laurel Atherton

    Positions in stocks mentioned: none

    Follow Me on Twitter: @StateDave


    The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

    Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

    The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

    The information contained in this report is provided by Ridge Publishing Co. Inc. (Ridge). One of the principals of Ridge, Mr. David Moenning, is also President and majority shareholder of Heritage Capital Management, Inc. (HCM) a Chicago-based money management firm. HCM is registered as an investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Ridge is a publisher and has not registered as an investment adviser. Neither HCM nor Ridge is registered as a broker-dealer.

    Employees and affiliates of HCM and Ridge may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

    Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

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