The 40-Week Cycle ‘ReSectored’

In my last piece I got “down in the weeds” a bit and detailed something known as the 40-Week Cycle in the stock market.  This follow-up fits under the category of “there’s more than one way to skin a cat” (which is one of those old sayings that is actually kind off disgusting if you stop and think about it for any length of time – so my advice is to just keep reading).

(See also The One Asset Class Per Month Strategy)

Using Sectors instead of an Index

The original article implied that an investor would have done much better holding an S&P 500 Index fund only during the 1st 20-weeks of each 40-week cycle.  In this piece we will look at one alternative using sectors funds.

First off – and as always – this blog does NOT offer investment advice, only trading and investment ideas. So nothing that follows should be construed as something you should rush right out and act upon.  This is especially true of the sector based idea I will discuss next.  The method should be thought of more as “food for thought” or even a “good starting point” than as a “system.”  With that in mind, it goes like this:

*After the close of the day before a new 40-week cycle starts, I run the AIQ TradingExpert Relative Strength – Strong Short Term Report (See Figure 1).

*I ignore gold (ticker FSAGX) and real estate (FRESX) as these sectors are typically affected by factors not closely related to the action of the S&P 500.

*The top-ranked sector (excluding FSAGX and FRESX) is bought and held at the close the next day.

*The fund is held until the end of the first 20 weeks of the 40-week cycle, OR until the Dow Jones Industrials Average registers a close that is 12.5% or more below its price on the day the new 40-week cycle began.

1Figure 1 – AIQ Relative Strength – Strong Report (Courtesy AIQ TradingExpert)

One more ancillary rule: In a stock market decline, it is possible to have no sector funds show up in the Relative Strength – Strong report.  In that case, I go to the AIQ Relative Strength – Week Short Term Report and select the sector fund at the very bottom of the list (i.e., the “least weak” performer) – once again FSAGX and FRESX are excluded.3bFigure 2 – 40-week cycle sector trade (FSNGX); 5/13/2016-9/30/2016 (Courtesy AIQ TradingExpert)

Caveat: Remember, this “method” is NOT a recommendation. Any system or method that says I am going to buy and hold one single sector fund for roughly four and a half months regardless, is inarguably fraught with peril.  So why do I bother to bring it up?  Well, see the results in Figure 3.

(See also With Retailers, it’s ‘When’ Not ‘What)

Entry Date Exit Date Fund Sector % +(-) SPX

%+(-)

