May the odds be ever in your favor

I was reading Savita’s note this weekend about how the US stock market is off to its best 2-month start since 1991. We’re back up to the 2800 level in the S&P 500 where stocks have failed three times now.

But the difference this time around is that breadth is getting stronger as we approach. The NYSE advance-decline made a new high last week. Every one of the 11 sectors in the S&P 500 index posted positive returns in February. The year-to-date rally is being led by industrials (!), which are up 18% on the year, followed closely by technology and energy stocks. The Russell 2000 (small caps) ourperformed the S&P 500 large caps while the equal-weighted S&P 500 also beat the cap-weighted index.

All of these details mean that, beneath the surface, the market is extraordinarily healthy. And this has taken place as full-year earnings estimates have fallen. Which, to me, means that expectations are now more reasonable and there’s a lower bar to beat.

If you’re an internals guy or gal, this is the very best set-up you could ask for.

The Equity & Quant Strategy team at Merrill looks at the potential implications for such a strong start to the year (bold is me):

Robust Jan-Feb return points to a strong 2019 The S&P’s 11.5% gain year-to-date (YTD) represents the best Jan-Feb total return since 1991, and compares to an average Jan-Feb return of +1.5% and a 58% hit rate of positive returns since 1928. A positive Jan-Feb has historically led to a positive year 87% of the time since 1928 and an average +16.8% total return, compared to a 54% hit rate and 3.7% average return when returns were negative in Jan-Feb.

Okay, 87% is a big number.

Here’s the caveat. No one can reliably tell you when we’re in the 87% of the time where stocks will follow through into year end for a positive return or when we’re in the 13% of the time, where it doesn’t work out that way. The odds look good, but nothing is a given. Even if I told you that stocks finished the year up 100% of the time after running up in the Jan-Feb period, you could say, “That’s great Josh, but things that have never happened before happen all the time, and data going back to 1926 is not even a hundred years.”

And this is true.


Best two-month start since 1991
Bank of America Merrill Lynch – March 1st, 2019

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  1. Daily Chart Report ? Monday, March 4th, 2019 - The Chart Report commented on Mar 04

    […] May the Odds be Ever in your Favor – Josh Brown  Here’s a blog post from Josh Brown, where he discusses the test of the 2800 resistance level that we’ve failed at three times in the past. He brings up the fact that historically, a strong Jan./Feb. signals a positive year for the market 87% of the time. […]

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