26% a Year in 3 Easy Trades?

February 10, 2015Uncategorizedadmin

Some trading strategies make intuitive sense. Other trading strategies do not. With some trading strategies it is possible to articulate some logical reason or reasons regarding why they might be expected to work well over time. With others trading strategies, well, not so much.

Some trading strategies lend some confidence to a trader. Others offer nothing but a ridiculously good historical track record – and require a trader to make a leap of faith.

For example, consider the following seasonal trading strategy.

The Rules

*On the last trading day of January buy Energies (FSESX)

*On the 1st trading day of May sell Energies

*On the 7th trading day of August buy Biotech (FBIOX)

*On the 9th trading day of September sell Biotech

*On the 19th trading day of October buy Retail (FSRPX)

*On the 20th trading day of November sell Retail

The rest of the time the portfolio is held in cash. For the purposes of this test we will assume that the portfolio earns interest at a rate of 1% per year while in cash.

The Results

We will start our test on 12/31/1988. But before we look at the results of our “system” (such as it is), let’s first create something to compare it to. So for our “comparative result” we will split $1,000 evenly between:

Fidelity Select Energy Services (FSESX)

Fidelity Select Biotechnology (FBIOX)

Fidelity Select Retailing (FSRPX)

At the end of each year we will rebalance so that each year all three funds start with 1/3 of the portfolio. The daily equity curve for this 3-fund buy-and-hold approach (with an annual rebalancing adjustment) appears in Figure 1.

Figure 1 – Growth of $1,000 in FSESX/FBIOX/FSRPX from 12/31/88 to 12/31/14 (rebalanced annually)

In a nutshell, $1,000 invested this way grew to $31,165 by the end of 2014. This works out to about a +16.3% annual return, which in the technical financial jargon that we “highly trained quantitative analyst” types like to use, “ain’t too shabby.” Of course a close look at Figure 1 reveals some pretty nasty swings along the way. But hey, you “gotta take the good with the bad”, right?

Well, possibly “not.”

Now let’s look at the results generated following the switching rules listed earlier. The growth of $1,000 invested using this method since the end of 1988 appears in Figure 2 (the blue line). For comparison sake, the results we generated using the buy and hold approach is also displayed in Figure 2 (the red line).

Figure 2 – Jay’s Seasonal System (blue) versus 3 fund buy-and-hold (red); 1988-2014

Despite the fact that you may not be a “highly trained quantitative analyst” type, chances are good that even your untrained eye can pick up on the fact that there is a “discrepancy” between the blue line and the red line in Figure 2.

For the record:

-$1,000 invested using the buy-and-hold approach detailed earlier grew to $31,165, or +3,016% (+16.3% annually).

-$1,000 invested using the seasonal trading rules listed earlier grew to $347,003, or +34,600% (+26.7% annually).

In still more highly technical financial jargon, these types of 11.5-to-1 discrepancies in return are what we refer to as “statistically significant.”

The annual results for both methods are listed in Figure 3.

figure 3 – Results: Jay’s Seasonal System versus Buy-and-Hold (thru 2/4/2015)

A few interesting numbers:

Figure 4 – A few relevant comparative numbers

Other Choices

Fidelity sector funds are not the only choices. Other possible candidates:

XLE Energy Select Sector SPDR (ETF)

IBB iShares Nasdaq Biotechnology (ETF)

XRT SPDR S&P Retail (ETF)

OEPIX ProFunds Oil Equipment (x1.5 leveraged)

BIPIX ProFunds Biotechnology UltraSector (x1.5 leveraged)

CYPIX Profunds Consumer Cyclical (x1.5 leveraged)

Summary

So should every investor simply stop what they’re doing now and just make these three trades every year and sit back and collect their 26%+ per year ad infinitum into the future?

Well it sounds good in theory, but of course the reality – as is the case with any seasonal trend – is that there is no guarantee that these trends will play out as consistently or as strongly in the future as they have in the past.

