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September of the 2nd year of the Presidential Cycle is historically the weakest month of the 4-year cycle.

Since working off its early year correction, the U.S. stock market has been on one of those inexorable runs that we’ve seen on so many occasions in recent years. Such runs have seen the market essentially steamroll any and all potential pitfalls that may arise. This recent run has been no exception as the stock rally has basically remained bulletproof to any exogenous hazards (real or fake). But just when the market is on this roll, even breaking out to new highs and apparently incapable of going down, a bout of selling strikes, seemingly out of nowhere. However, if we look a little deeper, perhaps we shouldn’t be surprised by the recent weakness.

The Presidential Cycle refers to the pattern of behavior in stock prices throughout the four years of a presidential term. Specifically, stocks tend to be strong during certain periods of a president’s term and weaker during others. And while there are many factors influencing stock prices during a particular period of a particular presidential term, the cycle has been one of the more historically consistent seasonal patterns.

This may be relevant to the current weakness because, on average, the worst performing month of the cycle, historically, has been September of year 2, i.e., the current month.

As the chart shows, since 1900, September of year 2 of the Presidential cycle has returned an average of -1.43%, slightly worse than September of year 3, February and September of year 1 and May of year 4.

Again, there are many factors that determine the market’s return in a particular month. And returns for a particular month in a particular year will not always match its historical average. That’s what makes an “average”. But to the extent that any month of the cycle can be relied upon to be weak, it is this September of the 2nd year of the Presidential cycle.

But just how reliable is it? And does the market’s recent level of conformity to the historical cycle enhance the pattern’s reliability? And to the extent that it does, what does it imply about the market’s potential path going forward?

In a Premium post at The Lyons Share, we discuss the current year’s performance relative to the historical pattern -- and what it may portend following the current weakness.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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After receiving very little interest in over a year, volume in inverse ETF’s spiked to near record levels yesterday.

Over the past several weeks, we noticed that investor sentiment had relieved a fair amount of its short-term frothy condition. Much of that was based on various measures from the volatility market. One area that had not shown a similar uptick in fear or nervousness was investor flows in the stock market. Folks were still consistently buying the diips, and the rips, and were all but shunning equity-based hedges altogether...until yesterday.

Now there are still some concerning data points related to money flow and a lack of hedging, but when it comes to inverse ETF’s, yesterday saw a long-awaited uptick in interest from traders. Inverse ETF’s, of course, are designed to rise when the stock market falls -- and vice versa. Thus, when the market is dropping, we typically notice increased volume in these instruments, signaling an uptick in investor fear.

Using a concept we first saw utilized by Jason Goepfort at www.Sentimentrader.com, we can use volume data from inverse ETF’s as a measure of investor sentiment. When volume spikes, it is a sign of fear, and when it is extremely subdued, it can be a sign of too much complacency.

With the proliferation of ETF interest around the time of the financial crisis, we now have nearly a decade of data with which to utilize for purposes of gauging sentiment. We prefer to measure volume versus total volume on the exchanges to provide a relative standard.

From 2010 to 2016, we found that volume in the inverse ETF group that we track (not a comprehensive group) has averaged about 0.7% of total volume on the NYSE and Nasdaq exchanges, with wider swings in either direction along the way, obviously. Since the beginning of 2017, however, volume in inverse ETF’s has been extremely depressed.

In fact, in 2017 there were just 11 days that saw higher than the historically average (0.7%) level of relative volume in inverse ETF’s. The last 4 months saw exactly 2 days above average. The relative calm, not to mention dearth of stock market losses, led investors to be especially complacent. As we said, though, that changed yesterday.

It took a few days, but the recent bout of weakness has apparently gotten traders’ attention. We say that because yesterday (2/5/2018) saw the 3rd highest volume total ever in inverse ETF’s, as a percentage of total exchange volume, at 2.11%.

As the chart indicates, just 3 other days in history (10/4/2011, 10/15/2014 and 8/24/2015) have seen at least 2% of exchange volume go to inverse ETF’s. In hindsight, those 3 days were pretty good times to be adding equity exposure. Will this time be the same? There are no guarantees, plus “3″ is an incredibly small sample size. However, it is at least encouraging to see some of investors’ complacency beginning to abate.

In a Premium Post at The Lyons Share, we take a deeper, quantitative look at some of the similar historical precedents and the accompanying market action. If you are interested in the Premium version of our charts and research, check out our “all-access” service, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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After a record run of muted movement, will recent volatility send negative shock waves through stock market?