Difference $1,000 in sectors becomes $1,000 in SPX becomes
12/31/87 05/20/88 FIDSX* 16.9 0.7 16.2 1,169 1,007
10/07/88 02/24/89 FSHOX 10.2 4.4 5.8 1,288 1,052
07/14/89 12/01/89 FSHCX 14.5 7.5 7.0 1,475 1,130
04/20/90 09/07/90 FSELX (6.8) (2.8) (4.0) 1,374 1,098
01/25/91 06/14/91 FSPTX 14.3 12.8 1.5 1,570 1,239
11/01/91 03/20/92 FBIOX (8.9) 7.2 (16.1) 1,430 1,328
08/07/92 12/24/92 FSVLX 15.0 (0.2) 15.2 1,646 1,326
05/14/93 10/01/93 FSESX 15.1 4.0 11.1 1,894 1,379
02/18/94 07/07/94 FSHCX (3.4) (5.1) 1.8 1,830 1,308
11/25/94 04/13/95 FSDCX 7.9 13.5 (5.6) 1,974 1,485
09/01/95 01/19/96 FSELX (10.4) 11.6 (22.0) 1,768 1,657
06/07/96 10/26/96 FSRPX (1.4) 5.4 (6.9) 1,743 1,747
03/14/97 08/01/97 FSLBX 25.7 18.1 7.6 2,191 2,064
12/19/97 05/08/98 FSLBX 21.3 16.7 4.5 2,658 2,409
09/25/98 02/12/99 FDCPX 45.2 15.5 29.7 3,859 2,783
07/02/99 11/22/99 FSESX 8.0 (0.4) 8.4 4,166 2,771
04/07/00 08/25/00 FSELX 19.7 0.7 19.0 4,989 2,791
01/12/01 06/01/01 FSHCX 6.6 4.4 2.2 5,317 2,914
10/19/01 03/08/02 FSMEX 1.9 14.9 (12.9) 5,420 3,347
07/26/02 12/13/02 FSCHX* (2.6) 2.0 (4.6) 5,279 3,416
05/02/03 09/19/03 FSUTX 8.1 12.4 (4.3) 5,708 3,839
02/06/04 06/25/04 FSDCX (10.1) (2.1) (8.1) 5,129 3,759
11/12/04 04/01/05 FSRFX 1.0 (1.3) 2.3 5,180 3,711
08/19/05 01/06/06 FSESX 23.3 3.8 19.5 6,388 3,851
05/26/06 10/13/06 FSHCX 6.0 6.0 (0.0) 6,773 4,084
03/02/07 07/20/07 FSNGX 25.1 14.3 10.8 8,474 4,670
12/07/07 04/25/08 FDFAX (3.9) (5.4) 1.5 8,144 4,418
09/12/08 10/6/2008** FSRPX** (19.6) (30.0) 10.4 6,549 3,095
06/19/09 11/06/09 FSAVX 36.4 17.4 19.0 8,929 3,632
03/26/10 08/13/10 FSAIX (5.0) (5.0) 0.0 8,480 3,449
12/31/10 05/20/11 FSESX 7.4 8.1 (0.7) 9,106 3,728
10/07/11 02/24/12 FSRPX 11.7 16.9 (5.3) 10,167 4,359
07/13/12 11/30/12 FBIOX 4.4 1.9 2.5 10,617 4,444
04/19/13 09/06/13 FBIOX 17.9 2.6 15.4 12,521 4,558
01/24/14 06/13/14 FBIOX (5.0) 5.6 (10.7) 11,894 4,815
10/31/14 03/20/15 FBIOX 29.5 4.2 25.2 15,398 5,020
08/07/15 12/25/15 FSRPX 5.9 1.0 4.9 16,312 5,071
05/13/16 09/30/16 FSNGX 17.5 4.4 13.1 19,170 5,295

Figure 3 – 40-Week Sector Method versus SPX

*- Sector fund chosen from bottom of Relative Strength – Weak Report

**- Stopped out early following Dow Industrials 12.5% stop-loss

Note: The results presented in Table 3 are calculated using closing price data from eSignal and/or Finance.Yahoo.com and do not represent total return data.

For the record:

-The Sector Method outperformed SPX 25 times (66%)

-The Sector Method underperformed SPX 13 times (34%)

-The average gain for the Sector Method was +8.9%

-The average gain for SPX was +4.9%

-$1,000 invested using the Sector Method grew to $19,170 (+1,817%)

-$1,000 invested using the Sector Method grew to $5,295 (+429%)

The bottom line: So far the selected fund has outperformed SPX 2 out of every 3 trades and every once in awhile  you get an outsized big winner.  As always, past results do not guarantee future results,so be forewarned.

Summary

So is the 40-Week Cycle Sector Method the key to riches beyond the dreams of avarice?  Hardly.  In fact it ranks more closely as “High Risk/High (Potential) Reward”, or even better as “a good place to start for someone looking for new and unique ways to attach the market.”

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

 

The 40-Week Cycle Recycles

As a proud graduate of “The School of Whatever Works” I for one am not afraid to “get down in the weeds” when it comes to finding ways to get an edge in the stock market.  Take for example the 40-week cycle in the stock market.

I have written about this cycle several times in the past (here and here) so I won’t go into a long-winded explanation here.  To make a long story short, it goes like this:

Our test starts on 9/8/1967.

