by Colin Cieszynski, CFA, CMT, Chief Market Strategist, CMC Markets 2015 has gotten off to quite a volatile start for US stock markets with indices falling in January then turning around and rebounding strongly through February, while March has had both its ups and downs. Historically Q2 market action has been mixed with stocks starting off strong in April but then hitting a seasonal rough patch between mid-May and late June. Adding to the usual mix of seasonality and earnings, markets may be influenced this quarter by the ongoing reaction to the oil price crash of the last few months, and speculation as to when the Fed might start raising interest rates (which we will cover off tomorrow). Overall, Q2 looks pretty promising for US stocks but it also looks like markets could be in for a bumpy ride which may create significant opportunities for trading and potentially favour swing trading approaches over long-term investing. Market Cycles and the overall 2015 outlook for stocks A look at how US stock markets have performed in previous cycles have many signals flashing green for US stock markets this year. The current stage in decade, Chinese calendar and both the four and eight year US Presidential cycles all suggest the potential for greater than 10% gains for US indices this year. Meanwhile, US market performance in the years immediately following the previous to non-war related oil price crashes suggest the potential for a 20% plus gain this year. The Super Bowl indicator, however, was mixed. New England pulling a rabbit out of their hat at the end of the game was good for the Patriots but potentially not so good for the markets. The market did do well, however, the last time the Seahawks lost so their big brain cramp may not have been a total disaster.
|Cycle indicators 2015||Average Dow/S&P return|
|Year ending in 5||31.4%|
|Year of the Goat||7.71%|
|Super Bowl: New England Wins||(3.64%)|
|Super Bowl: Seattle Loses||13.62%|
|Presidential Cycle Year 3||12.37%|
|Presidential Cycle Year 7||17.68%|
|Post Oil crash 1986||22.57%|
|Post Oil crash 1999||25.23%|
Source: CMC Markets How have markets historically traded in the northern spring? US stock markets have historically fluctuated with the seasons starting off the year strong with average monthly gains from January through May. There has been a weaker patch between June and mid-October with a July bounce in the middle around earnings season. Stocks have historically finished the year strong as traders look ahead to the next. The performance of markets over the last 12 months has been a bit different from historical seasonal patterns. The Dow underperformed its longer term monthly averages last March and April then outperformed in May and June. A June correction didn’t materialize but the Dow sold off in July instead setting the stage for an unusually strong rebound in August. The September selloff was weaker than average and the Dow had a stronger than usual surge in October and November. December and January were quite soft but then February was very strong relative to its historical average. So far March 2015 has been pretty much flat to lower. Continuing this pattern of alternating outperformance and underperformance suggests that we could be heading for a stronger than usual spring season for US stocks. Dow Monthly Return
Source: CMC Markets What could the crude oil collapse mean for US stocks? Although the initial impact of the crude oil price crash has been to drag on energy stocks, historically big crude oil price drops have been followed by big rallies in the stock market. Higher energy prices have historically acted as a drag on economies and the earnings of many companies, while lower energy prices have acted as stimulus by putting cash back into the pockets of consumers and companies. Here are a few examples:
|WTI||Dow Return After|
|3 Month||Oil Trigger|
Source: CMC Markets What could the oil price crash mean for trading this spring? Out of the six oil price crashes in the table above, four coincided with wars or other political or financial crises. The selloffs in 1985 and 1998 are the most similar to now having occurred mid cycle at a time of relative political and financial stability and the 1986 slide also being driven by a market share war among producers. Both of these big declines were followed by strong market advances in 1986 and 1999. Looking at those two years on a monthly basis shows that although markets gained over the whole year, there were large moves in both directions from month to month. 1986, for example had five months where the Dow gained over 5% and two where it lost over 5%. Similarly, in 1999 the Dow gained more than 2% in five months and fell more than 2% in three months. The long term average gain for US markets over the last several decades of 8% a year would mean an average monthly rise of 0.66%. Both 1986 and 1999 saw a higher than expected average monthly gains but as noted above the volatility was also higher with big moves in both directions. 2015 appears to be off to a similar start with the Dow posting a 3% loss in January and 5% gain in February. In the two previous years noted, March had been very strong but the Dow is down slightly so far this March. The previous post-oil crash years saw a one month correction in the spring and both saw a big pullback in July. This year we could see a catch up rally in April or May with the possibility of a correction in June or July if stocks get too far ahead of themselves. Dow Monthly Performance in Years following oil crash
Source: CMC Markets Focus Chart: US 30 Index versus WTI Crude Oil Source: CMC Markets The chart above shows that after tracking similarly from March through July of last year, since August, the performance of the Dow and WTI crude oil has diverged dramatically. While crude oil has fallen off a cliff, losing over half its value since the end of July, the Dow has rallied only moderately, posting a 10% gain over the same time frame. With crude oil starting to fall again following a period of consolidation, the stage could be set for the Dow to see more of the benefits of lower energy prices. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.