But, How Long Can Stocks Stay This Hot?

The first quarter has been especially profitable over the last few years

by Joe Bell

Published on Jan 3, 2015 at 9:25 AM
Updated on Jun 24, 2020 at 10:16 AM

It was an interesting -- albeit relatively quiet -- holiday-shortened week on Wall Street. The major market indexes flirted with record highs and wrapped up a stellar 2014, but ended the week and the month mostly lower. So, what's in store for 2015? Schaeffer's Senior Equity Analyst Joe Bell, CMT, outlines some potential market-moving events for the short- and long-term, while our Senior Quantitative Analyst Rocky White breaks down historical first-quarter returns.

  • The technical pattern on the radar
  • The sentiment stat that favors the bulls
  • A closer look at a pair of bullish streaks on the SPX and Dow

Finally, we close with a preview of the major economic and earnings events for the week ahead, plus our featured sector.

Notes from the Trading Desk: What We're Watching at the Start of 2015
By Joe Bell, CMT, Senior Equity Analyst

After a lot of ups and downs, patient long-term investors were rewarded with a pretty nice year in 2014. The S&P 500 Index (SPX - 2,058.20) netted a profit of 11.4%, the Dow Jones Industrial Average (DJI - 17,832.99) gained 7.5%, and the tech-heavy Nasdaq Composite (COMP - 4,726.81) surged 13.4%. Small-cap underperformance was one of the big stories of 2014, with the Russell 2000 Index (RUT - 1,198.80) managing only a 3.5% profit. The other big story was the bond rally that almost no economist predicted. Higher rates were assumed to occur by almost everyone, but after a 23% gain in 2014, we once again see how dangerous it can be to blindly follow crowd sentiment.

Although the equity market had a nice year in 2014, the same can't be said for the past week. The momentum that carried us during the second half of December came to a screeching halt during this holiday-shortened week. Although volume was dreadfully low, we saw the bulk of the weekly loss occur on the final day of the year. After an early bounce to open the first day of 2015, selling gave way and the S&P ended the week with a notable 1.5% decline.

Typically, the second half of December has been bullish, and this year was no exception. Despite their underperformance during much of 2014, small-caps led the advance off the mid-December bottom. During this week's decline, it is also important to note that small-caps underperformed during the pullback as well.

After briefly making a new all-time high on Wednesday, the RUT finished Friday 1.9% off its weekly high. This retreat left the index back below the 1,200 mark, which is near the site of its March and June 2014 peaks. On a shorter-term basis, the 1,180-1,190 area is the site of former resistance in September, November, and December 2014. This could be a logical area of support from buyers who are looking for an entry point. (Click chart to enlarge.)

Daily Chart of RUT since January 2014 with 50-day and 200-day Moving Averages
Chart courtesy of StockCharts.com

The S&P didn't quite make it to the 2,100 level before reversing course mid-week. The Dow briefly eclipsed the big 18,000 level this week, but finished well below this round number by Friday's close. (If you didn't catch it already, Schaeffer's Senior Quantitative Analyst Rocky White did an interesting study on the significance of round numbers in last week's Monday Morning Outlook; be sure to check it out.)

As Schaeffer's Senior VP of Research Todd Salamone discussed in last week's MMO, the S&P MidCap 400 Index (MID - 1,451.31) broke out above the 1,450-1,460 area in December, a level that represents the neckline of a bullish inverse "head and shoulders" formation. This past week, MID has pulled back to this former level of resistance, which could now be a potential level of support. This will be an area to watch in the weeks ahead. (Click chart to enlarge.)

Daily Chart of MID since January 2014 with 50-day and 200-day Moving Averages
Chart courtesy of StockCharts.com

On the sentiment front, we have continued to see a lack of hedging from institutions in recent weeks. An extremely popular hedge for institutions and hedge funds are CBOE Volatility Index (VIX - 17.79) calls. The VIX 20-day buy-to-open call/put ratio is down to 1.0 -- the lowest level since April 5, 2012. In other words, there aren't a lot of people buying hedges on their portfolios right now. These low-hedging ratios could leave stocks vulnerable to headline news, and may be somewhat related to the quick-trigger selling we experienced late last week.

VIX 20-day buy-to-open call-put volume ratio and SPX since 2013

Another hedging indicator we monitor is the 20-day buy-to-open put/call ratio of the SPX, SPDR S&P 500 ETF Trust (SPY - 205.43), PowerShares QQQ Trust (QQQ - 102.94), and iShares Russell 2000 ETF (IWM - 118.93). These are some of the more popular hedges on portfolios, and traditionally there are more puts than calls purchased on these exchange-traded funds (ETFs). This ratio is now at its lowest level since June 2014. June was not a short-term top in the market, but the momentum from May definitely slowed a bit around this time.

Taking a step back, the major market trend is still higher, and there is one sentiment indicator that bulls should be encouraged by: the 10-day equity-only buy-to-open put/call ratio on the SPX, which rolled over recently from a high level, and made a sizeable move downward this week. When this ratio rolls over, it has tended to coincide with strong upward price action, as bearish sentiment gives way to bullish sentiment and cash flows off the sidelines.

Buy (to open) equity put/call volume ratio since June 2013 with SPX

As we enter 2015, there will be a lot of factors affecting the market. The Fed will continue to remain in focus, as investors try to glean just when exactly rates will be increased and by what amount. Policymakers have continually stated that their decisions will be data-dependent, and most market participants are not anticipating a rate hike until at least the second half of 2015.

Oil will continue to grab the headlines, as prices have plummeted during the past several months. Russia's uncertain economy, Greece's political chaos, Europe's economic issues, and China's slowdown all could create market-moving headlines in the coming months. The strong U.S. dollar and its impact on U.S. multinational companies will also be something to keep an eye on in 2015. Finally, when will this downtrend in Treasury rates end? Just remember that sometimes trends last longer and go further than most people believe.

