Archive for July, 2009
A Summer Rally – Is It Possible?
Posted by: | CommentsIn July investors will probably stumble across an article or two discussing the possibility of a summer rally. The articles usually portray the opinion that the market has room to run based upon some good numbers that have come out at the time. July is earnings month and the market can do well in the first half of the month based upon the expectations of good earnings.
The official date for the non-favorable season is May 5th. This is typically the time that the market starts to roll over and proceed into the summer doldrums.
Is a summer rally from July 20th possible? Absolutely, but the returns from July 20th to October 27th are well short of spectacular. In fact, the market has only been positive 51% of the time during this period and produced an average gain of -0.8%. Some investors may be inclined to just “wait it out.” Using the average numbers, it is 50/50 that the market will be up and then there is only a loss of less than 1%.
In my books these are not good odds. Investors are in the market to make money, otherwise why be there? During this time there is a higher chance of a large downdraft, compared with the rest of the year. Why take the risk?
Sometimes the best way to illustrate the validity of an approach is to make a comparison. If the subsequent period of October 28th to January 31st is used (a similar time frame), the return profile is much better, to say the least. During this time period the market has returned an average 5.3% and has been positive 78% of the time. This time period is clearly a better time to focus on equity investments.
Below is a yearly chart that illustrates the returns from July 20th to October 27th, by year, by decade. All the really large returns above 10% in the late summer took place either at the start or the middle of a strong bull market. We are obviously not in the middle of a strong bull market and I doubt we are starting one. Therefore, from a seasonal perspective it is prudent to favor the position of reducing equities.
Market Reflections – July 2009
Posted by: | CommentsThe stock market has had a good run since March 9th. Both the S&P 500 and the TSX Composite have climbed 36%. More recently the S&P 500 has shown signs of tiring and has been bumping up against the 940-950 range. Currently the index sits at 900. This point is at both the 50 and 200 day moving averages, with the market moving sideways for the last while a breakdown at this point would have negative implications in the market. Conversely, if the market is able to break through resistance and the downward sloping channel line on strong volume, the short-term outlook for the market would be positive.
Given that we are in the non-favourable season (beginning of May to the end of October) of the market, a strong run in the index has a low probability of happening. Over the next two weeks it is possible for the markets to produce positive action as the market can sometimes extend a top into mid-July and the time around Independence Day tends to be positive (discussed later in newsletter). It is the time period after July 19th that will present possible corrections of magnitude.
Another indicator that has recently turned down is the NYSE – BPI. After topping out at 75, the indicator is now sitting at 58 – a negative indication.
The Bullish Percent Index (BPI) is a popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. Bullish Percent levels that are above 70% are considered overbought, whereas levels below 30% are considered oversold. Strong buy signals occur when the Bullish Percent Index falls below 30% and then reverses up by at least 6%. Conversely, promising sell signals occur when it goes above 70%, and then reverses down by at least 6% (Source: Stockcharts.com).
Independence Day Trade
Posted by: | CommentsThe Independence Day Trade is similar to the Memorial Trade and is based upon the premise that the market tends to do well around major U.S. holidays because of the lack of institutional involvement in the markets at this time, and therefore the markets are generally pushed higher by the bullish retail investor. The dates for the Independence Day Trade this year are: buy at the end of the trading day on Friday June 26th and sell on July 10th. Sometimes the market can extend its momentum into mid-July (July 19th), but this usually occurs in strong bull markets. Given that we are not in a strong bull market it would be seasonally prudent to exit on the standard Independence Day Trade date, or start to leg out earlier depending on market conditions at the time.
Below is a performance table for Independence Day Trade by year, by decade. The Independence Day Trade has worked 71% of the time since 1950 and has produced an average return of 1%. Interestingly, the trade worked very well in the 1950’s, 60’s and 70’s, on a frequency basis. In the 1980’s the trade was fl at and did not vary by more than 2.6%. In the 90’s the trade worked very well, although some of the positive results must be attributed to the strong bull of the 90’s. Since 2000, the trade has suffered its greatest losses in the bear markets of 2001, 2002 and 2008. Overall, the trade presents a fairly good short-term seasonal opportunity.
