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The 3 Days of the Month to Avoid

educational newsletters, jay kaeppel, seasonal, trading strategy

Some days are just better than others – am I right or am I right?  As a corollary, some days are worse than others.  Wouldn’t it be nice to know in advance which days were going to be which?

Well, when it comes to the stock market, maybe you can.

The 3 Days to Miss

 For our purposes we will refer to the very last trading day of the month as TDM -1.  The day before that will be TDM -2, the one before that TDM -3, etc.  Now let’s focus specifically on TDMs -7, -6 and -5.

 Let’s now assume that we will buy and hold the Dow Jones Industrials Average every day of every month EXCEPT for those three days – i.e., we will sell at the close of TDM -8 every single month and buy back in 3 days later.  We will refer to this as Jay’s -765 Method.  Granted some may not be comfortable trading this often, but before dismissing the idea please consider the results.

Figure 1 displays the growth of $1,000 invested in the Dow as described above versus the growth of $1,000 from buying and holding the Dow.

*The starting date for this test is 12/1/1933.
*For this test no interest is assumed on the 3 days a month spent out of the market.
1

Figure 1 – Growth of $1,000 invested in Dow Industrials during all days EXCEPT TDM -7,TDM -6 and TDM -5 (blue line) versus $1,000 invested in Dow Industrials using buy-and-hold (red line); 12/1/1933-8/15/2016

For the record:
*Jay’s -765 Method gained +94,190%
*The Dow buy-and-hold gained +18,745%

While these results are compelling, the real “Wow” comes from looking at would have happened if you had been long the Dow ONLY on TDMs -7,-6 and -5 every month since 1933.  These results appear in Figure 2 (but you’d better brace yourself before taking a glance).
2

Figure 2 – Growth of $1,000 invested in the Dow ONLY on the 7th to last, 6th to last and 5th to last trading days of every month since 12/1/1933

The net result is an almost unrelenting 83 year decline of -80%.

Summary

 I would guess that some readers would like me to offer a detailed and logical reason as to why this works.  Unfortunately, I will have to go with my stock answer of “It beats me.”  Of course, as a proud graduate of “The School of Whatever Works” (Team Cheer: “Whatever!”) I am not as interested in the “Why” of things as I am the “How Much.”

Sorry, it’s just my nature.

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

Hedging Risk Away with Ticker TZA

educational newsletters, ETFS, jay kaeppel, trading strategy
It pains me to say that I don’t know where the stock market is going next.  You would think that after being in the markets for so long and following a bunch of indicators and systems etc., that by now I would have developed some ability to divine what is coming next.
Alas, I have not.
But I do know three things:
*My trend-following stuff is bullish so I need to give the bullish case the benefit of the doubt (no matter how nervous or cynical I may be).
*Based on a variety of indicators the market is certainly getting overbought
*Based on the calendar, some caution may be in order
So, a thought today for those who might be wishing to hedge away some of their market risk.
Ticker TZA
Ticker TZA is not necessarily one of my favorites.  It is an ETF that tracks 3 times the inverse of the Russell 2000 small-cap index. In other words, if ticker RUT falls 1% today then TZA should rise 3%.  There are two primary concerns to keep in mind before considering buying shares of TZA are:
*The shares are extremely volatile
*The shares have experienced a serious downside bias – even when RUT is headed sideways (See Figure 1).
1
Figure 1 – Ticker TZA (black bars) versus Ticker RUT (Russell 2000) (Courtesy AIQ TradingExpert)
So if you are going to buy TZA you’d better pick your spots. As I discussed here we are entering an “interesting” time for the market.  So let’s explore the possibility of buying a call option on ticker TZA as a hedge against a potential market decline.
Call Option on TZA
Remember, TZA should increase in value if the Russell 2000 declines.  Therefore, a call option on TZA should also increase in value if the Russell 2000 declines.
As you can see in Figure 2, the “implied volatility” (which generally tells you whether there is a lot of time premium built into the price of the options for a given security) for options on TZA is near the low end of the historical range.  This tells us that there is relatively little time premium built into TZA options, therefore they are “cheap”.
2
Figure 2 – Implied option volatility for options on TA near the low end of the historical range (Courtesy www.OptionsAnalysis.com)
Next I ran the “Percent to Double” routine in www.OptionsAnalysis.com (see output in Figure 3.  The phrase “percent to double” tells us what percentage the underlying stock must rise in order for the call option to double in price.
3
Figure 3 – Percent to Double routine suggests buying Sep30 TZA call which will double in price if TZA rises 12.56% (i.e., if RUT declines by roughly -4.19%) (Courtesy www.OptionsAnalysis.com)
Figures 4 and 5 display the particulars and risk curves for buying 10 TZA Sep 30 calls.
4
Figure 4 – TZA Sep30 details (Courtesy www.OptionsAnalysis.com
5
Figure 5 – TZA Sep30 risk curves (Courtesy www.OptionsAnalysis.com)
A few things to note:
*The cost to buy 10 is $2,550.
*TZA is trading at $30.25/share.
*The breakeven price for this trade is $32.25 (if TZA is below $32.25 at expiration and we still hold this position then we will lose -$2,250)
*There are 50 days left until September expiration
*The trade has unlimited profit potential
Regarding potential, in Figure 6 we see that if TZA rallies back to its June low of $33.77 this trade will generate a profit of between $1,500 and $2,400 depending on how soon  that price is reached
6
Figure 6 – A potential 1st profit target for TZA hedge (Courtesy www.OptionsAnalysis.com)
Summary
Is this a good trade?  I can’t say for sure that it is.  In fact, the only way this trade makes money is if the broader market suffers a hit, so a good part of me would prefer to see this trade “not work out”.
But the point of all of this is simply to point out that it is possible to hedge against a significant market decline by buying call options on an inverse leveraged ETF.
Mr. Market, you take it from here.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client

