/ June 09 / Weekly Preview
-
Monday:
N/A
---
Tuesday:
N/A
---
Wednesday:
Inflation Rate YoY (2.5% exp.)
Core Inflation Rate YoY (2.9% exp.)
---
Thursday:
Initial Jobless Claims (239K exp.)
PPI MoM (0.2% exp.)
---
Friday:
Michigan Consumer Sentiment (53.5 exp.) -
Monday:
N/A
---
Tuesday:GameStop
Dave & Buster's
GitLab
---
Wednesday:
Chewy
Oracle
---
Thursday:
Lovesac
Adobe
RH
---
Friday:
N/A
April Correction Resolved
As we return from a well deserved partial summer break, it’s time to review the market’s progress since our last analysis. Furthermore, the Stock Screener is now available in our V2 app, and a video presentation will be put together shortly for this instrument.
Most notably, during the previous period, the market has been able to successfully test support at the 200-DMA and S1 cluster. A slight consolidation period has followed, but now there is nothing to stop equities from reaching all time highs. On Friday the market broke out of the ongoing consolidation process that has been in place since May 12th. The good news is that bullish breakouts confirm bullish momentum and suggest markets will trade higher into the next resistance level (M-Trend, $621). Indices remain overbought short-term, but it is not uncommon for markets to stay overbought longer than most expect.
Institutions have largely sit out this rally and we are now trading in a low volatility regime, where the most likely outcome is a steady grind higher. As such, awaiting a pullback to increase portfolio exposure becomes a harder test of patience, as it could be a while longer before it occurs.
To illustrate that last point, Dark Pool traders have sold into the rally over the past month (including over the 1 and 2 week periods), as the average BUY ratio sits below 45% for the most important and liquid stocks in the S&P 500.
The corollary to this observation is that dips are much more likely to be bought at this stage, absent another “cataclysmic” news cycle.
Since 1950, the S&P 500 has typically seen lower returns from May to October (around 1–2% total gain) compared to the November to April period (about 6–7% gain). Reduced trading volumes, mid-year economic slowdowns, and summer vacations among investors have the tendency to suppress stock market gains.
However, the “sell in May” adage shouldn’t be followed blindly. Global trading, modern market dynamics, and technological advancements have lessened its relevance, though it still highlights seasonal market trends and the need for caution during slower months.
June has historically been one of the weakest months for U.S. stocks. Since 1950, the S&P 500’s average June return is nearly flat at about 0.1% (with a similar median gain), with just over half of Junes ending positive. June is the second-worst month for returns, after September, averaging only about 0.06% since 1957. This weak performance contributes to the “sell in May” saying, as early summer often delivers below-par returns.
In recent decades, June hasn't always been a weak month for the S&P 500, with gains in 12 of the last 20 Junes and 8 of the last 10. Seasonality is a trend, not a guarantee. A key factor is May's performance: a strong May, with S&P 500 gains of 5% or more, often leads to a positive June, occurring in five out of six cases with an average return of about +1.2%, compared to the overall June average of roughly +0.7%.
A large May rally frequently signals momentum into June, countering typical summer weakness. When May rises over +5%, June has an 83% chance of gains and a median return of 1.2%.
It’s usually the slower growth, defensive sectors which tend to do well in June (Utilities, Healthcare, Consumer Staples, Real Estate). According to the options market, we should expect a rotation into Healthcare (XLV) and Energy (XLE), as these sectors hold the best risk-reward ratio for the month. Conversely, Industrials (XLI) and Tech (XLK) look to be the most vulnerable.
From a Factors perspective, small-cap and mid-cap stocks, such as those in the Russell 2000 and S&P 400 indices, often struggle during the summer months. They tend to lag behind large-cap stocks during late-cycle phases, pre-recession periods, or economic slowdowns, as observed currently. This is due to their greater sensitivity to economic shifts, particularly in earnings. For instance, the Russell 2000 closely tracks the NFIB small business confidence index, reflecting how small and mid-cap earnings are heavily influenced by economic conditions.
Below, we’ve averaged IWM and MDY (small and mid caps) and compared the returns to SPY for the past year. While small caps surged following Trump’s win in November, the April decline and subsequent rebound have been unkind to their performance. We expect this to be the case going forward as well.
Emerging Market equities, often seen as riskier, typically underperform when global risk appetite slows, which frequently aligns with summer months and economic uncertainty. A decelerating U.S. economy can negatively impact EM through lower export demand and declining commodity prices, affecting commodity-exporting EM countries. Moreover, heightened risk aversion can trigger capital outflows from EM stocks, putting pressure on their equities and currencies. Historical summer sell-offs, such as the 2015 China market scare in August or the 2018 EM currency fluctuations are notable examples.
A critical factor for international and emerging market stock performance is the U.S. dollar's value. There’s an inverse relationship between the dollar and international/EM stocks. Foreign countries hold surplus reserves in U.S. dollars, so when the dollar weakens, they tend to repatriate these funds (withdrawing from U.S. markets), and the opposite occurs when the dollar strengthens. Below, we’ve charted the UUP ETF (proxy for the USD) in green, and the average of EEM and EFA ETFs (non-US stocks). The negative correlation is clear.
On its own, the dollar deeply oversold on multiple levels. Technicals USD show a supply/demand equation bordering on the lower band. For the medium term, this should be a reasonable buying opportunity for the USD, and a selling one for EM stocks and currencies.
Finally, bonds warrant consideration in a summer slow-growth investment approach. Unlike stocks, bonds often perform well during economic slowdowns. When inflation is stable and growth weakens, interest rates typically decline, lifting bond prices, especially for high-quality options like U.S. Treasuries. Historically, adding bonds from May to October has enhanced risk-adjusted returns. The Stock Trader’s Almanac highlights that shifting from stocks to fixed-income in summer and back to stocks in winter has been profitable over time. While we don’t advocate a full portfolio overhaul, bonds provide a defensive buffer during summer downturns.
Treasury bonds serve as a safe haven, mitigating portfolio losses, while investment-grade corporate and municipal bonds tend to retain value better than stocks in such conditions. High-yield (junk) bonds, however, move more in tandem with equities due to issuer risk. Still, junk bonds can outperform stocks—declining less in milder slowdowns—owing to their interest payments.
TLT, the long term government bonds ETF, has stabilized in the recent year and managed to hold above a key support level following multiple attempts to break lower. If we view this chart pattern as a “triple bottom”, there are large prospective gains for TLT ahead.
Our Trading Strategy
While our portfolio has suffered minimal alterations as of late, we have handily beat our benchmark so far this year. Despite holding quite a large cash quantity, our exposure has been enough to outperform the 60-40 target.
This week, we will rebalance our equity holdings to better track the Millennium Alpha portfolio and bring selected holdings to target in anticipation of a “grindy” market ahead. There is clearly room to buy the dip if one occurs, as institutions need to step back in at some point.
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!