Big Picture Review

After ten straight months of higher highs, the S&P500 is poised to put in its first month with a lower high. Granted, February is only three days old, so it’s a bit premature to be talking about end-of-month patterns. Nonetheless, given that the S&P stands nearly 5% below its January high, it’s not unreasonable to assume this will be the month that breaks the long string of higher highs. Is that a bearish omen? History tells us the answer is no. After six months of higher highs, the first month with a lower high is usually a buying opportunity. The table below lists every occurrence since the 1930’s, beginning with the date when the S&P put in a lower monthly high after six higher highs and followed by the performance of the S&P over the following month….

Six Higher Monthly Highs followed by Lower Monthly High
03/30/07… SPX +4.3% one month later
06/30/06… SPX +0.5% one month later
04/30/04… SPX +1.2% one month later
06/30/99… SPX -3.2% one month later (higher close five months later)
03/29/96… SPX +1.3% one month later
05/31/91… SPX -4.8% one month later (higher close three months later)
11/30/89… SPX +2.1% one month later
05/29/87… SPX +4.8% one month later
09/30/86… SPX +5.5% one month later
07/29/83… SPX +1.1% one month later
12/31/80… SPX -4.6% one month later (higher close three months later)
08/29/75… SPX -3.5% one month later (higher close two months later)
06/30/72… SPX +0.2% one month later
06/30/67… SPX +4.5% one month later
06/30/64… SPX +1.8% one month later
07/31/63… SPX +4.9% one month later
06/30/61… SPX +3.3% one month later
02/27/59… SPX +0.1% one month later
05/31/55… SPX +8.2% one month later
03/31/51… SPX +4.8% one month later
07/31/50… SPX +3.3% one month later
03/30/46… SPX +3.8% one month later
07/31/45… SPX +5.8% one month later
08/31/43… SPX +2.4% one month later
12/31/36… SPX +3.8% one month later
12/31/35… SPX +6.6% one month later

In 22 out of 26 occurrences, or 85% of the time, the S&P closed higher the following month, significantly above the 59% random chance. Note that in the four instances in which the S&P closed lower the following month, we still saw a subsequently higher monthly close at some point within the next six months. Put another way, the price pattern above has almost always (25 out of 26 times) led to a subsequently higher monthly close at some point over the next three months, and usually the next month.  That’s something to keep in mind given that we’re likely to see the 27th occurrence at the end of February.

Bill Luby recently opined that the S&P is range-bound between 1150 and 1070, and I generally agree with that outlook although I’d widen the range a bit. On the upside, I’d use  the upper trendline channel discussed in this January 10th column. That line currently stands in the SPX 1158 area, although that will rise to 1185 by July and 1215 by December. On the downside, I would expect a break of 1070 at some point in the next few months given that down Januarys inevitably lead to another lower monthly close. But I would also expect the monthly close below 1070 to be a fakeout, at least initially. Despite the long-term negative TICKscore divergence and overhead trendline resistance, we have to keep in mind longer-term bullish patterns like the cluster of 400+ new highs, the new all-time high for cumulative breadth and various signs of persistent price strength (see this November 23rd column)  all of which suggest the S&P will be trading at a similar level or higher later this year. The conflicting evidence suggests we could see a  lot of false breakouts this year, perhaps initially to the downside over the next couple of months followed by a false break to the upside later this year, all while holding below trendline resistance. Ultimately this action would most likely represent a longer-term sell, particularly if the Last Hour indicator continues its rapid descent.

Categories : Archived EOD Commentary, End-of-Day Commentary

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