The recent uptick in stock volatility has some investors on edge (OK, it is mostly just financial news editors on edge). The truth is, while volatility over the past week has seen an increase, it is not all that far away from the historical norm. Last Thursday through Monday, for example, the Dow Jones Industrial Average (DJIA) experienced 3 straight “volatile” days, with daily ranges of between 1% and 1.6% on all 3 days. Looking historically, however, we find that the average daily range in the DJIA over the last 90 years is 1.6%. Even during the current bull market since 2009, the average range is 1.08%. Thus, the recent action should hardly be characterized as volatile.

The reason it perhaps seems so tumultuous is because we are emerging from a long stretch of calm in the market -- record calm, at that. Prior to Thursday, the DJIA had gone 72 days without experiencing a daily range as wide as 1%. If that sounds like a long stretch, it’s because it is a record. In fact, the record prior to this recent streak was just 49 days in a run that ended in late February of this year. And prior to 2016, the record going back to 1928, according to our database, was a mere 32-day streak back in 1944 -- less than half the recent streak.

Furthermore, historically, there have been just 16 streaks that have lasted as long as 21 days, i.e., 1 month.

Interestingly, this recent streak is the first of any of the 16 that saw 3 straight 1% daily ranges immediately following its culmination. So is mean-reversion starting to rear its volatile head here following the record calm? And is there a nefarious message to the sudden uptick in volatility? In a Premium Post at The Lyons Share, we take a deeper dive into prior streaks of calm in search of clues that may help shape our expectations for our present case.

If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

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The 4th quarter of years ending in “7″ have historically exhibited the stock market’s worst quarterly performance of the decadal cycle.

Exactly 3 months ago, we published a post highlighting what we discovered to be serially poor historical performance in the stock market during the 2nd half of years ending in a "7". In fact, the period has historically exhibited the worst performance of any semi-annual period of the decadal cycle. Here's what we wrote:

"Given our current year “2017”, we were recently pondering the unfortunate fate that has befallen the stock market during the most recent years ending in a “7”.  There was the market top of 2007, the Asian crisis in 1997 and the crash of 1987.  It got us wondering if this was just some recent fluke – or if there really was a sort of a curse around “7” years.  So we got out our history books (i.e., we scrolled to the left on our chart of the Dow Jones Industrial Average) to check previous “7” years going back to 1900.  As it turns out, 7 does indeed appear to be quite unlucky.

Consider the track record for the back half of “7″ years:

2007: “Just” a 10% drawdown, but also a cyclical market top

1997: Asian Crisis…swift 17% drawdown

1987: “The Crash”…20% decline, with a 41% drawdown

1977: Cyclical bear market…9% decline, with a 15% drawdown

1967: Up 5% for half, but 12% drawdown, all in the 4th quarter

1957: Straight down from July…13% loss, with 20% drawdown

1947: Mostly unscathed…2% gain, with ”just” a 7% drawdown

1937: Major bear market…Down 29% with 41% drawdown

1927: Roaring bull…9% drawdown, but a gain of 21%

1917: Cyclical bear market…22% decline, with a 31% drawdown

1907: Cyclical bear market…24% decline, with a 35% drawdown

So, at first blush the track record looks pretty lousy. But is it any worse than most semi-annual periods? Yes.

At -9.29%, the 2nd half of “7″ years has the worst median return of all half years. In fact, it is one of just 3 halves with negative median returns, along with the 1st half of “0″ years and the 2nd half of “1″ years. And other than the 1st half of year “0″, the median return of the 2nd half of year “7″’s is over 600 basis points worse than any other half year.

Looking at drawdowns, the picture is just as bad.

On average, the 2nd half of year “7″ has experienced a drawdown of more than -20%, much worse than any other half year (FYI, the median drawdown in the 1st half of year “0″ is worse than that of the 2nd half of year “7″, -19.51% vs. -16.83%).

Thus, when we were pondering the rough ride that stocks have suffered over the past several “7″ years, its historical track record is actually even worse. Again, while we are not about to construct a trading system based on this data point, considering the overwhelming evidence, it does at least have our attention.

So, while the stock market remains in an uptrend, and hitting new highs in some cases, we do have an open mind that it may get “unlucky” at some point in the back half of this year."

Well, halfway through this supposed "worst semi-annual" period, stocks are no worse for wear thus far. In fact, the market is in the midst of a historically broad-based, involatile and relentless rally. So perhaps the "7" curse has been sidestepped?