August/September – Play it Safe or Swing for the Fences?

educational newsletters, jay kaeppel, seasonal
We are entering an “interesting” time of year for investors (Unfortunately, that’s “Interesting” as in the ancient Chinese curse stating “May you live in interesting times”).
Now I personally I have no idea if the stock market is going to break out to the upside and rally to further new highs or if this latest lull will be followed by a painful reversal of fortune.  I am willing to play the long side as long as things are holding up/moving in the right direction.  But investors should be aware that the August/September timeframe is the “Danger Zone” for the stock market historically.
August/September Historically
Figure 1 speaks for itself.  The chart displays the growth of $1000 invested in the Dow Jones Industrials Average only during the months of August and September every year starting in1934.
1
Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average (using price data only) ONLY during August and September; 12/31/1933-present
Two key takeaways:
*The net result has been a loss of -53% or the past 82 year.  Not exactly the kind of returns most of us are looking for.
HOWEVER
*Despite the negative net results, the fact is that the Aug/Sep period has showed a gain more often (45 times) than not (37 times).
So while caution appears to be in order, no one should assume that the next two months are doomed to show a loss.
Stocks versus Bonds
Figure 2 compares the performance of:
Ticker VFINX – Vanguard S&P 500 Index fund
*Ticker VFIIX – Vanguard Mortgage Bond Fund
(*VFIIX is used as a proxy for intermediate-term treasuries as it has a high correlation to IT treasuries and a longer data history.  Any short-to-intermediate term treasury fund or ETF would likely produce similar results)
The test starts in 1980 (when VFIIX started trading) and shows the total return for buying and holding each fund ONLY during the months of August and September each year since.
2
Figure 2 – Growth of $1,000 invested in VFINX (stocks; blue line) versus VFIIX (bonds; red line); August 1980 to present
Summary
So what will it be this year?  A breakout to new highs?  Or something much worse?  I wish I could tell you the answer.  But at least now you have some information to help guide your “speculative” versus “conservative” instincts in the months ahead.
Jay Kaeppel
Chief Market Analyst at JayOnTheMarkets.com and AIQ TradingExpert Pro (http://www.aiqsystems.com) client

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chart patterns, EDS, stock market

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The State of Dividends for U.S. Stocks

educational newsletters, fundamental analysis
Dividends for U.S. companies continue to be under pressure as fewer issues are increasing payments and those issues that do increase do so at a lower rate. Within the S&P 500®, the average dividend increase for Q2 2016 was +10.56%, down from +10.62% in Q1 2016 and +13.08% for all of 2015. The pace of dividend cuts continues to rise, as Q2 saw a substantial increase in cuts from mid and small-cap energy issues, with the overall aggregate dollar 12-month cuts rising 157% over the prior 12-month period. Yet, the over-all dividend increases continue to outweigh the decreases. So the outlook remains positive.

Energy and Materials issues are expected to remain under pressure for 2016, potentially resulting in disappointing announcements for earnings, capital investments, buybacks and dividends. Assuming dividend policies remain unchanged, the U.S. equity market in 2016 is positioned to set another record in payments, especially in the S&P 500®, but the increase is seen as being in the mid-single digit range, not the double-digits seen over the past few years.

The good news for dividends is that, while things are difficult, the majority of issues continue to increase and have the resources to do so for the near future.
Large, Mid, Small Caps
Within the S&P 500®, 418 issues, or 82.8% currently pay a dividend. All 30 members of the Dow Jones Industrial Average® pay a dividend as well.
Within the S&P Mid Cap 400®, 69.3% of the issues within pay a cash dividend, a decrease from 70.3% in Q1 2016. Within the S&P Small Cap 600®, 51.4% of the issues pay a dividend, which is unchanged from Q1 2016.
Yields continued to vary among the various market indices.
Large-Caps at 2.17% (no change from the 2.17% in Q1 2016).
Mid-Caps at 1.68% (1.69% in Q1 2016).
Small-Caps at 1.38% (1.47% in Q1 2016).
The yields across dividend paying market-size classifications continue to be compatible, with large-caps coming in at 2.54% (the same as Q1 2016), mid-caps at 2.37% (2.36% in Q1 2016) and small-caps at 2.47% (2.50% in Q1 2016). 
Contributed by Top Stock Analyzer
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