Which is where the “leap of faith” I mentioned earlier enters into the picture and leads most traders to stand on the “outside looking in.” And maybe that is the wise thing to do.

Still, 26% is 26%. Or to quote the immortal words of Glenn Frey: “The lure of easy money – it’s got a very strong appeal.”

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

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.

A Time for Crude and a Time, um, Not for Crude?

January 20, 2015Uncategorizedadmin

I like to think of myself as a creative, independent thinker. Of course I’d also like to think of myself as handsome, charming and witty and look how that’s worked out. But I digress. Anyway, on my Twitter feed last week I posted a link to a piece from Stock Trader’ Almanac regarding a terrific seasonal trend in crude oil. Let’s take a closer look at what the boy’s at the Stock Trader’s Almanac lab uncovered.

The Stock Trader’s Almanac Crude Oil Seasonal Trend

The seasonal trend highlighted in the link to STA points out the fact that crude oil trends to be bullish for 60 trading days starting on February 13th (or the closest trading day to it). As we will see in a moment, the results are compelling. What is even more interesting is to compare the results generated by holding a long position in crude oil (or a crude oil ETF) during this time period to the results generated by holding a long position in crude oil all of the rest of the year.

The Test

For the record, the historical data that I use for crude oil futures is based on a “continuous contract” (which basically strings together the daily price change for the currently most active contract at any given point in time), so they may not exactly reflect what a real trader might have experienced in real-time trading. But they will be close. And the point of this exercise is not really the “raw” returns but the “relative” returns of the “bullish” period versus “all other” periods.

So for our test:

*Bullish Period

Starts at the close of trading on the last trading day prior to February 13th each year, and lasts for 60 trading days.

*Bearish Period

Starts at the end of the 60 day period described above and lasts until the close of trading on the last trading day prior to February 13th the next year.

The Results

Figure 1 displays the growth of equity achieved by holding a long position in crude oil futures (a $1 move in the price of crude oil equals $1,000 change in the value of the futures contract) during the bullish period (blue line) versus holding a long position in crude oil futures during the bearish period (red line) since April 5th, 1983 (when crude oil futures starting trading).

Figure 1 – $ +(-) for crude during bullish period (blue line) versus bearish period (red line); 4/5/1983 through 1/16/2014

For the record:

-During the “bullish” period crude oil futures gained roughly +$106,000.

-During the “bearish” period crude oil futures lost roughly (-$88,000)

Using ETFs instead of Futures

While the numbers above are compelling, let’s be honest, the vast majority of traders will never trade a crude oil futures contract (and in reality that is probably a good thing given the dollars and risks involved). So what about using an ETF that tracks the price of crude oil?

The most heavily traded crude oil ETF is ticker USO. Now I don’t wish to go into details but USO has had some – how shall I say this, um, performance issues – due to the way its portfolio is configured (i.e., it holds several months of futures contracts however, due to “contango” – whereby the farther out contracts trade at a higher price than the closer months – its share price has tended to lag the price of crude oil, particularly in up markets and, oh never mind. If you want to know more Google “contango and uso”).

Still, the results generated by this seasonal trend via USO are pretty compelling. Figure 2 displays the growth of $1,000 fully invested in USO only during the bullish seasonal period (blue line) versus $1,000 fully invested in USO only during the bearish seasonal period (red line) since USO started trading on 4/10/2006.

Figure 2 – Growth of $1,000 invested in ETF ticker USO during bullish period (blue line) versus bearish period (red line); 4/10/2006 through 1/16/2014

For the record:

-During the “bullish” period, $1,000 in USO grew to $1,861 (+86.1%)

-During the “bearish” period, $1,000 in USO declined to $146 (-85.4%)

These types of stark contrasts are what we “quantitative analyst types” refer to as “statistically significant.”

Summary

So does it make sense to simply buy and hold crude oil futures during the bullish period and to sell short during the bearish periods? Probably not. For the record I am not advocating this as a standalone strategy. A closer look at Figures 1 and 2 reminds us that large unexpected moves can and will happen regardless of what the “seasonals” are suggesting “should” happen. And as always, there is never any guarantee that the bullish phase will see higher prices nor that the bearish phase will see lower prices.

