Time to Rally? Look no Further than Seasonality Patterns for Clues

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.

Name Your Own Price

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.

September Market Recap Video

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.

https://youtu.be/6xHKyibY1Z0

ADHD

The chart below shows the average investors holding period for stocks from just before the great depression until now.  I don’t know if the recent declines are more a reflection of the increase in the use of HFT computers or really echo investor’s (and society in general) shortening attention span. It’s likely a combination of these items and more.  Sadly and in spite of the direct correlation with performance, investors time horizons continue to shrink

One of the consequences of such a short investment time horizon is that investors have begun to fear short-term market events and volatility as much or more than the factors that shape prospects for long-term economic and profit growth that drive stocks over the longer term. Ironically short term time horizons add to the volatility, the exact same thing these skittish investors are trying to avoid.

India ... on the Ropes

Below is a chart of India’s Bombay Sensex index. You can see they broke out of a sideways consolidation in October of 2013. For the next 2 ¼ years, price rose almost 50% topping out in March of this year. Since peaking, it has been a choppy downward move creating negative momentum divergence and eventually gapping down through the 3 year (blue) uptrend line.  Currently the moving averages are bearishly configured, pointing down and signaled a death cross in early May. Two months later it found at least a short term bottom stopping exactly where you would have expected, at the upper red horizontal support line. Looking to the left of where we are today we see that price has essentially gone nowhere over the past 19 months and has formed multiple different bearish topping patterns telling us there is a lot more downside if this support does not hold. 

Like so many investments I am watching, this is do or die time. Will price bounce off current support and move higher or will it consolidate for a few more weeks or months and then finally give way under its own weight with an ultimate target at the lowest red horizontal support line some 20% below?

Again, if you look left to the left side of the chart just below the upper support line you will notice there exists very little supply of buyers who might be available to step in and cull any move to the downside until you reach the target zone. As such any confirmed close below the 25000 level will likely be followed by a swift and intense move lower. While I like India’s long term outlook, the short to intermediate term has me leaning neutral to bearish.