Happy Days Are Here, Um, Monday?

Nov 26, 2014 | Uncategorized

It is not a little known fact that historically the action of the stock market has been relatively favorable both around holidays and towards the end of the year.  But some question remains as to just how favorable things have been during these periods and how often.  So let’s address it.

The Year-End (or “Santa Claus”) Rally
Different analysts will look at historical data and draw different conclusions.  This is actually a good thing, otherwise everyone would be trying to buy or sell at the same time.

But in the opinion one analyst (“Hi, my name is Jay”) the “year-end rally” period (or as I like to call it the “Santa Claus Rally”):

*Starts on the Monday before Thanksgiving
*Ends at the close of the third trading day of the following January

Have I mentioned lately that this stuff doesn’t need to be rocket science?

So how has this period performed?  We will start our test at the close of trading on Saturday (yes, Saturday) November 19, 1949 and examine what would have happened to a hypothetical $1,000 investment in the Dow Jones Industrials Average that was in the market only during the bullish year-end period described above (in other words, the trader would buy the Dow Industrials Average at the close on the last trading day prior to the Monday before Thanksgiving and would hold through the close of the third trading day of the following January.  The rest of the time the “system” is out of the market.  For our purposes, no interest is earned so as to reflect only the gains made during the bullish year-end period).

The results appear in chart form in Figure 1.

Figure 2 displays the annual year-by-year results in table form.

A few performance notes:
# times UP = 54 (83% of the time)
# times DOWN = 11 (17% of the time)
Average% +(-) = +3.19%
Median % +(-) = +3.08%
Largest % Gain = +13.87% (1991-92)
Largest % Loss = (-3.69%) (1977-78)

It is also worth noting that the year-end rally period has witnessed a gain for the Dow in 27 of the last 29 years and 33 of the last 36 years.

Summary
So do the results displayed in Figures 1 and 2 guarantee that the stock market is destined to rally in the near future?  Ah there’s the rub.  For the answer is “not necessarily”.  Still, investing is in many ways a game of odds and probabilities.  While one always needs to be prepared to act defensively if things start to go south, history suggests that traders and investors might do well to give the bullish case the benefit of the doubt between Thanksgiving Week and early January 2015.

Or to put it more succinctly:
Jay’s Trading Maxim #215: Santa Claus is real (approximately 83% of the time).

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

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Nov 26, 2014 | Uncategorized

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The 40-Week Cycle Revisited

Nov 11, 2014 | Uncategorized

As I mentioned last time around, when it comes to analyzing the financial markets, I am a proud graduate of “The School of Whatever Works”.  In my youth I “wrote down” a lot of interesting analysis ideas (that’s how we did it back then, sadly). 

Whenever I would hear or read of a new market analysis or market timing idea, rather than passing judgment one way or the other based solely on my own “youthful wisdom” (har, good one), I would agnostically write it down and “track it for awhile”.  OK, “quantitative” is  not a word that most “youths” get around to using until, well, whatever it is that comes after youth (which I believe most people refer to as “Mid-20’s and broke”, or alternatively, “Our parents have stopped feeding us, now what?”  But I digress).

At lunch time I would take a break from my job in “Personnel” (which coincidentally is where I came to realize that I “hate people” and that I was going to have to do something that involved numbers instead) and go to the local library and peruse the available market newsletters, advisory services, etc.  Anyway, I had quite the appetite for “market analysis” so I “wrote down” a lot of “stuff.” 

Long story short, if I had a $1 for every idea/method I wrote down that did not stand the test of time, well, let’s just say I wouldn’t need to worry about analyzing the financial markets anymore.  But I guess that shouldn’t really come as a surprise.  What surprises me more is some of the ideas that I would likely have considered “arcane” (had I actually used that word in my youth) that actually did end up standing the test of time (at least so far).  One of those is something I refer to as the “40-week cycle.“ 

Now I am certain that I personally did not “invent” the 40-week cycle.  I must have read about it somewhere (OK, original thinking isn’t my strong suit, is that a crime?),written it down and followed it.  But sadly, I don’t remember exactly when or where or from whom I first got the idea.  But whoever you are, if by some strange twist of fate you are reading this article, let me just say “Thanks.”

The 40-Week Cycle   
For the record there is the “Raw theory 40-week cycle” and the “Raw theory 40-week cycle with a stop-loss provision added because you know how that pesky stock market loves to crater even the best theories every once in a while” version (which I considered as the title for my next book but my editor emphatically said “No!” Guess the price of ink must be up these days).

The Rules are pretty simple:

*Starting at the close on 4/21/1967, the first 140 calendar days (20 weeks times 7 days) is considered the “Bullish Phase”

*The second 140 calendar days is considered the “Bearish Phase”

*During the Bullish Phase, if the Dow Jones Industrials Average losses 12.5% or more from its closing level at the end of the previous “Bearish Phase”, sell and remain in cash until the start of the next Bullish Phase.

Figure 1 displays this cycle going back a few years.

 

There are three critical things to know about the raw 40-week cycle:

1) The stock market DOES NOT always go UP during each bullish phase.
2) The stock market DOES NOT always go DOWN during each bearish phase (in fact, for the record, the “Bearish Phase” has seen the Dow advance more often than it declined.  But when it does decline, it “really declines” – see Figure 3 below).
3) No one should rely on the 40-week cycle as their sole method of market analysis (even at the peak of “Youthful Wisdom”)

With those caveats in mind, let’s look at why it still may be useful to keep an eye on this cycle as a “weight of the evidence” tool.

