Don’t you just hate titles like this one?  I mean if you are into the stock market you almost can’t help but to click on it – even if for no other reason than to seek the answer to that age old question, “What’s the catch?”

Now in this case the title is accurate, at least in the hypothetical sense.  But as you probably know, for any book, article or publication the name is everything.  For example, if the title of this article were “Would You Be Willing to Risk $3,000 on a Trade for the Chance of Making as Little as $25 on Said Trade?” (which would also be hypothetically accurate), you would be a lot less likely to click on the link, right?  I mean let’s be honest here.

So, yes, technically you can’t judge a book (article or publication) by its cover.  But in reality, we all do it all the time.  So just remember that  the people designing the covers have a vested interest in getting you to open the cover, so be forewarned.

Hence the title of this article.  But since you’ve already “cracked open the cover”, why not read on a little further?  (Insidious, no?)

A Seasonal Oversold “Idea”
Note the use of the word “Idea” in the section title.  And also please remember that the word “idea” is quite different from the words “sure” and/or “thing” and way different from the phrase “you can’t lose.”  So again, be forewarned.  In the interest of full disclosure I am not attempting to urge you to use the “idea” spelled out below – only to be “aware” of it and to consider whether or not it might “fit your style.”

So what’s this all about?  Simple.  Awhile back I wrote a piece titled “Happy Days are Here, Um, Next Monday?” that in a nutshell highlighted the fact that the stock market tends to perform well between the close of trading on the Friday before Thanksgiving and the close of the third trading day of the following January.  The “idea” in this article builds from that trend.

Entry Rules
Here are the “rules” (to paraphrase the immortal words of Bill Murray, they are really “guidelines” more than “rules”, but here goes):

*If today is between (and including) the Friday before Thanksgiving and the third trading day of the New Year, AND;
*The 2-day RSI is below 30, a “buy alert” is signaled.
*After a “buy alert” occurs, a “buy signal” occurs when the E-mini S&P 500 exceeds a previous day’s high price (however, a “buy signal” cannot occur after the third trading day of January).

Exit Rules (OK, again – Guidelines):
*Sell if the E-mini S&P declines 60 (i.e., $3,000 per contract) points from the buy trigger price (i.e., the previous day’s high + 0.25 points), OR
*On the first profitable close.

Results
Starting in November 2004 there have been 42 trades.  During this time there have been no post buy declines of 60 points (although a few have come close), hence the reason no losing trades.
Figure 1 displays the most recent signal using the December 2014 E-mini S&P 500 contract.

 

Figure 2 displays the trades from the 2013-2014 periods.

Figure 3 displays the trades from the 2012-2013 periods.

Figure 4 displays the trades signaled each year during the bullish seasonal period (assuming a 1-lot per trade).

A few things to note:

*42 winners, 0 losers
*Maximum drawdown per 1-lot = -$2,125
*Average winner in points (dollars) = +9.32 (+$466)
*Median winner in points (dollars) = +6.00 ($300)
*Average Maximum drawdown per trade in points (dollars) = -11.74 (-$587)
*Median Maximum drawdown per trade in points (dollars) = -9.38 (-$469)

Summary
So on the face of it, anything that is capable of generating 42 consecutive winning trades would seem to have some merit to it.  On the other hand, with any trading method it is critically important to look “under the hood” and make some realistic assessments regarding the actual usefulness of said method.

The system rules include a 60 point stop-loss for the E-mini S&P 500 futures contract.  At $50 a point, this equates to a potential loss of $3,000 per contract per trade.  The average dollar profit was only $466 and the median dollar profit per trade was $300.

The key elements of risk in this method then are:

1) One losing trade of $3,000 could require a number of trades to come back from.
2) Using a tight stop-loss will result in a number of losing trades that would ultimately have ended up winners.

So the question for a trader to ask is – can we judge this book by its cover?

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

December has historically been a bullish month for the stock market. In fact, over the past 24 years, buying and holding an S&P 500 Index fund during the month of December would have netted a gain 20 times, or 83.3% of the time, with an average gain of almost +2% (+1.93% actually).  A lot of investors might be tempted to say “That’s good enough for me”, and who could blame them?
But there might be a way to do even better.

Certain sectors show historical tendencies to perform well during certain times of the year.  So let’s look at a simple 3 fund portfolio that has performed quite a bit better than the S&P 500 over the past 24 years.

The “December Three”
The three sectors are Biotech, Software and Home Construction.  Figure 1 displays some potential trading vehicles.

Results
For testing purposes we will use the Fidelity funds listed in Figure 1 as they have historical data going back much further than the ETFs listed.

Figure 2 displays the annual result of a portfolio split evenly between the three funds versus the S&P 500 Index.

Figure 3 displays the growth of $1,000 invested only during the month of December in the “Fidelity 3” versus the S&P 500 Index.

Figure 4 displays the relevant comparative figures.

A few things to note:

*The Fidelity 3 has gained an average of +4.21% versus +1.93% for SPX.
*The Fidelity 3 median gain was +2.52% versus +1.25% for SPX.
*The Fidelity 3 has showed a higher standard deviation, but also a *higher Average/Standard Deviation.
*The worst December for the Fidelity 3 was -4.99% versus -6.03% for SPX.
*Interestingly, the Fidelity 3 has been up 19 times and down 5, versus up 20 and down 4 for SPX. 

However – and most importantly – the Fidelity 3 has outperformed SPX in 18 of the past 24 years.

Summary
So are biotech, software and home construction guaranteed to show a gain and outperform the S&P 500 this December.  Not at all. But for an investor looking to “beat the market”, it certainly is “food for thought.”

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

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/