The TradingExpert Market Log

In your WinWay TradingExpert or TradingExpert Pro package, look for the icon for Reports and open it. The Market Log is toward the bottom of the list on the left.

Trading and investing becomes clearer when you’re armed with this snapshot of the market and SP 500 stocks every day.

– AI rating on the market and how long it has been in place
– AI rating on all Sp 500 stocks percentage showing up ratings vs down ratings
– Bullish vs bearish levels on the market on multiple techncial indicators
– Bullish vs bearish percentage of SP 500 groups trending up vs down and the change from prior day
– Bullish vs bearish levels summary for all the SP 500 stocks on multiple indicators

marketlog32916

Groups with seasonal trending in July

Groups with seasonal trending in July

While looking through the seasonal trends in stocks and currencies, we decided to start running the seasonality scans on the S & P 500 groups. As a reminder here are the criteria we consider when running this.

Our study looks at 7 years of historical data and looks at the returns for all groups in the S & P 500 for the month of July from 2006 to 2013.

We do make an assumption that the month is 21 trading days and work our way back from the last day of the month. July also has the July 4th holiday and a half day trading on July 3rd. if the last day of the month falls on a weekend, then we use the first trading day prior to that date.

We make no assumptions for drawdown, nor do we look at the fundamentals behind such a pattern. We do compare the group to the market during the same period and look at the average SPY gain/loss vs. the average group gain/loss. This helps filter out market influence.

Finally we look at the median gain/loss and look for statistical anomalies, like meteoric gains/loss in one year. Here are top 5 performing groups based on average return.

Average return alone is misleading. In the seasonal analysis we need consistent patterns in the price action throughout the periods we are testing, in this case 7 years. While The S & P 500 Motorcycle manufacturers group (MTRCYCLE) looks good on average, it includes one stellar July of 37.50% back in 2010, and has 2 July’s that were negative returns. NOTE: there’s only one stock in the group (guess which one that is!).

The office REITs group (REITOFC) is more consistent. It has an average return for the last 7 years in July of 6.50%, with the last 6 years Julys all positive. There are no stellar months skewing the average. The group also contains only one stock, Boston Properties [BXP].

Here’s the seasonal chart for BXP

Interestingly the other consistent group in July is another REIT, the Diversified REITs (REITDIV). It has an average return for the last 7 years in July of 6.06%, with the last 6 years Julys all positive. There are no stellar months skewing the average. The group also contains only one stock, Vonando Realty Trust [VNO].

A quick check on what the market did during the same period reveals an average return of 1.83% with 4 gaining Julys and 3 losing Julys.

 
 
 
The Oil & gas Equipment group (OILGASEQ) also had a decent average, but is more volatile over the past years, however the last 5 years have all been gainers.
 
Remember, we don’t draw conclusions here, just mine for information.

When the Dow Breaks, the Sectors will Fall….

…and down will come, well just about everything, as far as I can tell.

OK, for the record maybe it should say “If the Dow Breaks.”  After all I am still firmly ensconced here at “Camp Bull.”  I would like to attribute this to disciplined nerves of steel, but it would be an understatement to say that that would be an overstatement.  The truth is my crystal ball broke a very long time ago (sadly I continued believing what it portended for a long time before I realized it was actually broken).  So I have long since held dual citizenship in “Camp Trend Follower”.

But I have got be honest…..I am feeling the urge to run like a sissy through the woods to “Camp Yikes”. 

The Overall Market
Defining the “overall” market is something of a crapshoot these days, as some of the “overall” market seems to be going one way and another part of the “overall” market seems to be going another way.  In Figure 1 we see the Dow, the S&P 500, the Nasdaq 100 and the Russell 2000.

 jotm20140514-01

Figure 1 – The Four Major Averages with 200-day moving averages (charts courtesy AIQ TradingExpert Pro)

In a nutshell, the “Generals” are still marching but the “Troops” are in retreat.  Now every market pundit seems to be offering up their opinion as to whether the “Generals” will ultimately lead the troops higher or the other way around.  With my crystal ball still out of order I must unfortunately go with my stock answer here of “it beats the heck out me.”  And “hey things are swell here at Camp Bull.”  But I have been around this business long enough to remember several instance where the “Troops” led the way (1984, 1987, 1990, 2000, 2008) and the “Generals” followed.  So we’ll see what we see.