Probably a better way to use this information is to given the bullish case the benefit of the doubt during the bullish phase and vice versa. To wit, should crude oil show signs of bottoming out and/or attempting to rally starting around mid-February, aggressive traders might do well to look for ways to play the bullish side.

Thanks Stock Trader’s Almanac!

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

January 15, 2015: Market Minute: Into 2015

January 17, 2015Uncategorizedadmin

This post from Donald Dony (AIQ seminar speaker).

2015 marks the year with a very strong upside pedigree. Since
1895, every year that ended in a “5” has seen the S&P 500
advance. Only in 2005, did the U.S. index post its first negative return of
-0.61% (Chart 1).

That being said, the early stage of this year has the
set-up for a sharp correction in the S&P 500.

In the January 3, 2015: Market Minute titled “World markets continue to
separate from the U.S.”, we stated that the MSCI World (ex-USA) Index was
progressing lower while the U.S. index forges a new high (Chart 2).
As global markets can trend in different paths for a short time, they will
ultimately regroup and move again as one.

We expect the tailwinds of the steadily declining world markets to catch the
U.S. index in Q1.

Nevertheless, with a supporting background of performance in years that end in
“5” and the entrance into a secular Stock Cycle in 2012, we
anticipate the S&P 500 will advance to new highs by year-end.

Bottom line: The separation of global markets from the U.S. index strongly
suggests a short term correction is coming in Q1. However, the underlining
tailwinds points to favorable conditions for the S&P 500 by the second
half of 2015.

Our 2015 target remains at 2250 for the S&P 500.

Donald W. Dony, FCSI, CFTe, MFTA

D. W. Dony and Associates Inc.

4973 Old West Saanich Rd.

Victoria, BC  V9E 2B2

Ph. 250-479-9463

Fax. 250-479-9417

www.technicalspeculator.com

Great Days for Real Estate

January 7, 2015Uncategorizedadmin

This title implies that perhaps I am talking about the fact that real estate stocks have been performing quite well of late. As you can see in Figure 1, since bottoming in December 2013, the most heavily traded real estate ETF – ticker IYR – is up over 25%. And that is a good thing.

Figure 1 – Real Estate ETF Ticker IYR (Courtesy: AIQ TradingExpert)

But the most recent rally is not what I am talking about. I am referring more to what goes on “under the hood.”

As you may know if you (WARNING: Shameless Self-Serving Plug to follow) read my book “Seasonal Stock Market Trends”, I have a “thing” for seasonality in the financial markets. And I also understand that this is also not everyone’s “cup of tea.” Depending on one’s point of view seasonal trends can either be considered to be

a) Interesting and potentially useful, OR;
b) Data curve-fitting to the nth degree

Personally I choose a), but you may choose b). And that’s OK because if we reach the point where we all trade and invest the same then there won’t be anybody left to take the other side of our trades.

The Gist of Seasonal Trends
For the record, the underlying reason that I look at seasonal trends is to attempt to find an “edge.” I would guess that 90% of traders and investors look at fundamental and/or technical analysis. I would guess that no more than 10% of traders and investors look at seasonal trends. So my rhetorical question of the day is:

If you are looking for an edge in the markets does it make sense to look:

a) Where everyone else is looking, OR;
b) Where hardly anyone else is looking?

Again, the choice is yours.

The Best Days for Real Estate
For the following illustration of using seasonal trends we will use ticker REPIX, which is the Profunds Real Estate mutual fund. For the record, this fund uses leverage of 1.5-to-1. For those who want less risk – and are willing to settle for less return – there is the Rydex real estate mutual fund (ticker RYRIX) and many real estate ETFs – with ticker IYR being the most heavily traded.

