Today I will share some information on an interesting indicator called the “Turn of Year Barometer” (TOY for short), which was discovered by Wayne Whaley and made known to me by Steve Deppe (@SJD10304).
The TOY indicator calculates the price gain in $SPX between November 19th and January 19th. If the price gain is greater than 3%, the indicator is bullish. If the price gain is between 0 and 3%, the indicator is neutral. Finally, if the price gain negative, the indicator is bearish. More information on the indicator, including historical results, can be found in an article written by Steve here.
There are 4 trading days left in this year’s TOY signal calculation period and, barring a big collapse next week, this year’s signal will be bullish ($SPX needs to close on January 19th above 2655). In the past, bullish signals have resulted in almost unanimous positive 12-month forward returns, whereas bearish readings have resulted in poorer than normal 12-month forward returns. Neutral readings have resulted in random returns. Given the small number of samples (23 since 1971), we should be cautious about inferring too much from this. However, the small number of historical precedents suggest that the 12-month forward returns for $SPX have a strong chance of being positive.
What is also interesting is how the historical 12-month forward returns following a bullish TOY signal have been concentrated within the “best 6 months” between November and April, as is ordinarily the case. Similarly, losses following past bearish TOY signals have tended to be concentrated within the worst 6 months between May and October. Wayne Whaley discussed this phenomena in a 2012 article in which he outlined the results of a strategy that went 100% long during the best 6 months following bullish TOY signals and 100% short during the worst 6 months of the year following bearish TOY signals (link). For the period covered in his study, the strategy would have resulted in an equivalent return to a buy and hold strategy with only one-third the market exposure, which is pretty remarkable.
I recreated the yearly seasonal results for bullish TOY signals for the period since 1971 so that they can be visualized. First, here are the results during the period between the open on January 20th and the close of April 30th, going back to 1971 (we need to divide the best 6-months into two periods, since the TOY signal starts during the middle of the best 6 months). I have not included this past year’s results since they cannot be calculated until January 19th, but obviously they too will be positive.
Next, the results for the period between the open on November 1st and the close on January 19th.
Finally, the total for the two combined periods.
As can be seen, bullish TOY signals since 1971 have never had a negative price return during the following best 6 months of the year. Even in 1987, the sole negative 12-month period since 1971 following a bullish TOY signal, was positive during the best 6 months, since the crash of 1987 was in October. The average price return has been 12.3%. This compares to 7.0% for all years for the best 6 months.
So how does this compare to results during the worst 6 months following bullish TOY signals? As shown below, while those results were also generally positive, they were not as good. The average price return for the worst six months following a bullish TOY signal since 1971 has been 3.4%. For all years the average was 1.2%, so still an improvement. There were also some sizeable drawdowns during the worst 6 months.
I would also note that we are in the heart of the bullish 40-week cycle, made known to me by Jay Kaeppel (@jaykaeppel). More information on this cycle, including historical results, can be found on Jay’s website (link). The current cycle began on November 24th and runs to April 13th. Here are the historical results since 1971 for periods during which the 40-week cycle has overlapped with a bullish TOY signal and the best 6 months. The current melt-up in the market is taking place within such a period.
Finally, every signal on my systematic model is green (and has been so for the past year), so none of these signals is providing a reason to be negative on equities.
Does all of this mean that the market will not correct? Absolutely not. Anything can happen and everyone should plan accordingly. That said, given this technical backdrop, we should not be shocked if the current melt-up continues until at least April.