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December is the number three Dow Jones Industrials and S&P 500 month since 1950, averaging gains of 1.6% and 1.5% respectively. It’s also the third-best NASDAQ (since 1971) month. It is the second-best month for Russell 2000 (since 1979). The market rarely falls precipitously in December and a repeat of 2018 does not seem highly likely this year. In 2018, DJIA suffered its worst December performance since 1931 and its fourth worst December going all the way back to 1901. When December is down it is usually a turning point in the market—near a top or bottom. If the market has experienced fantastic gains leading up to December, stocks have consolidated in the first half of the month.

In the last eighteen election years, December’s ranking changes modestly to #2 for DJIA and S&P 500, NASDAQ’s slips to fifth place. Small caps, measured by the Russell 2000, have had a field day in election-year Decembers. Since 1980, Russell 2000 has lost ground just once in eleven election-year Decembers. The average small cap gain in all eleven years is a solid 3.5%. The Russell 2000’s single loss was in 1980 when the Prime Rate was 21.5%.

A full blown trade war with China is not in anyone’s interest. President Trump’s negotiating style may be unsettling to the market at times, but neither country is likely to stand on ceremony to save face at the risk to their respective economies and markets. With the market at new highs and up big the first four months this year it is even more prone to short-term weakness in May.

Our overall outlook for the year remains bullish as it has been since our Annual Forecast in December that was followed by a bullish January Indicator Trifecta. The historical strength of Pre-Election Years, which has been self-evident thus far this year, is supported by resilient economic and corporate readings, a dovish Fed clearly done with raising interest rates for the time being and a White House that is supportive of Wall Street. But, as you can see in the chart of Pre-Election Year Seasonal Patterns below, the Dow (black dotted line) and S&P (green dotted line) are already at historical average gains for the Pre-Election year and NASDAQ is way ahead of the pace up more than 20% for 2019 to date.

Ostensibly, the S&P and NASDAQ are on the brink of clearing the last levels of resistance. But the Dow is struggling and Russell 2000 is well off the pace. S&P and NASDAQ made new all-time highs last month, but are straining to hold those levels and there is chatter in technical analysis circles about a bearish double top forming on the S&P and NASDAQ. Also evident in the chart here is the weakness often experienced in the latter part of May. So while we remain bullish on the year, we do expect the market to be weaker during the May soft patch and backing and filing during the Worst 4 Months July-October.

Over the past 29 years the DJIA has declined 19 times and advanced 10 with an average loss of 0.76% near the end of March. S&P 500 has a similar track record. Excluding advancing years, the average decline is right around 1.5% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in any gains and establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third.

Coming into this stretch with March down month-to-date has mitigated losses on several occasions. Last year the market came into the final week of March down 6.0% on DJIA and 4.6% on S&P. Then big gains on Monday March 26 and the last trading day of March trimmed end-of-Q1 losses but did not avoid them completely. Of the 9 times DJIA was down MTD in March since 1990 month-end was up 5 times. For the S&P, the 9 down MTDs were also followed by 5 gains.

Currently, DJIA is down 1.5% for March 2019, but S&P is up 0.5%, so risk is still high for the usual last three or four days of March selling.

The market has been showing is dissatisfaction with the Fed for the past two and a half months now. Today’s market action brought the Dow Jones Industrials, S&P 500 and NASDAQ Composite below their early 2018 closing lows intraday today: Dow 23533, S&P 2581 and NASDAQ 6777.

Only the Dow was able to rally enough at the end of the day to close above its 2018 closing low. S&P and NASDAQ did make new 2018 closing lows today. Two out of three is bad, but the Dow Industrials holding above that low is slightly encouraging – and holds off the dreaded Dow Theory Sell Signal.

If all three violate these 2018 lows more selling becomes more probable as there is little support below that. Next levels of support are found way back at the August 2017 lows around Dow 21700, S&P 2425 and NASDAQ 6200.

