S&P 500 Seasonal Patterns, Oil Breaks Out, an Outsized Decline in Gold, and the Dollar Tests Prior Lows (Premium)

SPY stalled the last seven weeks, but remains in a clear uptrend. Despite some concerns with seasonal patterns in June, August and September, the price chart for SPY remains strong and the Composite Breadth Model is fully bullish. The Fed balance sheet expanded this week and hit a new record, while BBB and CCC yields spreads narrowed even further. Today we will look at upcoming seasonal patterns for the S&P 500, examine the outsized decline in gold, steer clear of TLT and touch on the Dollar.

Seasonal Trends for June

While I would not call it outright negative, the seasonal trends for the S&P 500 are not very positive in June. On average over the last 25 years, the S&P 500 closed higher 64% of the time, but the average gain (+2.18%) was much smaller than the average loss (-3.44%). Trading only the month of June yielded a Profit Factor of 1.07, which means total profits barely exceeded total losses. Profit Factor is the total Dollar gain divided by the total Dollar loss. This is the ex-post reward to risk ratio.

The image below shows the equity curve if one were long SPY during the month of June. It started strong with a rise from 1997 to 2000 and then fell into 2011. The equity curve flat-lined into 2018 and then surged in 2019 with a 6.89% gain. Note that a 6.6% loss in May 2019 preceded this outsized gain. Thus, the June surge was just recapturing the May loss. Overall, June does not have a bullish bias.

You can learn more on SPX seasonality in this article/video. I cover the best/worst six months and the individual months with performance metrics and equity curves.

SPY Remains in Clear Uptrend

Looking ahead, the seasonal trend for July is pretty positive, but August and September are decidedly negative. This is why we could see  a correction between now and September. Seasonal patterns, however, are a distant second to price action when it comes to importance. SPY is still in a strong uptrend with the current move starting with the early November breakout. SPY was up some 29% from late October to early May and entitled to a corrective period. Yes, SPY has a sense of entitlement. The blue shading shows that SPY traded flat the last seven weeks with two intra-week dips below the 10-week SMA (green dashed line). Sideways price action is also corrective in nature. Even though there are no signs of a correction just yet, note that a 10% decline would carry SPY back to the rising 40-week SMA.

Oil Breaks to New Highs

The big line chart shows spot crude breaking out to multi-year highs with a big move the last two weeks. The upper left chart shows NYMEX Crude Futures (July 2021), which is the purest play on oil. The green lines show the cup-with-handle and the red shading marks rim resistance. The break above rim resistance signals a continuation of the bigger uptrend and targets a move to the upper 70s. The breakout zone in the 66-67 area turns first support to watch should we see a throwback.  

An Outsized Decline for GLD

Gold took a big hit on Thursday with the biggest decline (-1.96%) since February 26th (blue arrow). An outsized decline after an extended decline can be bullish, while an outsized decline after an extended advance can foreshadow a reversal. The 26-Feb outsized decline occurred after an extended decline and led to a selling climax (bottoming process). GLD fell over 2% on January 8th and this outsized decline led to a reversal and further weakness (blue dashed line). This outsized decline broke the rising wedge line, reversed an advance and led to further weakness. The concern here is that the current high is below the January high and lower highs could be forming (chart upper left). A break back below the 200-day and a lower high would be quite negative.

Silver Backs off Resistance

The Silver ETF (SLV) still has a big triangle working on the long-term chart (upper left). This is a big bullish continuation pattern and a breakout would target a move to the upper 30s. The red zone on the bar chart marks a big resistance zone going back to the August 2020 highs. SLV backed off with a sharp decline on Thursday, but the swing since late March remains up. The green zone marks support around 25 and a follow through break would reverse this upswing. Keep in mind that GLD and SLV are positively correlated and move in the same direction, even if their charts look different. Thus, a GLD break below the 200-day would also be negative for SLV (and GDX for that matter).

Tainted TLT

No change: The 20+ Yr Treasury Bond ETF (TLT) is in a long-term downtrend and it is easy to be bearish on bonds. The Fed, however, is the elephant in the room because the Fed is actively buying US Treasury bonds. I do not want to speculate on Fed purchases and future tapering plans, but the Fed presence is an issue. On the price chart, TLT is in a long-term downtrend and getting some sort of oversold bounce. It is also possible that a triangle consolidation is forming. Either way, I am not interested in TLT right now because the Fed is spiking the cool-aid and stocks are in a bull market.  

Dollar Bounces off January Lows

The Dollar firmed near its January lows and ticked higher the last two weeks. The green zone marks support, but I am hesitant to mark support levels because the downtrend is the dominant force at work and support is not expected to hold. A bounce, however, is possible here, especially if the S&P 500 corrects. Note that the Dollar is negatively correlated with the S&P 500, which means they tend to move in opposite directions.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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