We have written in the past on a notable tendency of the stock markets to reverse course on or about the cardinal points of the year, that being the two solstices and two equinoxes. The cardinal points are March 21, June 21, Sept 21, and December 21. If one views these dates on a 360-degree basis in a 365.24-day solar year, the dates are 90 degrees apart in time, one date to the next, hard right angles. It doesn’t always happen, but there is a tendency for a complete trend change or a quick countertrend move to occur on or about those dates.
As we write this on the first day of summer, the solstice, we see a bounce occurring in equity markets after one of the most severe selloffs in some time having occurred the prior week.
Although the major averages peaked in early January, many stocks had seen their bull market peaks months beforehand. As money shifted away from relative strength losers to the RS winners, the underlying poor health of the market was camouflaged by the major indexes continuing to move to new all-time highs.
Bear markets hide in the strength seen in the major indices. One can see the evolution from bull to bear by following daily the advance/decline numbers and new high/new low numbers.
Money managers are generally not paid to sit on cash, so there is a tendency in an aging bull market, as the broader market participation drops, for portfolio managers to seed cash into large-cap liquid names showing relative strength. It is sort of like the children’s game of musical chairs. As the music plays, fewer and fewer stocks are performing or seats available sit upon, so to say. Eventually, even the relative strength stocks get hit.
Back in November 2021, we noted in the Bear Growls a propensity for financial firms on Wall Street to run into trouble (and their markets to do the same) whenever management constructed, leased, or bought a new building and put their name on it. At the time, we noted that a Singapore based cryptocurrency firm had purchased the naming rights to the former Staples Center in LA in a 20-year 700-million-dollar deal. Transactions like this occur when management projects into the future a recency bias. Everything is great, and the future is assured in the management’s mind, so they make these commitments. History is littered with firms that, after taking possession of a new building, a bear market arrives; the firms then run into hard times or fail, like Drexel, Solomon, Lehman, and Bear Stearns, to name a few. On the day we posted our note on the subject ”Edifice Complex”, Bitcoin was quoted at 57K in dollars. Many were calling for much higher prices, but history argued otherwise.
Over this past 3-day weekend, we took note of several news stories that do not generally show up at market tops but have a propensity to show up near tradeable market lows. In the cryptocurrency world, there was a substantial story about a large crypto hedge fund that was reported to be in trouble and seeking out a financing package to stabilize the fund. Shortly after that news item hit the wires, Bitcoin traded with a 17K handle but recovered by Tuesday to the 21K+ level. As we write, we note a business section story in Tuesday’s NY Post “Crypto Fouls Out”. Again, generally not the kind of story found at market peaks. Sentiment may have found a level for a potential countertrend trade to the upside. If so, stop-loss orders are a must. Anything can happen, as nothing is assured. Digital assets are speculative.
As we stated last week, there is a seasonally weak period for the S&P 500 this week over the last 20 years of data. Caution is warranted.
Looking at our master cycle of 60 years, the S&P 500 found a low for the year in 1962 on June 25, then it enjoyed a summer rally into the fall, after which a decline occurred for a successful test of the year’s low, coincident with the Cuban Missile Crisis. Between the low on June 25 and July 5 of 1962, the index climbed 11% to kick off the summer stock market rally.
Looking at the 90-year cycle, the DJIA in 1932 found a low for the entire 1929-1932 bear market on July 8, 1932. As we made note of last week, that bear market was completed after 1040 calendar days had passed. (1040 is a biblical number). It was a devastating decline.
If we count out 1040 days from February 17, 2021, the high before the pandemic, we get December 25, 2022, close enough to the Winter Solstice for a potential change in trend. If we count out 1040 days from January 4, 2022, the all-time high for the S&P, we land on November 4, 2024, which is close to the presidential election. We make note of both of those dates in our trading calendar.
Trade well and stay safe. JHS
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