*A new 40-week cycle starts exactly every 280 days after that

*The 1st 20 weeks of the cycle is considered “bullish”

*The 2nd 20 week of the cycle is considered “bearish”

(DO NOT STOP READING – I know, I know.  It sounds ridiculous, right?  But at least consider the results detailed below)

For testing and actual trading purposes:

*During the “bullish phase” we will hold a long position in the Dow Jones Industrials Average

For actual trading purposes:

*A 12.5% stop is used as follows: If the Dow Jones Industrials Average declines 12.5% or more on a closing basis from its price at the start of the latest 40-week cycle, the “bullish” phase of the cycle ends (to put it mildly) and the “bearish phase” begins at the close of the next trading day (this has happened twice – in 1974 and in 2008).

*We will assume that interest is earned at an annual rate of 1% while out of the stock market.

Figure 1 displays the growth of $1,000 invested since 1967using the “system” detailed above versus buying and holding the Dow.1Figure 1 – Growth of $1,000 using the 40-Week Cycle System described above (blue line) versus buying and holding the Dow Jones Industrials Average(red line); 9/8/1967-2/7/2017

To put things in perspective, Figure 2 displays the growth of $1,000 invested in the Dow ONLY during every “bearish phase” since 1967.2Figure 2 – Growth of $1,000 invested in Dow Jones Industrials Average only during “bearish phases”;  9/8/1967-2/7/2017

For the record, since 1967:

*There have been 65 completed 40-week cycles

*The “bullish phase” has showed a gain 49 times (75%)

*The “bearish phase” has showed a gain 36 times (55%)

*The “bullish phase” has generated a net gain of +3,957%

*The “bearish phase” has generated a net loss of (-27%)

*Buying and holding the Dow has generated a net gain of +2,175%

The next 40-week cycle begins at the close on 2/17/2017. The “bullish phase” extends through the close on 7/7/2017.

Welcome to “the weeds”.

Jay Kaeppel

Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

January Barometer Flashes a ‘Buy’. Now What?

Three cheers – for the first time since 2013, the January Barometer is bullish. The January Barometer was devised by Yale Hirsch of The Stock Trader’s Almanac in the early 1970’s and is still tracked today at STA by his son Jeffrey Hirsch.  The simple theory is that “as January goes, so goes the rest of the year”, if January shows a gain then the 11 months from end of January through the end of December should also show a gain.

(See also A Two-Fund Portfolio for the Next Three Months)

For the record, since 1943 following a gain for the Dow Industrials during January, February through December shows:

  • # times up = 39 (83% of the time)
  • #times down = 8 (17% of the time)
  • Average Gain = +13.9%
  • Average Loss = (-12.3%)

 

Other Useful January Studies

The January Barometer – Myth or Statistically Relevant? By Eric Hein

What A Strong January Means For Stocks Historically by Dana Lyons

How to Use AND How NOT To Use This Information

The proper way to use this information is as “weight of the evidence” – i.e., as a reminder to be patient in giving the bullish case the benefit of the doubt between now and December 31st, 2017.

The improper way to use this information is to assume that things are “All Clear” between now and the end of the year and that you can simply forget all about your stock market investments – because there can be countervailing influences.  To wit:

(See also Months to Beware of in 2017)

(See also Out With the Old, In With the, Uh-Oh)

(See also The Sordid Past of Years Ending in ‘7’)

Jay Kaeppel

It’s Hard With ‘Oil’ These Choices

On 1/5/17 I wrote about a bearish position on ticker USO – an ETF that purportedly tracks the price of crude oil.  This article updates the status of that position and considers several potential actions from here.

(See also Why You Should Be Rooting for a Bullish January)

The Great Irony of Option Trading

The “Great Irony of Option Trading” is that the best thing about option trading is also the worst thing about option trading, as captured quite succinctly in:

Jay’s Trading Maxim #74a: The best thing about option trading is that there are so many choices.

