82% probability of S&P 500 gains into YE (since 1930) and 'Golden 6M' for homebuilders

As we move into the final 10 weeks of 2019, our sense is many of our institutional investors clients will remain quite active.  The reasons are intuitive: (i) too many macro moving parts (disruption/oppty); (ii) performance issues (many are not tracking their benchmarks) and (iii) political risks.

Our stance remains that markets will rally strongly into YE, as we expect the S&P 500 to break to the upside from this ‘markets going nowhere’ for past 20 months (never been more than 20 months, so this month is a test of our thesis).

POINT: When markets up >17% thru 10/15, avg gain thru YE 3.1% (82% of time, since 1930)… implies >3,100 for S&P 500 by YES&P 500 is up 17% thru 10/15 (noted in earlier FLASH, best YTD in 22 years).  The table below shows all instances (since 1930) when YTD >17%.

– Notably, avg further gain is 3.1%, which implies 3,100 for S&P 500 (in range of our YE target).
– 1987 is only exception (scary one)
– In years when S&P 500 <17% YTD, odds of further gain is only 63% vs 82% (>17%), so YTD makes a difference.




POINT: ‘Golden 6M’ for Homebuilders (Oct 20 to April 30, 19% gains, 80% of time)
We published our annual ‘Golden 6M’ for homebuilders report (link–>Click here for report).
Since 1999, Homebuilder stocks annual bottom is October 20th (next week) and avg 6M gain is 19% (80% of years).  This trade has also worked 9 of last 10 years, including 2018, where homebuilders bottomed on Nov 4th.

– Homebuilders have already done well YTD (up 25%).  But this was also true in 2000, 2003 and 2012, and they still saw big gains during ‘Golden 6M’ (+53%, +16%, +18%, respectively). 
– Why does this happen? Our best guess is Cyclicals are seasonally strong in 4Q and Homebuilders are beta to this.  If you have a view, please email me!!!





POINT: Rising rates actually make this trade work better when rates rise…
Another curiousity is this trade works better when interest rates are rising (next 6M).  

– Since 1999, when rates rise, the ‘Golden 6M’ return is 21% and works 89% of time.
– We are also scratching our head–its counterintuitive



STOCK IDEAS: 13 stock ideas.

Here are some stocks that are in the building space and ranked DQM 1 by our quant model. 
– Tickers: TPX, DHI, KBH, LEN, MDC, MTH, NVR, PHM, TMHC, AAN, HELE, AWI and JCI.

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