In the short term, the market gets back in the swing of things this week with a lot of economic data on tap. On Wednesday, the ADP employment data, crude inventories report, and Federal Open Market Committee (FOMC) meeting minutes will be released, and on Thursday comes the weekly jobs figures. We will end the week with the December monthly jobs report. All of these data points have the possibility to create volatility as participants start getting back to the market after the busy holiday season.

Indicator of the Week: Seasonality & Streaks Heading into 2015
By Rocky White, Senior Quantitative Analyst

Foreword: Happy 2015. The rally that started in 2009 continued last year, and we find ourselves in the midst of a couple of bullish streaks. There's an impressive quarterly winning streak on the S&P 500 Index (SPX) and a similarly impressive yearly streak on the Dow Jones Industrial Average (DJI). I'll talk a little about these below. First, though, I give some numbers on how stocks have typically performed in the first quarter.

First-Quarter Seasonality: This table summarizes the quarterly returns on the SPX over the past 50 years. The fourth quarter has been the best quarter when looking at the average return and the percentage positive. I would say the next-best quarter has been the first quarter, averaging a 2.31% gain and positive 60% of the time.

SPX Quarterly Gains over Last 50 Years

The chart below shows the average first-quarter path to that 2.31% return I just mentioned. According to the chart below, the best times for short-term traders to buy over the next three months is around Jan. 24, or at the very end of February (these points are marked on the chart). The market has tended to really take off around these times.

SPX Best Times to Buy in First Quarter

While the first quarter hasn't been too bad over the long run, recently, it has been especially good for stocks. The table below summarizes the quarterly returns over just the last five years. As you can see, the first quarter is the only quarter positive in each of the last five years, averaging a gain of 6.72%.

SPX Quarterly Gains over Last 5 Years

Streaks: While the first quarter for the SPX is on a five-year win streak, the index in general hasn't seen a negative full quarter since 2012. Specifically, the fourth quarter of 2012 is the last time the index lost points in a quarter. We have SPX data back to 1928, and this is just the fourth time we've seen eight straight positive quarters.

The table below shows some data on the past streaks. One notable point is that a streak never ended at eight quarters. In the other three occurrences, the streak lasted at least two more quarters. In two of the three prior streaks, the SPX underperformed over the next year (3.85% and 2.98% is less than the typical yearly return for the SPX). But then the last time the quarterly streak made it to eight, in 1996, stocks exploded higher with the index gaining over 30% in the next 12 months.

SPX After 8 Straight Positive Quarters

While the SPX has an eight-quarter winning streak, the Dow streak is only three quarters. The Dow lost points in the first quarter of 2014. However, the Dow does have a six-year winning streak to its credit, which the SPX can't boast (the SPX was down a fraction of a percent in 2011).

Going all the way back to 1900, it's only the second time the large-cap index was up six years in a row. The only other time was 1991 through 1996. That streak went on for a total of nine years, ending in 2000, the bursting of the dot-com bubble. Hopefully, when the current streak ends, it's a much softer landing.

This Week's Key Events: Fed Minutes, Payrolls On Tap
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.

Monday

  • The week kicks off with the motor vehicle sales report. There are no notable earnings on tap.

Tuesday

  • On Tuesday, the Institute for Supply Management's (ISM) non-manufacturing index and factory orders are slated for release. Commercial Metals Company (CMC), Lindsay Corp (LNN), and Sonic (SONC) will step into the earnings confessional.

Wednesday

  • ADP's national employment report, the Federal Open Market Committee's (FOMC) meeting minutes, the international trade balance, and weekly crude inventories come out on Wednesday. Micron Technology (MU), Greenbrier (GBX), Monsanto (MON), and SUPERVALU (SVU) will release their earnings.

Thursday

  • Weekly jobless claims and the Fed's consumer credit report will be released on Thursday. Apollo Education Group (APOL), Bed Bath & Beyond (BBBY), Constellation Brands (STZ), Global Payments (GPN), Ruby Tuesday (RT), and Schnitzer Steel (SCHN) will announce earnings.

Friday

  • The Labor Department's monthly report on nonfarm payrolls and the unemployment rate comes out on Friday, along with wholesale inventories. Infosys (INFY), Acuity Brands (AYI), and AZZ Incorporated (AZZ) will step under the earnings spotlight.

And now a sector of note...

Retail
Bullish

The retail sector has been in the headlines recently, with holiday shopping only recently concluding. While signs suggest retail sales figures will most likely meet forecasts, expectations are not exactly at euphoric levels, even as the SPDR S&P Retail ETF (XRT) carves out new all-time highs. In fact, the exchange-traded fund (ETF) notched its loftiest mark on record -- $97.15 -- this past week. What's more, the shares are currently sitting atop several layers of previous resistance, including $90.12 -- a 10% premium to XRT's mid-October closing low of $81.93. Plus, the round-number $90 level is roughly double the ETF's 2007 and 2010 resistance level at $45, and could now reverse roles to act as support. It should be noted, the $97 area could serve as a short-term speed bump, as it is 20% above multiple lows near $81 the ETF has panned since April.

On the sentiment front, two-thirds of the 69 retail stocks we follow are trading above their 80-day moving average. Nevertheless, the typical short interest-to-float ratio among these equities is nearly 13%, which would take more than five sessions to cover, given average daily trading volumes. Also, fewer than half of the brokerage firms covering these names have handed out "buy" ratings. All things considered, retail stocks could be poised to run higher on potential short-covering activity and/or a round of analyst upgrades.

Daily Chart of XRT since January 2014

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