Seasonality shows that there is a strong bullish bias from the middle of October to the end of December. The following chart illustrates the median % gain per month from 2000-2015. Since recent seasonality is more meaningful, we did not use seasonality before 2000.
We believe that the S&P will not make a new high in 2015 despite the bullish seasonality. In fact, the S&P probably will not even break above its 200 sma, which is currently sitting at the 2050-2060 range. Here’s why.
Will the S&P 500 Make a New Low? (i.e. fall to 1800)
As you are well aware of, the S&P 500 and other U.S. stock market indices crashed on August 24, 2015. Crashes of this magnitude are not uncommon. Historically speaking, the S&P 500 always made new lows after it crashed. The following is a list of cases that illustrate what happens to the S&P after it falls more than 5% in one day.
- August 8, 2011: The S&P made a new low 2 months later.
- May 6, 2010: The S&P bottomed 2 months later.
- August 31, 1998: The S&P bottomed 1 month later.
- October 27, 1997: The S&P bottomed the next day.
- October 13, 1989: The S&P bottomed the next day.
- October 16, 1987: The S&P 500 crashed 22% the next day.
- September 11, 1986: The S&P made a small new low by the end of September.
- May 28, 1962: The S&P made a big new low 1 month later.
Will this time be the exception? Perhaps, but the odds are slim. There is a very solid reason for why all these historical crashes were quickly followed by new lows.
Market crashes do not appear out of the blue. They exist in the midst of larger declines. For example, the S&P crash on August 24, 2015 occurred in the midst of a larger 14% decline that began in late May. This big 14% decline has left many investors and funds underwater. Some of these investors are worried that a bear market will begin, which is why they sell on the first bounce. Their selling will cause the market to make a new low.
Even If History is Wrong…
Let’s assume that history is wrong and the U.S. stock market does not make a new low in the next few months. This is a plausible scenario. There’s a first time for everything.
However, history also shows us that if the S&P does not make a new low, it will still face significant resistance at its 200 sma.
The following graph illustrates the correction of 2011. The S&P 500 backed down from its 200 sma after its bottom was already in.
The following graph illustrates the long consolidation of 1994. The S&P 500 did not make a new low after the 1994 low. However, it faced very significant resistance from its 200 sma.
In each of these cases the S&P went up to its 200 sma and then retraced a significant part of that rally. If the S&P rises to its 200 sma in the next few weeks and backs down, it will not be able to make a new high in 2015.
The U.S. Economy is Slowing Down
U.S. economic data is deteriorating significantly. The data figures are missing previous months’ figures and expectations. This deterioration in the economy is occurring while U.S. corporations are laying off far more workers than usual.
It’s not just the U.S. whose economy is drastically slowing down. The German economy is facing a significant decline in factory orders. This is particularly worrisome because Germany is a manufacturing powerhouse. We aren’t usually concerned when foreign economies face problems while the U.S. economy is strong. The U.S. economy and stock market can be perfectly fine in the face of foreign turmoil. This was the case in 2014 when the European economy contracted while the U.S. economy was on fire. But foreign turmoil is problematic for U.S. stocks if it occurs when the U.S. economy is slowing down too.
We do not think that a bear market is about to begin. Our long term U.S. stock market model states that there are still a few years left in this bull market. We are merely in the midst of a large correction.
Disclaimer: We are sitting on 100% cash and are waiting to buy UPRO, the S&P 500’s 3x leveraged ETF. We invest in UPRO instead of SPY (the 1x S&P 500 ETF) because our models are very good at sidestepping bear markets and big corrections. The U.S. stock market will soar once this big correction is over.
About The Author: I’m Tony Mermer Chou, CEO and founder of Investing Track. We are a quantitative investment firm that’s privately held. All of our investment decisions are determined by our algorithms that predict rallies, corrections, bull markets, and bear markets. We do not trade in and out of the markets every few days like other quants.