Looking for LUV in All the Right Places

After failing at 3 attempts to break and hold above the $66 level late last year, Southwest Airlines stock, LUV, was eventually taken out to the woodshed and beaten with a stick. Price fell ~25% as sellers had their way until it hit the $50 mark where willing buyers showed up in numbers and provided a respite for the decline. As you can see in the chart below that support level acted was important the past too as the 2017 correction found a bottom twice in exactly in the same area.

Since bottoming in May, price has retested that same $50 level and each time buyers have stepped in pushing prices higher, where sellers take back control at $53. For now, LUV is stuck in a $3 range and looking for a catalyst for that to change.

Picking bottoms is hard but I have found that a downtrend followed by sideways consolidation that last for at least 6 months and then break higher provide a much high probability trend reversal follow-through and investment gain opportunity.

It doesn’t mean it won’t turn out to be a good investment opportunity if the consolidation is cut short. In fact, in the case of LUV, if the market wants to move higher from here right away, the first upside target is the 200 day moving average, a near 7% gain.  A bullish market tailwind that would push prices even higher, point to the chance of it filling both open gaps made during the most recent decline which makes it a much more compelling (20+%) opportunity.  

When 10 is More than 100

Through the first half of the year, as you can see in the chart below, just 10 stocks (2%) of the SP500 index have made up more than 100% of the indexes return this year.

While this is not what stock bulls want to see, it isn’t necessarily negative … at least not yet. Ideally, the more stocks participating and contributing to the indexes (positive) return the better. What would be healthy for higher future stock prices is to see strength rotate from the above 10 companies and across a wider breadth of not just companies but also sectors.

When Bad Turns Good - Mid-Term Election Year Stock Market Performance

Midterm election years tend to be the weakest of all in the 4 years of the Presidential cycle for the US stock market as you can see in the 115 year chart below.

Zooming in on the midterm election cycle year details in the chart below, we see they are marked by a stock market peak in the spring and followed by a yearly low in the fall.

Since 1913, on average, the DJIA has fallen more than 20% from the post-election year high to the midterm election (subsequent) year low. So far the major US stock market indices have pulled back 10% or so earlier this year falling short of the historical average. Assuming 2018 follows a similar path of the past, it appears like we have not likely seen the end of this pullback. Keep that in mind if we get additional selling pressure and probe lower in the coming months. 

What makes this interesting as investors is that since 1914, on average, the DJIA has subsequently gained more than 47% from the midterm election year low to its high the following year. Obviously, the only way to capitalize on this historical opportunity is to insure you have dry investment powder and a plan for whenever it may materialize.

I probably don’t need to remind everyone but the numbers above are based purely on what the historical averages suggest could occur, not will occur. As such there is risk in following a strategy even though it provides a historically higher statistical outcome.

June 2018 Charts on the Move Video

Yawwwwwwwn.   Sideways chop within the Jan -Feb consolidation range until we see a catalyst. I thought maybe trade war fears would be enough to break the trend but apparently not.  Bulls are still in charge.  I don't expect to see a resolution for months so until then, sit back, enjoy the summer and check out this month's Charts on the Move video at the link below  ...

https://youtu.be/FLo_AyzWVeA

Inversion

When economist talk about the “yield curve” they are really just referring to a plot of yield versus varying bond maturities. An inverted curve is when the difference between the yields of long term bonds (usually 10 year) rates to short (usually 2 year) is negative (short term yields are higher than long). This is a very closely watched benchmark by knowledgeable investors because we know every recession that has occurred in the US over the past 60 years has been preceded by an inverted yield curve, according to research from the San Francisco Fed. Curve inversions have correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession, according to the Fed’s data. 

While the US yield curve is still positive (NOT inverted) the global curve just recently inverted for the first time since 2007 where its inversion lasted briefly (less than 6 months).  I have not seen any studies that show if global yield curve inversion has the same strong correlation to economic slowdowns (recessions) as it has in the US, so the implications of the crossover may or may not be of significance.   

As a minimum though, it raises a warning flag for investors to take the portfolio off autopilot and have a plan. There is no question, a recession, if it were to ensue around the world would likely drag the US along. Economic slowdowns are rarely ever good for stock prices and when combined with us being in the latter stages of the 2009 economic recovery cycle while stock prices are at very extended valuations, next year looks like it could be shaping up to present challenges investors have not had to face in many years.