Not so fast.

As the 4th quarter gets under way (and just in time for Friday the 13th), we took a fresh look at performance in "7" years. What we discovered is that the lion's share of the poor-performance during "7" year 2nd halves actually took place during the back half of those periods, i.e., the 4th quarter.

Specifically, of the -7.88% average historical return during the 2nd half of "7" years, a full 730 basis points, or -7.30%, of the loss took place in the 4th quarter alone. That ranks it as the worst average performance of any quarter of the decadal cycle.

Further, of the -21.69% average historical drawdown during the 2nd half of "7" years, 15.93%, or nearly 1600 basis points, took place in the 4th quarter alone. Not surprisingly, that equates to the worst average drawdown of any quarter of the decadal cycle.

Is there a silver lining? One small one is the fact that due to a few out-sized losses, e.g., 1987 and 1937, historical median returns and drawdowns for the quarter are slightly less horrific. However, as the yearly rundown listed above can attest, the period has still exhibited consistently weak performance.

A more profound and perhaps relevant silver lining, though, is the present structure of the overall stock market. As mentioned in the opening, the recent rally has been broad-based and has delivered just about every major market average to all-time high ground. But will this combination of solid internals and price momentum be enough to stave off the "7" year, 4th quarter curse?

If you’re interested in the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. TLS is currently running a 30th anniversary 1987 Crash Commemoration SALE, offering a discount of 22.6% -- the equivalent of the Dow's 1-day drop on October 19, 1987. The SALE ends October 22 so considering the discounted cost and a potentially treacherous market climate forthcoming, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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This week has seen yet more examples of poor internals despite new highs in the major averages.

Last week, we highlighted 2 recent potential examples of a weakening in the “internals” of the stock market rally. Again, by internals, we are referring to the amount of participation in the rally as measured by statistics such as advancing vs. declining stocks,  advancing vs. declining volume and new 52-week highs vs. 52-week lows. The broader the participation, the stronger the foundation in the rally. Last week’s posts demonstrated some possible cracks in what has been a pretty solid foundation.

Today, we highlight another example of potential internal cracks, similar to those mentioned last week. This one involves the Dow Jones Industrial Average (DJIA), which has been on a roll of late, setting now 7 consecutive all-time highs. Yesterday’s new high was interesting in its lack of participation from the rest of the market.

Specifically, the DJIA hit a 52-week high, yet amazingly just 40% of issues on the NYSE advanced and just 40% of volume went towards advancing stocks. That was just the 10th time ever that we have seen such weak internals occurring with a new high in the DJIA (FYI, today’s new high might mark the 11th such day, pending official breadth stats).

As we queried last week, is this simply a 1-day coincidence, or is it a genuine warning sign regarding a weakening rally foundation? Certainly, it is easier for a 30-stock index, especially a price-weighted one, to generate these types of divergences or distortions. There just needs to be a few stocks, e.g., AAPL, that happen to be up big on the day (due to earnings or whatever) in order to overcome a weak day in the overall market.

However, when we begin to see clusters of these types of days, it starts to become less of a coincidence and more of a concerning trend. Are we at that point of warranted concern now? In a premium post at The Lyons Share, we address that question by studying those historical occurrences above and the DJIA’s aggregate subsequent performance. We also look at some additional, perhaps more alarming, angles to this recent phenomenon, all in an attempt to come to an informed, quantitatively-backed conclusion.

If you’re interested in this “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. Thanks for reading!

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There is some evidence to suggest that stock investors would be well served by NOT selling in May and going away this year.

One of the most famous of all of Wall Street’s trading bromides is “Sell In May & Go Away”. Of course, the saying refers to the tendency of stocks to perform worse during the 6 months from May through October than they do from November through April. Perhaps the reason why it is still so popular is that, unlike some of Wall Street’s other sayings, there is actually solid historical evidence to back it up, including recent history.

Specifically, here are the average returns in the Dow Jones Industrial Average during the 2 periods since 1900:

November-April: +5.45%

May-October: +1.61%

Not only does the average return for the May-October period lag badly, but the consistency of positive returns has been much less reliable:

November-April: 69% Positive Returns

May-October: 61% Positive Returns

Plus, as mentioned, unlike many seasonal tendencies that lose their effectiveness over time as the edge gets arbitraged away, the Sell In May pattern has held true even as of late. For example, 6 of the last 7 years, 10 of the last 12 years and 18 of the last 23 years saw the Dow stronger from November-April than from May-October.