The Results
For measuring results during the “bullish” phase:
Buy the Dow at the close on the last day of the previous Bearish cycle.
Sell if either:
a) The Dow declines 12.5% or more on a closing basis from the buy price, or;
b) 140 calendar days go by if a) is not triggered

For our purposes, we will assume that interest is earned at a rate of 1% per year while out of the stock market.  Starting on 4/21/67, $1,000 invested using the rules above would be worth $36,483 as of 10/31/14, as shown in Figure 2.

On the flip side, had an investor skipped all of the “bullish” days and invested only during the “bearish” days (including after the 12.5% stop was hit), he or she would have done, ahem, worse.  The growth of $1,000 invested only during the “non bullish” days appears in Figure 3.

To be succinct:
*$1,000 invested only during the “Bullish” days grew to $36,483 (+3,548%)
*$1,000 invested only during the “Non Bullish” days shrank to $688 (-31%)

Summary
The latest bullish phase started at the close of trading on 10/31/2014 (and extends through 3/20/15).  This nicely coincides with the “Bullish Six Months” period originally espoused by Yale Hirsch which (according to my own rules) extends from the close of trading on October 31^st each year through the third trading day of the following May.  So does this combination of bullish seasonal factors guarantee us that “Happy Day are Here Again?” 

Sadly, no.  Murphy and his d$%^ Law stand ever vigilant against complacent investors. But if history is a guide (and “sometimes” it is) we might continue to give the bullish case the benefit of the doubt.
Well, at least for another 139 days.

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

Finding The Golden Triangle

Nov 6, 2014 | Uncategorized

The AIQ code and EDS file based on Charlotte Hudgin’s article in the September 2014 Stocks & Commodities issue, “Finding The Golden Triangle,” is provided at www.TradersEdgeSystems.com/traderstips.htm, and is shown below.

I created an indicator I named the clear value indicator (“ClearValueSum” and “ClearValueAvg”) that might be used to rank signals. The “ClearValueSum” indicator sums the daily percentages that the close is above the simple moving average (SMA). The summing starts at the last cross up and goes to the current bar. If the close is below the SMA, then the value of the indicator is zero.

In Figure 7, I show a chart of Priceline (PCLN) with the ClearVauleSum indicator in the subgraph. In addition, I provide the code for the golden triangle setup and confirmation.

The author did not discuss exits, so I provided one based on a cross under the SMA or an exit after a maximum-bars-to-hold input (“maxBarsToHold”).

I ran a short optimization on the “maxBarsToHold” input, the results of which are shown in the table in Figure 8. Most of the metrics are best at the 18-bar setting. In Figure 7, I also show a sample trade from the system from 2009 with the 18-bar setting.

!FINDING THE GOLDEN TRIANGLE
!Author: Charlotte Hudgin, TASC Sept 2014
!Coded by: Richard Denning 7/10/2014
!www.TradersEdgeSystems.com

!INPUTS:
 smaLen is 50.        !moving average length
 periods is 252.      !Total look back period
 strength is 4.       !Number of bars on each side of pivot
 maxBarsToHold is 18. !max bars to hold position

!VARIABLES:
 C is [close].
 L is [low].
 V is [volume].
 OTD is offsettodate(month(),day(),year()).
 
!CLEAR VALUE INDICATOR:
 SMA is simpleavg(C,smaLen).
 Xup if C>SMA and (valrule(C<=SMA,1) or countof(L=1).
 XupDte is scanany(Xup,periods).
 XupOS is scanany(Xup,periods) then OTD.
 ClearPct is (C/SMA -1) * 100.
 ClearPctSum is iff(C>SMA,sum(ClearPct,^XupOS),0).
 ClearPctAvg is iff(C>SMA and ^XupOS>1,simpleavg(ClearPct,^XupOS),iff(ClearPct>0,ClearPct,0)).
 
!CODE TO FIND PIVOTS:
 LowR is LoVal([low],(2*strength)+1).
 LowM is Val([low],strength).
 LS if LowR = LowM.
 HighR is HiVal([high],(2*strength)+1).
 HighM is Val([high],strength).
 HS if  HighR = HighM.

   !FIND FIRST PIVOT LOW 
      LT1 is scanany(LS,periods) then OTD .
       LO1 is ^LT1 + Strength.
     LO1dte is SetDate(LO1).    
 LowLO1 is val([low],^LO1).
 
   !FIND FIRST PIVOT HIGH
      HT1 is scanany(HS,periods,0) then OTD .
       HO1 is ^HT1 + Strength.
 HO1dte is SetDate(HO1).    
 HighHO1 is val([high],HO1).

!SYSTEM CODE: 
 Xdn if [low]=SMA,1).
 XdnDte is scanany(Xdn,periods).
 XdnOS is scanany(Xdn,periods) then OTD.

 ShowValues if C > 5. 
 HHVpivot if HighHO1 = hival([high],smaLen) and C > 5.
 Setup if Xdn and HHVpivot.
 PriceCnf if C>SMA.
 SetupOS is scanany(Setup,periods) then OTD.
 PriceCnfOS is scanany(PriceCnf,periods) then OTD.
 AvgV is simpleavg(V,smaLen).
 VolumeCnf if ^SetupOS<15 and="" ricecnfos="" setupos="" v="">avgV and V=highresult(V,^PriceCnfOS).

    !BUY & EXIT RULES (LONG ONLY):
 Buy if VolumeCnf and countof(Setup,15)=1 and countof(PriceCnf,15)>=1 
  and countof(C>SMA,SetupOS+1)=SetupOS+1.
 Exit if C=maxBarsToHold.