OK, just in case that little segment was not foreboding enough, let’s get to the really “scary” part.

Sectors Suck in Summer (during Mid-term years)
One caveat before I even launch, the sample size of what I am about to detail is very small (6 calendar years each four years apart starting in 1990).  Also, that’s the good news.  As a “seasonalaholic” (“Hi, my name is Jay”) I am acutely aware of the following facts:

1. The market tends to perform better between the end of October and the third trading day of the following May than it does from the third trading day of May through the end of October (also known as “Where We Are Now.”)

2. This is a mid-term election year.

I also do a lot of work with sectors and sector funds as I have found that investing at the right sector at the right time is – all kidding aside – one heck of a great way to invest.
So I was curious as to which sectors tended to perform the best during the May to October period during mid-term election years.  Here is the short list:

Health Care.  Period.

Everything else.  Well on a buy in May and sell in October basis – let’s just say it isn’t pretty.  So here is the test I ran:

Tracking the growth of $1,000 invested in each Fidelity Select Sector fund only:
*Between the close of May trading day 3 and the end of September (for the record, October tends to be an OK month during mid-term election years – more on this topic in a future article) during each mid-term election year.

The results appear below in Figure 2.  If you are squimish you might want to brace yourself.

Fund
%+(-)
FBIOX
(12.1)
FBMPX
(34.5)
FBSOX
(36.9)
FCYIX
(28.8)
FDCPX
(42.4)
FDFAX
(3.7)
FDLSX
(45.9)
FIDSX
(55.9)
FNARX
(35.4)
FPHAX
(18.6)
FSAGX
(1.6)
FSAIX
(65.7)
FSAVX
(71.4)
FSCGX
(58.9)
FSCHX
(49.7)
FSCPX
(31.2)
FSCSX
(35.9)
FSDAX
(62.7)
FSDCX
(38.2)
FSDPX
(57.5)
FSELX
(71.0)
FSENX
(42.9)
FSESX
(65.3)
FSHCX
(20.1)
FSHOX
(79.1)
FSLBX
(59.1)
FSLEX
(49.6)
FSMEX
(12.0)
FSNGX
(47.5)
FSPCX
(27.2)
FSPHX
41.6
FSPTX
(42.0)
FSRBX
(59.5)
FRESX
(26.4)
FSRFX
(61.2)
FSRPX
(43.8)
FSTCX
(35.4)
FSUTX
(12.1)
FSVLX
(59.1)
FWRLX
(32.8)
FNARX
(35.4)

Figure 2 – Net %+(-) invested only between 3rd trading day of May and last trading day of September during mid-term election years (1990 , 1994, 1998, 2002, 2006, 2010, 2014)

Anyone notice a trend? To see just how bad things can be, once you are able to work yourself back up out of the fetus position, take a glance at Figure 3, which shows the three worst performers during the May-Sep mid-term year period – FSAIX (-71%), FSELX (-71%) and FSHOX (-79%).

jotm20140514-03 

Figure 3 – FSAIX, FSELX, FSHOX – growth of $1,000 May through Sep of mid-term election years (1988-present)
 

Now I have an obvious flare for the obvious (which I think should be pretty obvious – also I tend to repeat myself) but I am not even going to comment on Figures 2 and 3.

The Good News
The one mistake you should not make based on looking at these numbers and charts is to assume that it is not possible to make money in sector funds between May and September of mid-term years.  It just requires something better than a buy and hold approach.  Several momentum systems and seasonal plays that I have developed over the years have still managed to show some pretty good gains historically “among the ruins” of midterm election summer months.