The Strategy – We will hold ticker REPIX on the following trading days each month:

*The first two trading days of the month
*Trading day’s #8, 12 and 15
*The last four trading days of the month

Obviously this particular strategy is only for traders who are “hands on” and willing to hold positions for either 1 day (in the case of trading days 8, 12 and 15) or 6 days (the four end of month days plus the two start of the next month days). Once again, this is obviously not everyone’s “cup of tea.” Still, the results are fairly compelling.

Figure 2 displays the growth of $1,000 invested in ticker REPIX only during the days listed above starting on the August 8, 2000 (when REPIX started trading).

Figure 2 – Growth of $1,000 invested in REPIX during “Best Days” (Aug 2000-present)

For the record, $1,000 invested this way grew to $25,694. Now some people will look at the return and say “hmm, that look pretty good.” Others will look at the chart itself and say “Wow, that looks way to volatile.” But looking at a set of returns in a vacuum makes it hard to really judge things.
So to get a better feel for things, let’s compare the performance in Figure 2 to that of the S&P 500. In Figure 2 the blue line represent the growth of $1,000 invested in REPIX as described above while the red line represents the growth of $1,000 invested in ticker SPY on a buy-and-hold basis over the same time period.

Figure 3 – Growth of $1,000 invested in REPIX only on “Best Days” (blue line) versus SPY (red line) (Aug 2000-present)

For the record, $1,000 invested in REPIX during seasonally favorable days grew to $25,694 (+2,469%) while $1,000 invested in ticker SPY on a buy-and-hold basis grew to $1,390 (+39%).
One last comparison to make is to compare the performance of REPI on “seasonally favorable” days versus “all other trading days.” Figure 4 displays the growth of $1,000 invested in REPIX only during the trading days not listed above.

Figure 4 – Growth of $1,000 invested in REPIX only on “non favorable” days (Aug 2000-present)

$1,000 invested in REPIX only on all non-favorable seasonal days actually declined in value to just $82 (-92%).

So let’s sum up the results from August 2000:

SPY: +39%
REPIX non-seasonally favorable days: -92%
REPIX seasonally favorable days: +2,469%

For the record, the difference in the relative rates of return listed above are what we “quantitative analyst types” refer to as “statistically significant.”

Summary
So is everyone going to now resolve to trade real estate stocks on certain days of each and every single month going forward? Surely not. This strategy has serious risk and volatility involved. So this is not a “hey let’s bet the ranch” type of idea. Still, a roughly 30% a year average annual return typically does involve some risk.

So most people will shy away from anything even remotely resembling what I have just described. But if you carefully reread the section above titled “The Gist of Seasonal Trends” then you may come to understand that that is exactly my point.

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

December 23, 2014: Market Minute: A test for the NYSE

January 6, 2015Uncategorizedadmin

This post from Donald Dony (AIQ seminar speaker) posted on December 23, 2014 was right on the nail.

U.S. Equity markets continue to share one element that the rest
of the world’s markets largely failed to accomplish; they are still trending up

However, a significant test is coming for the benchmark NYSE. The index
needs to pass through the 11,100 resistance level to continue the uptrend.

For six months, this mark (11,100) has kept the U.S. index pinned.

Global stock markets normally trade together. Although separation can occur for
six to eight months, they will eventually move as one.

In the lower portion of the chart, is the MSCI World (ex USA) index.

It shows that the peak occurred in mid-year and a new downtrend has been
in-place for five months.

Bottom line: Separation has developed between the benchmark NYSE Composite and
the MSCI World (ex USA) index since August.

The expectation is that the two indexes will move back in sequence in Q1.

We believe that the NYSE will find crossing the 11,100 level a challenge in the
coming months and that the path of the MSCI World (ex USA) index will likely
dominate the NYSE.

Donald W. Dony, FCSI, CFTe, MFTA

D. W. Dony and Associates Inc.

4973 Old West Saanich Rd.

Victoria, BC  V9E 2B2

Ph. 250-479-9463

Fax. 250-479-9417

www.technicalspeculator.com