When thinking about the short-term outlook for stocks, I believe we can all agree that “Fed expectations” and the state of the U.S. dollar are the driving forces at this time. I also think it is a safe bet that Janet Yellen’s merry band of central bankers is doing all that they can to help the market “reset” expectations for the potential of a rate hike this year.
Personally, I don’t think a September move is really on the table. And I believe that Stanley Fischer’s comments about the possibility of two rate hikes before the end of 2016 is more posturing than anything else. However, given the recent economic data and the accompanying fedspeak, it appears that traders had best get on board with the idea the Fed Funds Rate moving up in December.
From an intermediate-term perspective, I’m of the opinion that both seasonal factors and the outlook for the economy are the dominant issues at this time. As I’ve relayed recently, our cycle work turns decidedly weak from now through early October. This is due primarily to the seasonal cycles, which tend to produce a swoon in the early fall each year.
Recommended article: A Letter To The Fed: Please Stop Talking
To review, the cycle composite I follow is comprised of 3 separate historical cycles: The 1-year seasonal cycle, the 4-year Presidential cycle, and the 10-year decennial cycle. When combined and plotted daily, the cycle composite (the blue line in the chart below) often does a very good job at projecting what might happen next in Ms. Market’s game.
To be sure, there is no perfect indicator for the stock market. And as the late Marty Zweig was famous for saying, “Those who rely on a crystal ball will wind up with an awful lot of crushed glass in their portfolio.” However, when the cycle composite is “on” it can be scary good as a projection of what comes next.
S&P 500 and 2016 Cycle Composite
View Larger Image
As you can see from the chart, the cycle composite now calls for a steady – bot not severe – decline into mid-October. This is due to the fact that (a) September/October tends to be weak and (b) the 4-year presidential cycle is in play this year. Historically, the outcome of a presidential election tends to be up in the air at this time of the year, which, of course, causes uncertainty in the stock market. And since markets hate uncertainty more than anything else, it isn’t surprising to see the cycle composite projecting some downside action for the next 5-6 weeks.
The good news is that after the fall swoon, stocks traditionally embark on the “year-end rally.” And according to the composite, this year will be no different.
So, what is an investor to do with this information, you ask? First, understand that this type of work is best used for setting general strategy – and not for day-to-day decision making. But given that we believe a new cyclical bull market began in February, it looks to me that investors may be presented with an opportunity here. In other words, the projected seasonal weakness over the next few weeks might be a good time to “buy the dip.”