But if you’re gonna play, you’d better bring your “A” game.

Summary  
Repeating now – I am still in “Camp Bullish.”  And ideally I’d like to spend the summer.  There seems to be a lot of fear and loathing among the “crowd” that I follow regarding the stock market.  Typically that’s a good thing and suggests that the stock market just might surprise everyone this time around.  And I hope that it does.

But I will be keeping a pretty close eye on my “camp mates” in the days and week ahead. Any sign of “trouble” (i.e., Dow, S&P breaking below 200-day moving averages) and they are going to have to send a search party out to find me……

Jay Kaeppel  
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client

Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.

Jay’s Simple Momentum Sector Fund System

If there is one is universally true statement that I can make about trading systems in general and in specific, it is this – they sure are fun when they work.

When I first started trading – back in what I longingly refer to as the “Hair Era” in my life – I figured that I would be a “gut” trader – i.e., I was determined to rely on my keen instincts and intuitive reasoning to decide when to buy and sell based on current market conditions.

That was not fun.  After continually getting sucked into the swirling vortex of emotion – not to mention the abject fear associated with seeing  your money disappear – I found that I was getting the, um, back of my front so to speak, burned so many times that I was having difficulty, um, sitting down, so to speak.

Eventually I evolved into a systematic trader.  Now I am able to sit down much more often.  A few strategies that I have developed over the years have stood the test of time and become something of “bread and butter” strategies.  And they sure are fun when they work.  To wit….

Jay’s Pure Momentum System

In 2001, I published an article in “Technical Analysis of Stocks and Commodities” magazine titled “Trade Sector Funds with Pure Momentum”, which detailed one specific and simple trading method.  While in fact this is only one of many sector trading systems that I have developed over the years – and not necessarily the best one – it remains one of my favorites.  Probably because it is just so gosh darn simple.  When I was young my Momma told me to be a simple kind of man (or was it a Freebird she told me to be?).  Well, in any event, here are the “simple kind of rules” using Fidelity Select Sector funds:

– After the close of the last trading day of the month identify the five Fidelity Select Sector funds that have the largest gain over the previous 240 trading days.

– For this system, ignore Select Gold (ticker FSAGX).  If FSAGX appears in the top 5 funds then skip it and include the 6th highest rated funds.

– If fewer than five funds showed a gain over the previous 240 trading days, then hold cash in that portion of the portfolio (i.e., if only 3 funds showed a gain, then 60% of the portfolio would be in those funds and 40% of the portfolio would be in cash).

– If you sell more than one fund at the end of a month, then rebalance the proceeds in the new funds being purchased (example, you are selling Funds A and B and buying Funds C and D.  You have $12,000 in Fund A and $10,000 in Fund B.  Split the difference and put $11,000 each into funds C and D).

And that’s all there is to it.

The Results
Figure 1 displays the annual results of this method. jotm20140106-01

Figure 1 – Jay’s Pure Momentum Annual Results

Figure 2 displays the current portfolio.
jotm20140106-02

Figure 2 – Jay’s Pure Momentum Current Portfolio

My opinion as to why this system has performed well over the years is, well – what else – simple.  The effects of a positive change in the fundamentals for a given industry or sector typically take a long time to play out.  Thus, by finding the sectors that are performing well you very often find the sectors that are most likely to continue to perform well for a while.

jotm20140106-03 Figure 3 – 12/31/13 Test (Courtesy: AIQ TradingExpert) 
 JOTM20140106-04
Figure 4 – Several Current Sector Fund Holdings (Courtesy: AIQ TradingExpert)

Summary

Obviously 2013 was a banner year for this system.  There is nothing like a rip roaring bull market to help things along.  A couple of caveats:

*First off, sometimes people new to momentum investing will look at the charts in Figure 4 and say “Whoa, these things have already rallied sharply, I’m not jumping into those.”  That’s something you’ll have to get over to use this system.