Jay’s Trading Maxim #74b: The worst thing about option trading is that there are sooooooooooooo………………. many choices!

Unlike many stock and mutual fund strategies, option trading strategies are rarely of the “set it and forget it” variety.   Also, a given position can evolve and be adjusted into an entirely different – and potentially more favorable – position.  In the 1/5/17 article I wrote about a hypothetical bearish option position for crude oil.  In this piece we will update that trade and then examine some of those $%^& choices.

(See also A Two-Fund Portfolio for the Next 3 Months)

Bearish on USO

On 1/5/17 I wrote about a bearish position on ticker USO – an ETF that purportedly tracks the price of crude oil.  It involved buying the in-the-money February 13 put.  By buying in-the-money the negative effect of time decay was essentially eliminated as very little time premium was paid in the first place. Since that time USO has bounced up and down in a fairly tight range. As of the close on 1/30 the position had a small profit of $180 as displayed in Figure 1.

(click to enlarge)1Figure 1 – USO Feb 13 puts (Courtesy www.OptionsAnalysis.com)

So the question is “what to do from here.”  As always there are choices. To wit:

So Many Choices

Choice #1: A trader still thinks crude is going to break lower between now and February expiration (2/17).

In this case, no action needs to be taken.  As you can see in Figure 1, the good news is that if USO plunges this trade will make a lot of money. The bad news is that if USO rallies this trade could still turn into a $1,500 loss of premium.

Choice #2: A trader thinks USO will decline in the relatively near future but would like to cut the risk of experiencing a loss.

In this case the trader could:

*Sell 10 USO Feb 13 puts

*Buy 2 USO Mar 11.5 puts

(click to enlarge)2Figure 2 – USO Mar 11.5 puts (Courtesy www.OptionsAnalysis.com)

The good news is that there is now no risk of losing money on this trade.  The bad news is that the profit potential is greatly diminished if in fact USO does finally plunge in price.

Choice #3: Flip to a Bullish position.

As I have written about here and here, energy related securities and products have a tendency to rise during the late winter, early spring season. So let’s say a trader decides it’s time to cash in the existing trade and “flip to the other side”.  By making the trade below he or she can essentially “use the house money” to bet that crude oil will rally sharply in 2017.

*Sell 10 USO Feb 13 puts

*Buy 2 USO Jan18 13 calls

(click to enlarge)3Figure 3 – USO Jan18 13 calls (Courtesy www.OptionsAnalysis.com)

The good news is that the trader in this case now has until Janaury of 2018 for USO to make a move higher, with no risk of loss.

Choice #4: A trader has no idea which way USO is headed anymore but doesn’t want to risk the initial $1,500 anymore.

He or she might:

*Sell 10 USO Feb 13 puts

*Buy 1 USO Jul 11.5 call AND Buy 1 USO Jul 11 put

(click to enlarge)4Figure 4 – USO Jul 11.5 call and Jul 11 put (Courtesy www.OptionsAnalysis.com)

Summary

So which is the proper choice?  Ah, there’s the rub.  But now you have some idea regarding the “good news” and “bad news” associated with the many choices available to an option trader.

Remember, choose wisely.

Jay Kaeppel

Happy ‘Holiday Days’ in Action

The good news is that the stock market has demonstrated a persistent historical tendency to perform well around stock market holidays (as I detailed here).  The bad news is that we simply do not have enough holidays (can I get an “Amen”?) Well, at least not enough to justify a standalone holiday trading strategy.

Or do we?

(See also Why You Should Be Rooting for a Bullish January)

One Approach to Holiday Trading

For this test we will employ the following rules:

*If today is within 3 trading days before or 3 trading days after a stock market holiday we will hold ticker UMPIX (Profunds Ultra MidCap – which tracks the daily change for the S&P 400 MidCap Index times 2).

*For all other trading days we will hold cash and will assume we earn an annualized rate of interest of 1%.

