Monday Morning Outlook

Short-Term Risks to the Bullish Case

Taking a historical look at what to expect in the second quarter

by 3/29/2014 8:11:36 AM
Stocks quoted in this article:
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Indicator of the Week: Second-Quarter Seasonality
By Rocky White, Senior Quantitative Analyst

Foreword: The second quarter of 2014 begins on Tuesday. In the first quarter so far, the S&P 500 Index (SPX) is up by less than 1%. If it is still positive after Monday, it will be the fifth consecutive positive quarter (more on that below). The table below summarizes each quarter for the SPX over the past 40 years. The second quarter averages a respectable return of 2.78%. Going by standard deviation, the second quarter has been the least volatile of all the quarters.

SPX Quarterly Returns Over Last 40 Years

Second Quarter by Month: Breaking down the second quarter by month shows that it has typically started off pretty strong. In fact, April is the top-performing month of the year over the past 40 years, going by average return. May has averaged a return of 0.67% (ranking seventh out of the 12 months), and then June is even weaker, having averaged a return of 0.39% (ranking eighth).

SPX Returns By Month Over 40 Years

Quarterly Streaks: I mentioned earlier that if the SPX doesn't pull back too much on Monday, this will be five straight positive quarters for the broad-market barometer. Specifically, the index needs to stay above 1,848.36 to stay out of the red. The table below looks at other times the SPX was positive five quarters in a row. In the past, five straight positive quarters has been a bad omen. Four of the five times the next quarter was lower, ending the streak at five. One year after, the index has averaged a loss of about 4%. However, that one time it was positive, the quarterly win streak lasted for the next two years! That streak went all the way until the second quarter of 1998, reaching 14 consecutive positive quarters.

SPX After Five Straight Positive Quarters

Best and Worst Second-Quarter Stocks: Finally, the two tables below show which stocks have performed the best and worst in the second quarter over the past 10 years. I looked at all optionable stocks that have at least eight years of returns and met certain liquidity criteria, and summarized their second-quarter returns. The first table shows all stocks where at least 80% of the returns were positive. NRG Energy Inc (NYSE:NRG) was the only stock that was a perfect 10 out of 10, as far as positive second quarters go. The second table shows the worst second-quarter stocks over the same time frame, with just one or two positive quarters.

Best 2Q Stocks Over Past 10 Years

Worst 2Q Stocks Over Past 10 Years

This Week's Key Events: All Eyes on Payrolls
Schaeffer's Editorial Staff

Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.


  • The week gets started with the Chicago purchasing managers index (PMI) and the Dallas Fed's manufacturing survey. Cal-Maine Foods (CALM) will release quarterly earnings on Monday.


  • Due out Tuesday are motor vehicle sales, the ISM manufacturing index, construction spending, and Markit's purchasing managers manufacturing index (PMI) for March. Apollo Education Group (APOL) will step up to the earnings plate.


  • The Automatic Data Processing (ADP) employment report, factory orders, and regularly scheduled crude inventories update will be released Wednesday. Monsanto (MON), Acuity Brands (AYI), and Texas Industries (TXI) will report earnings.


  • Economic reports slated for Thursday include international trade data, weekly jobless claims, and the ISM non-manufacturing index. Micron Technology (MU), Perry Ellis International (PERY), and Schnitzer Steel (SCHN) will step into the earnings confessional.


  • The week closes out with the Labor Department's nonfarm payrolls report for March, as well as earnings from CarMax (KMX).

And now a sector of note...


The financial sector got some good news last week, after the Federal Reserve approved 25 of 30 capital plans submitted by large-scale U.S. banks. The Financial Select Sector SPDR Fund (XLF) continues to churn north of the noteworthy $22 mark, which emerged as support for the fund. This area represents roughly double XLF's 2011 low, and it acted as a sticking point for XLF earlier this year. Meanwhile, there's plenty of room for sentiment to improve toward the banking sector. Put buying on the XLF has accelerated, even among strong price action -- a sign that certain stocks under the financial umbrella could be under accumulation by hedged market participants. Although more than two-thirds of the finance stocks we track are trading above their respective 80-day moving averages, the average short interest ratio for the group stands at an elevated 3.14 days to cover. Likewise, the mean Schaeffer's put/call open interest ratio (SOIR) has risen to 1.72 from 1.18 last week, underscoring a growing appetite for short-term puts over calls on these banking names. If XLF continues to display promising price action, a capitulation by the bears could contribute to additional upside.

Weekly Chart of XLF since August 2011

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