*Secondly, while the long-term yearly numbers look pretty good, there was about a 45% drawdown along the way in 2008.  So it is not for the faint of heart.

*One other danger is that some people see +48.8% for the year in 2013  and get it in their head that this will occur again often.  History suggests otherwise. 

Still, an average annual return of +20.7% since 1990 (versus +8.9% for the S&P 500) isn’t bad – especially for a “Simple Kind of System.”

Best of Good Fortune in 2014.
 
Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiq.com) client
 
Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.

A Seasonal Sector Trading System

The Stock Trader’s Almanac, put out each year by the Hirsch Organization, is one of my favorite publications.  Interesting ideas are one thing.  Interesting ideas that actually work are entirely something else.  And the Almanac is chock full of just that.

Of course, some of us are not content to leave well enough alone (Hi, my name is Jay).  One system that I follow involves using the Almanac’s “Nasdaq’s Best Eight Months Strategy” with MACD Timing.  However, instead of buying a stock index I focus on the top performing Fidelity Select Sector Funds.

The method works like this:

-Starting on October first, track the action of the MACD indicator for the Nasdaq Composite Index using MACD parameter values of 8/17/9.

-When the fast line crosses above the slow line – or if the fast line is already above the slow line on 10/1, a buy signal occurs.

 Figure 1 displays the most recent buy signal which occurred at the close on 10/15/13.

jotm20131021-01

 
Figure 1 – MACD Buy Signal (Chart courtesy of AIQ TradingExpert)
 

-Then find the five top Fidelity Select sector funds.

There are a number of different ways to do this.  The method I use is to run AIQ TradingExpert Relative Strength report over the past 240 trading days.  This routine looks at the performance of each fund over 240 trading days but gives extra weight to the most recent 120 days.  You can use different variables, or you can simply look at raw price change over the previous 6 months to come up with a list of “Top Select Sector Performers.”  The list for 10/15/13 appears in Figure 2.

jotm20131021-02

Figure 2 – High Relative Fidelity Select Sector Funds (Courtesy AIQ TradingExpert)
 

-Buy the top five Select Sector funds the next day.
-Starting on June 1st of the next year, track the action off the MACD indicator for the Nasdaq Composite Index using MACD parameter values of 12/25/9.

When the fast line crosses below the slow line – or if the fast line is already above the slow line on 6/1, then sell the Fidelity Select sector funds on the next trading day.

Repeat.

Results

The test period used here starts in October of 1998.  The year-by-year results of this system during the Favorable eight month period versus the performance of the S&P 500 Index during the same time appears in Figure 3.

20131021-04

Figure 3 – Year-By-Year Bullish Eight Months (System vs. SPX)

Measure
System
S&P 500 Index
Number of times UP
14 (93%)
11 (73%)
Number Times Down
1(7%)
4 (27%)
Number time better performer
11
4
Average % +(-)
+14.1%
+6.2%
Worst %+(-)
(-0.8%)
(-10.9%)

Figure 4 – System versus S&P 500 during “Bullish Eight Months”

Summary

As you can see, this relatively simple system has registered a gain in 14 of the past 15 “bullish” eight month periods.  On average it has outperformed the S&P 500 by a factor of 2.27-to-1.

So does any of this mean that a portfolio of FSAVX/FBIOX/FBSOX/FSCSX/FSESX is sure to make money and outperform the S&P 500 between now and June of 2014?  Sadly, no.

I guess I’ll just have to take my chances.

Jay Kaeppel

Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro client

http://jayonthemarkets.com/

Jay has published four books on futures, option and stock trading. He was Head Trader for a CTA from 1995 through 2003. As a computer programmer, he co-developed trading software that was voted “Best Option Trading System” six consecutive years by readers of Technical Analysis of Stocks and Commodities magazine. A featured speaker and instructor at live and on-line trading seminars, he has authored over 30 articles in Technical Analysis of Stocks and Commodities magazine, Active Trader magazine, Futures & Options magazine and on-line at www.Investopedia.com.