June May Signal a Hot Streak in S&P 500

So here we are in June. Can you believe the year is almost half over? Some 156 days have already clicked past, and there are 209 more to go. If there was something you really wanted to accomplish in 2016, there’s still time. But less of it, is all I’m saying.

Not sure what Mr. Market is trying to accomplish. The Dow Jones Industrials (DJI) are up 2.19% for the year. And the Russell 2000 is up 2.49% for the year. The S&P 400 Midcaps (IJH) have fared much better, rising 8%, while the Nasdaq 100 (QQQQ) is down 2%.

Now we’re facing June, which tends to be one of the most humdrum months for the market in part because of a lack of catalysts, and the fact that volume starts to dry up.

For a much more penetrating analysis than that, let’s turn to analyst Jason Goepfert, of Sundial Capital Research. He makes this interesting observation:

The S&P 500 hit a 12-month low in February. Since then, it has risen for three straight months. If it also rises in June, odds are good for even more gains.

Here’s why. He rifled his database and found that the last time the S&P 500 managed to string together three consecutive positive months following a 12-month low was in May 2009. We should only be so lucky to get a repeat of May 2009! The market rose 40% over the next year.

To learn more, he went back to 1928 and looked for every time the S&P 500 fell to a 12-month low then rallied for the next three months. It turns out that the medium-term did indeed show some signs of lasting momentum, he reports. Stocks showed a positive return over the next three months 12 out of 14 times, with an average return about three times larger than random. After that, it was questionable. There were several false signals in there that led to large losses within the next year, 2001 being a perfect example.

Goepfert then notes that a positive heads-up emerged when the S&P 500 rose the next month as well. In those cases, the market tended to record even better returns in the months ahead. But when stocks fell back right away (like in 1957, 1968, 1978 and 2001), then longer-term returns were terrible.

So a positive June would be a very, very good sign according to this study, and a negative June would be a disproportionately bad sign. Stay on your toes.

One last note: When the S&P 500 strings together three positive months on the heels of three negative months, as it did in March, April and May of this year, the overall results were even more positive than the ones following a 12-month low, Goepfert reports.

Sample sizes are small, so beware of that, but it’s encouraging background on how intense pain felt from losses, followed by a wary happiness from gains, have worked their way through the psychology of the human mind and heart into stock prices.

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Why Apple Wants to Ride-Share

Mobility as a Service (MAAS) jumped back into the headlines a couple of weeks ago when Apple (AAPL) announced it was making a $1 billion investment in Didi Chuxing, China’s largest ride-hailing company.

It’s not as though MAAS slipped into the blind spot of the automobile industry. The sector is being disrupted, and leading carmakers know it. Ford (F) is building an independent mobility services division. General Motors (GM) invested in ride-hailing startup Lyft, and it’s working with Maven, a ride-sharing company. And Uber is tooling around the streets of Pittsburgh in self-driving Ford Fusions even as it shakes up traditional taxi fleets worldwide.

Cultural mores are changing, and the car business is being put on notice. As people become not only greener but also more willing to rent and share the stuff they need, traditional car ownership makes little sense. Cars are typically used less than two hours daily, they create pollution and traffic. Car-sharing and ride-hailing services reduce traffic congestion and pollution because they reduce the number of vehicles in use. When cars become autonomous, these trends will accelerate.

For carmakers, the writing is on the wall. There is a paradigm shift coming, and old profitability models are going to be run over. The most-likely scenario would see profitability shift from volume to premium carmakers. For example, a second car used only to run errands — like picking up the children from school or grocery shopping — could be replaced by a mobility service. That family might use the savings to upgrade the car it still owns.

The consulting firm Roland Berger sees three types of auto-industry manufacturers in the future: Vertically integrated premium providers, general-mobility service providers, and automobile device manufacturers.

And that’s what makes Apple’s Didi Chuxing investment so interesting. Apple’s electric-car aspirations are no longer in dispute. Project Titan is a go. A vertically integrated, premium-product business model that connects smartphones to vehicles makes sense for Apple.

In China, Didi Chuxing is a mobility services powerhouse, complete with machine-learning and big-data chops. It completes 11 million rides daily, by operating shared-bus, designated-driver and premium car services. It has the reach and software platform to put premium Apple cars into the biggest and now most important luxury car market in the world.

For Apple, getting there with Didi Chuxing would mean no upselling and a huge, reliable subscription-based revenue stream. And there is precedent for this approach. Last year, LeEco, a Chinese conglomerate, purchased 70% of another Chinese mobility services firm, Yidao. LeEco is best known outside of China for its splashy investment in Faraday Future, a company that plans to build electric cars in the U.S. and offer them as a subscription service.

Still, competition will be extreme. Apple has no bona fides as a premium car maker and the others have no incentive to yield as it merges into the marketplace. China’s Internet search leader Baidu (BIDU) already has a longstanding working relationship with BMW (BMW). In fact, a recent McKinsey study showed German automakers including Mercedes (DDAIF), Audi (AUDVF) and Porsche (POAHF) hold approximately 80% of the luxury market. Making inroads is not going to be easy.

Many observers worry about Apple’s next big thing considering the saturation of the global smartphone market. With the Didi Chuxing investment, the outline of its car business is starting to take shape.

Apple CEO Tim Cook likes to talk about how well Apple’s services are performing — apparently disregarding its recent flop in music services and its failure to follow through on its promise to disrupt the television industry. Adding luxury cars would certainly gas-up results if successful.

But this is no reason to buy Apple now. The car manufacturing business is super-tough, as Tesla (TSLA) can attest, and competition is intense. The path ahead is long, winding, and littered with obstacles. An electric car is not just an iPhone with wheels. If Apple is successful, awesome, but make no mistake — the odds, and competitors, are stacked against it.

Best wishes,

Jon Markman