So is there any thing that bulls can hang their hat on during the forthcoming 6 months? Well, first of all, despite the fact that May-October has generally lagged its 6-month counterpart, the historical average return for the period is still positive. So it’s not like the whole period has been a disaster, though there have certainly been some of those.

In parsing the data, however, we have found one historical trend that may actually encourage traders to stay invested during this year’s May-October period, rather than the mere expectation that their investments will just be biding their time. It is based on the performance of the just completed November-April period -- specifically, the Dow’s strong (but not too strong) +15.4% performance.

Here’s what we mean. We again went back to 1900 and measured the return in the Dow during every November-April period. We then broke the returns down by those less than -15%, those greater than 20% and all 5% intervals in between. We then looked at the subsequent May-October periods to see if there was any correlation.

As it turns out, negative November-April returns had a strong tendency to lead to negative May-October returns (except for the very worst years which typically saw mean reversion). Conversely, positive November-April returns had a strong tendency to lead to positive May-October returns. And the historical sweet spot for May-October periods came following November-April returns ranging between 15%-20%, e.g., this year.

As the chart reveals, following the 13 November-April periods with returns between 15%-20%, the average May-October return has been +9.64%. That, again, compares with an average return during all May-October periods of just 1.61%. Furthermore, 11 of the 13 years saw positive returns from May through October.

Now, there are no guarantees in financial markets. As recently as 2011 saw this tendency fail when the Dow lost 6.7% during the May-October period (with a drawdown that was much worse) following a November-April period that gained more than 15%. Furthermore, who’s to say these returns aren’t just completely random anyway?

We will say that this seasonal tendency is far down on the list of decision-makers for us as it pertains to these upcoming 6 months. We have our models and indicators that we track which, as always, will guide our investment posture. That said, given the negative ink paid toward the “Sell In May” period (and deservedly so), at least this is some evidence to suggest that, for this year, stocks could instead Excel In May.

Like our charts and research? Get an All-Access pass to our complete macro market analysis, including tons of charts and ideas like this EVERY DAY, at our new site, The Lyons Share.

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Volume in stock ETF’s designed to rise when the market falls has dried up significantly in recent days; is it a warning, or just noise.

We have been mentioning recently that one of our concerns regarding the stock market is the elevated, and nearly consensus, bullishness among market participants. Now, there are 2 categories of sentiment: what investors say they are doing and what investors are actually doing. The former includes surveys like the popular AAII and Investors Intelligence versions. We prefer the latter category, i.e., gauges of what investors are actually doing with their money. As they say, money speaks louder than words, and it is typically so in the financial market. If true, then sentiment may be looking a bit frothy right now, at least according to our Chart Of The Day.

The ChOTD shows the daily amount of volume traded in inverse ETF’s, expressed as a percentage of total exchange volume (notes: a) the series measures a group of popular inverse ETF’s that we’ve tracked for many years and is not inclusive of all such funds; b) we first saw this concept explored by Jason Goepfert of SentimenTrader.com). These inverse ETF’s, of course, are funds that are designed to move opposite a particular stock index. Traders use them as an equivalent to shorting the market, either as a hedge on their portfolio or as an outright downside bet on stocks. Like other inverse products, volume is generally elevated near market lows as traders get particularly fearful, or nervous. On the flip side, volume normally dries up substantially near market tops as traders become complacent, or less concerned about downside risk. The latter condition may be the case right now.

As the chart reveals, relative to overall market volume, the volume traded in inverse ETF’s on Friday, March 17 was the lowest that we’ve seen in nearly 10 years.

So is this indicator screaming “TOP!!”? Perhaps, but it is not so simple. First and foremost, Friday was expiration for a number of options and futures contracts. As such, volume in general was extremely elevated, especially compared to recent days and weeks. This is common for expiration days. It is also a factor in depressing the relative inverse ETF volume figure on Friday, as we have seen on expiration days the past.

But how much of a factor was it? And is this just a one-day wonder, or part of a larger trend? That is, have traders been overly aggressive in trimming their hedges at this point?

We do a “deep dive” into the inverse ETF sentiment picture on our new “all-access” site, The Lyons Share, where members get our full research reports -- as well as our complete macro market analysis EVERY DAY.  If you find the original research we share here helpful and enjoyable, we think you’ll get a ton of value from The Lyons Share.

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