*We will start our test on 2/7/2000, which was the first day of trading for ticker UMPIX

The growth of $1,000 invested using the rules above appears in Figure 1 along with the growth of $1,000 invested in the Dow Jones Industrials average on a buy-and-hold basis during the same time.1Figure 1 – Growth of $1,000 invested in ticker UMPIX using Holiday Days Trading Rules (blue line) versus buying and holding the Dow Jones Industrials Average (red line); 2/7/00-1/24/17

The annual returns for this method versus Dow buy-and-hold appear in Figure 2.

2

Figure 2 – Annual Results of Holiday Days Trading Method versus Dow Buy/Hold

*Figures for Year 2000 in  Figure 2 start on 2/7/2000

For the record:

*The system is in UMPIX only 20.75% of all trading days and in cash 79.25% of all trading days.

*The average annual return for System = +14.6%

*The average annual return for Dow Buy-and-Hold = +4.7%

*The maximum System drawdown was -34.3%

*The maximum Dow Buy/Hold drawdown was -53.8%

(See also Please Don’t Buy That S&P 500 Index Fund)

Summary

So is this simple approach to holiday trading a viable standalone strategy?  I will leave you to draw your own conclusions.

Jay Kaeppel

Happy ‘Holiday Days’

OK, I know what you’re thinking – “this guy is seriously behind (and a little redundant)”  Well, be all that as it may, I still want to talk about the holidays.  But I am not talking about any holiday in particular but rather ALL holidays and the trading days just before and after each.

(See also The Sordid Past of Years Ending in ‘7’)

Holidays and the Stock Market

The stock market has demonstrated a  tendency to perform well around U.S. market holidays.  Certain trading days around certain holidays have shown a tendency to perform better or worse than certain other trading days around certain holidays (example, for decades the Friday after Thanksgiving almost always showed  gain).  But rather than try to cut things too fine, we are going to look at one simple approach – what would the results look like if we bought and held the Dow Jones Industrials Average only during the 3 trading days before and the 3 trading days after each stock market holiday?  These include:

*Martin Luther King Day

*Presidents Day

*Easter

*Memorial Day

*Independence Day

*Labor Day

*Thanksgiving

*Christmas

*New Years

For our test we are going back to December 1933. The growth of $1,000 invested in the Dow only during the 6 trading days surrounding each stock market holiday (note that until the early 1950’s there were two holidays in February – Lincoln’s Birthday and Washington’s Birthday – which were ultimately combined into President’s Day.  Also, Martin Luther King Day was first celebrated in 1998) appears in Figure 1.

In order to capture only the market action around holidays, no interest is assumed to be earned during all other days.1Figure 1 – Growth of $1,000 invested in Dow Jones Industrials Average only during the 3 trading days before and 3 trading days after each stock market holiday (1933-2017)

As you can see in Figure 1 the long-term trend has been:

*Persistently favorable, but

*Not without bumps in the road

These “Holiday Days” comprise roughly 23.3% of all trading days. What makes the results fairly interesting is when we compare these “Holiday Days” to “all other trading days.”

Figure 2 displays the same line as in Figure 1 (blue line).  It also plots the growth of $1,000 invested in the Dow only during “all other trading days” (red line).2Figure 2 – Growth of $1,000 invested during “Holiday Days” (blue line) versus “All Other Days” (red line); 1933-present

For the record:

Measure Holiday Days All Other Days
% of All Trading Days 23.3% 72.7%
$1,000 becomes $18,121 $11,029
Cumulative % +(-) +1,712.1% +1,002.9%
% Up Days 54.7% 51.8%
%Down/Unch Days 45.3% 48.2%
Ave. daily %+(-) +0.0752% +0.0135%
Median daily%+(-) +0.0787% +0.0408%

Figure 3 – Facts and Figures for “Holiday Days” versus “All Other Days”

(See also With Retailers, it’s ‘When’ Not ‘What’)

Summary

Despite the fact that “Holiday Days” comprised only 23% of all trading days since 1933, they actually generated a greater cumulative return than the “other” 77% of all trading days. Likewise, they realized a higher percentage of up days and a much higher average and median daily rate of return.

