INVESTMENT EDGE
It turns out September was the low of the correction as October turned out to be one of the strongest monthly rallies in recent years. While I expect we will be in for some choppy action into the New Year, I do think the bias is to the upside.
Below is a link to my October 2015 Market Recap.
In many recent communications I have been mentioning my expectation of a coming seasonality market rally. The reasoning is there are a couple of positive seasonality patterns that occur that are now coming into play. One of these patterns is due to our recent back-to-back losing months for the market in August and September. This is the first time since 2011 this has occurred and historical performance suggest an expectation of a robust balance of Q4 performance. Looking at the Stock Trader’s Almanac we find going back to 1930 (85 years, excluding 2015), the combination of a down August and a down September has occurred 18 times (21.2% of all years). Of those 18 past years, the following October was up 11 times and down 7 with an average gain of 1.82%. Fourth quarters in those same years have an even better record, up 14 and down 4. The last losing Q4 was in 1977. Recently, the last three down August/down Septembers in 1999, 2001 and 2011 were followed by double-digit gains in the fourth quarter. 1999 and 2011 were presidential pre-election years, just like this year.
There are, of course, no guarantees but the probabilities of this seasonality pattern combined with that of the expected annual Santa Claus rally are compelling arguments to insure your accounts are adequately exposed to risk assets through the balance of the year. As always, it is critical to have an exit strategy mapped out beforehand incase the market wants to prove the seasonality thesis wrong.
It’s hard to believe in the early 2000’s Priceline stock (PCLN) fell more than 99%, bottoming 2x in 2001 and again 2003 at a weekly close under $8/share. A little luck (the internet boom) and a major business model overhaul has pushed the stock on a relentless path higher, currently testing all-time highs above $1350/share
In the weekly chart below, it’s clear to see why this stock has been a long-time dream for trend followers as it has stayed above its rising trend line for years. Like all investments it goes through consolidation periods, the first one on this chart was a sideways channel that lasted 11 months from April 2011 through Feb 2012. Once it broke out from the channel it rose ~40% in less than 3 months and started its next consolidation. The second consolidation formed a saucer (or cup and handle) pattern and lasted about 13 months finally breaking out in May of 2013. From that point price rose ~80% in 10 months, peaking in March of last year. Since then, price has again been consolidating and once again formed another saucer pattern. Notice how each of the moves out of consolidation higher create an overbought RSI momentum condition (in the upper pane). While overbought conditions are good as they are the hallmark of strong trends, they also have a limited life and eventually need to be unwound. The unwinding process allows the bulls to go reload. During that reloading process bulls want to see the RSI reading stay above 40, otherwise it is at risk for a direction change.
As a trend follower, strongly upward trending stocks that are consolidating and have not yet broken out are the frosting on our cake. A break above the current upper horizontal resistance line supported with increasing volume would trigger a model buy signal. Of course, price could just as easily reverse course and begin a new bear market. There just are no guarantees. Most likely we will find out our answer to this question very soon as they are set to release their latest earnings announcement on Nov. 9th. Based upon the chart patterns and the market’s reactions to past earnings I am leaning heavily toward this consolidation being the pause before its next leg higher.
The chart below is that of the Japanese yen which you can see has been in a steep downtrend since 2012, losing almost 38% of its value against the dollar during that time. For those not familiar with currency movement, this is a BIG move for a currency but not unexpected considering Japan’s Prime Minister’s extraordinary move in an attempt to stimulate Japanese growth.
As you can see in the lower right hand corner of the chart price has (temporarily) halted its decline and has been trading in a range for the most part of a year. The interesting thing to note is this consolidation has allowed the (blue) 40 week moving average (40 WMA) to flatten out and begin to curl upward from a previous downward slope. Additionally, price is now above that same 40 WMA for the first time since a brief stint in 2014 and prior to that, 2012. Additionally, if this consolidation continues and price moves higher it will be the first time these two conditions will have existed since 2011, the end of the last uptrend. One final constructive point to mention is that positive divergence has formed on the RSI momentum indicator telling us to expect a short term (and possibly more) reversal.
For those that have listened to my videos, for a bottom to take place after a steep downtrend, the above two conditions must be in place. Of course, just because they do does not guarantee a bottom is in but a bottom cannot happen without them. As such, this development deserves to be closely watched because a reversal in the Yen has some interesting implications which I would like to show you in my next chart.
The chart below is the same one as above except for the fact I have added the price of gold (dashed gold line) in the same pane as the price of the Yen. What should be obvious is that the price of gold has a very high correlation with the Yen, that is, it moves pretty much in lock step. Therefore if the yen does actually bottom, we would expect to see a commensurate bottom in precious metals if the correlation were to continue.
While the Yen hasn’t officially bottomed yet, I am very skeptical that it actually will. For now I see this attempt as just a corrective counter-trend move with prices to eventually move even lower still. This is due to my strong belief the dollar will eventually move much higher once done with the consolidation it is going through. As such strength in the dollar will have negative impact on the Yen, since they are negatively correlated. Even though I have my beliefs, I have to respect what the charts are telling us and as such let them dictate where to put investment dollars. If this turns out I am wrong and this is a Yen bottom, I will quickly look to confirmation in precious metals and likely find a home for (at least a small chunk) of our horde of idle cash.
While currencies are not great instruments to trade in brokerage accounts, because of inter-market relationships they occasionally provide early warnings for other things that are. As such, they continue to be worth following.
With September now in the books the question is will the the downside persist or have we seen the bottom and the start of the traditional year-end rally?
Below is a link to my September 2015 Market Recap.