The Fed remains the single biggest risk to the market and the economy. As we said in our Market at a Glance last month: “After nearly a decade at zero, a brief pause to evaluate the impact of recent hikes does not seem unreasonable.” Stanley Druckenmiller echoed this in his commentary over the weekend in The Wall Street Journal.

If the Fed goes ahead as planned with its next quarter-point increase this week, or doesn’t raise rates, but conveys or emphasizes that it is data dependent and not committed to more hikes in 2019 and that rates are close to normal and if the market can hold here then Santa Claus has a chance for a ride down Wall Street. Any hints of hawkish rhetoric will not be well received.

March can be a stormy market month and technically we are bound to test the early February lows at some point, we think it is more likely at the latter half of March as end-of-Q1 window dressing and the week after Triple Witching have been notorious weak spots. However, the odds remain in our favor for a solid March and rest of the year if history is any guide.

Market weakness in February is to be expected so, on the heels of an up January with a positive January Indicator Trifecta and a down February we took a look at S&P 500 in similar years. Since 1930 the S&P 500 has been up in January and down in February with a positive January Indicator Trifecta 13 times.

Only three years, highlighted in grey in the table below, had blemishes and all three were war related: 1942 and 1944 were impacted by WWII and the troop increase and bombing of Hanoi in Vietnam turned 1966 into a bear. Civil Rights marches and clashes in March 1965 brought the market down that month.

Today’s release of the upbeat minutes from the Fed’s January meeting (Chair Yellen’s last) was initially received positively by The Street. But then reality sank in. The Fed’s robust economy outlook and continuing commitment to raising interest rates to normal levels stoked trader’s fears of rising interest, triggering a late-afternoon selloff in bonds and stocks that drove the 10-Year Treasury yield up to 2.95%.

Good economic news was bad today and historically stocks tend to struggle in rising rate environments, but these levels are still well below historical averages for the 10-Year Treasury yield and below the lower end for the benchmark yield of around 4% prior to 2008. Nevertheless, this late-day selloff put a dent in the market’s current attempt to reclaim the recent correction and resume the rally back to and beyond the highs.

The market is struggling to reclaim the middle of the uptrend channel that has been in place since mid-November 2016 just after the post-election rally consolidated. After blowing through the upper-end in mid-January, the market pendulum swung quickly through the lower-end during the nine-trading-day 10.2% S&P 500 correction. Then it bounced firmly off the red 200-day moving average intraday the next day. Last week’s rebound delivered a positive crossover in our MACD indicator.

As the market hit its low on February 8 we noticed an encouraging technical reading. The market may have formed a “W” 1-2-3 swing bottom with the February 6 intraday low. Clearing the middle of the “W” high at point 2 (the February 7 intraday high) and closing above it (which it did on February 15 and 16) would be encouraging. In addition, the VIX was significantly lower at the February 8 low than it was at the February 6 low.

Based upon data in the now available Stock Trader’s Almanac for 2018 on pages 98, 107, 121-128, and 138, market performance on the last trading day of November has weakened substantially in the past 21-year period. S&P 500 has been the worst of the major averages, up only 8 of the last 21 years on the last trading day of November –down the last four straight and 13 of the last 19.

We may have to wait until winter 2018-2019 to find out who wins the “Game of Thrones” and what becomes of the Lannisters, Targaryens, Jon Snow and the Starks, but the stock market’s winter rally of 2017-2018 appears to be right on schedule despite fears that the banner rally year-to-date as of Thanksgiving might steal some thunder from the yearend rally, the Best Six Months and next year.

The average gain in all years since 1949 year-to-date as of Thanksgiving for the S&P 500 has been 6.8%. This year the S&P 500 was up an impressive 16% as of the close the last Wednesday before Thanksgiving. In the table below we compare the performance after Thanksgiving in all the years that had above average gains as of close the day before the big holiday.

These exceptional years gains with above average gains YTD through the Wednesday before Thanksgiving show some improvement with average gains from Thanksgiving to yearend up 2.2% for the S&P 500 vs. 1.9% for all years since 1949. Gains for the Best Six Months and full year are also markedly better, but the following year’s gains are slightly below average at 7.6%.