When the Dow Breaks, the Sectors will Fall….

May 15, 2014 | bonds, ETFs, group sector rotation, trading strategies

…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.

Bonds are to Fear Early in the Year

Jan 6, 2014 | bonds

The treasury bond market has showed a strong seasonal tendency to perform poorly during the early part of the year.  People often ask me “why” this would be so.  In fact I get that question often enough to make me wish I had a good answer.  Alas, as a proud graduate of “The School of Whatever Works”, I can only repeat our school motto, which is “Whatever!”

Two Early Year Trends in T-Bonds: Part 1

First let’s look at the performance of t-bond futures between the end of the first trading day of the new year and the 14th trading day of February starting in 1978.  Figure 1 displays the performance achieved by an (extremely stubborn and not terribly astute) investor who held a long position in t-bond futures during this time period every year.

 jotm20140102-01Figure 1 – Long t-bond futures from on January Trading Day 1 through February Trading Day 14 (1978-present)

All told, the loss came to -$49,511 (excluding any slippage and/or commissions).  Of course, like all seasonal trends there is never any guarantee that the trend will hold true the next time around.  For the record the Jan TD 1 through Feb TD 14 period saw T-bonds:

– Gain 10 times
– Lose 25 times
– Breakeven 1 time

Each point movement in t-bond futures is worth $1,000

– The median gain during up years was +$2,234
– The median loss during down years was -$2,406
– The largest gain was $6,937 in 2000.
– The largest loss was -$15,281 in 1980.

So basically, t-bonds gained 28% of the time, and lost or broke even 72% of the time, and the median loss was slightly greater than the median gain.

Two Early Year Trend in T-Bonds: Part 2
Let’s look next at the net performance for t-bonds during the first four months of the calendar year.  Typically, after bonds sink into mid-February there is a bounce in the second half of February.  But for our test we will just consider the results achieved by holding a long position in t-bonds from December 31st each year through the end of April.  These results appear in Figure 2.

 jotm12130102-02Figure 2 – Long t-bond futures December 31st through April 31st

All told, the loss came to -$66,389 (excluding any slippage and/or commissions).  Of course, like all seasonal trends there is never any guarantee that the trend will hold true the next time around.  For the record the Dec 31st to Apr 30th period saw T-bonds:

– Gain 16 times
– Lose 20 times

Each point movement in t-bond futures is worth $1,000

– The median gain during up years was +$1,797
– The median loss during down years was -$4,813
– The largest gain was $13,968 in 1986.
– The largest loss was -$11,313 in 1994.

In reality, the January through April time frame has seen t-bonds show a loss only 56% of the time.  So this trend is absolutely by no means a sure thing, so the one thing you should absolutely not do is get it in your head that t-bonds are bound to decline between now and the end of April.

The key thing to note regarding this trend is that the median “down” year has witnessed a decline that is 2.7 times larger than the median gain shown during the “up” years.  So the key is simply to recognize the potential danger.

Summary

With t-bonds presently quite oversold, it is a little difficult to jump on the bearish bandwagon at the moment (in fact, bonds are rallying nicely as I write here on the first trading day of the year).  And as I have tried to make clear, a decline in t-bond prices during either of both of the highlighted periods is by no means a sure thing.  Still, this little bit of history suggests that getting wildly bullish on t-bonds may not be the best strategy.

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.
en_GBEnglish
en_GBEnglish