So the summary in this case is simple:

We need to contact our representatives and demand more holidays!

Jay Kaeppel

With Retailers, it’s ‘When’ Not ‘What’

I’ve been seeing a number of panicked missives lately regarding the retailing sector.  They typically go something like this:

“Despite new highs for most of the major market indexes, the retailing sector has been struggling – and in some cases hit hard – therefore it is clearly (paraphrasing here) THE END OF THE WORLD AS WE KNOW IT, AHHHHHHHHHHHHH……………………..”

Or something along those lines.  And the truth is that they may be right.  But as it turns out, with the retailing sector it is typically more a question of “when” and not “what” (or even WTF for that matter).

(See also Months to Beware of in 2017)

Recent Results

The concerns alluded to above are understandable given recent results in certain segments of the retailing sector. Figure 1 displays the stock price action for four major retailers.  It isn’t pretty.

(click to enlarge)1Figure 1 – Major retailers taking a hit (Courtesy AIQ TradingExpert)

So if major retailers are performing poorly one can certainly see why someone might extrapolate this to conclude that the economy is not firing on all cylinders and that the recent rally to new highs by the major averages is just a mirage.  And again, that opinion may ultimately prove to be correct this time around.

But before swearing off of retailing stocks, consider the following.

Retailers – When not What

For our test we will use monthly total return data for the Fidelity Select Retailing sector fund (ticker FSRPX).  Figure 2 displays the growth of $1,000 invested in FSRPX only during the months of:

*February, March, April, May, November, December

2Figure 2 – Growth of $1,000 invested in ticker FSRPX only during the “favorable” months since 1986

For the record:

*An initial $1,000 grew to $50,274, or +4,927% (this test does not include any interest earned during the months out of FSRPX).

*# of years showing a net gain = 27

*# of years showing a net loss = 4

*Average UP year = +17.0%

*Average DOWN year = (-3.4%)

*Maximum UP Year = +50.0% (1990)

*Maximum DOWN Year = (-5.9%) (1994)

The Year-by-Year Results appear in Figure 3

Year % +(-)
1986 26.2
1987 15.8
1988 12.2
1989 16.9
1990 50.0
1991 45.5
1992 8.0
1993 4.6
1994 (5.9)
1995 3.0
1996 26.1
1997 18.1
1998 45.7
1999 4.0
2000 1.8
2001 12.5
2002 (0.1)
2003 18.5
2004 11.3
2005 10.3
2006 0.1
2007 (2.8)
2008 (4.7)
2009 44.9
2010 24.5
2011 4.6
2012 10.8
2013 16.6
2014 11.5
2015 6.1
2016 9.2

Figure 3 – Year-by-Year Results for  “Favorable” Months since 1986

The Rest of the Year

If for some reason you had decided to skip the months above and hold FSRPX only during all of the other months of the year, your results appear in Figure 4.4Figure 4 – Growth of $1,000 invested in ticker FSRPX only during the “unfavorable” months since 1986

For the record:

*An initial $1,000 grew to $1,037, or +3.7% (this test does not include any interest earned during the months out of FSRPX).

Summary

Is the retailing sector guaranteed to generate a gain during our “favorable” months in 2017?  Not at all.  Still, given that retailing is presently beaten down a bit and the fact that the worst full year loss during the favorable months was -5.9%, it may be time to think about taking a look (although – as always, and for the record – I am not “recommending” retailing stocks, only pointing out the historical trends).

Still, as the old saying goes, the results below are what we “quantitative types” refer to as “statistically significant”.

*Favorable months since 1986 = +4,927%

*Unfavorable months since 1986 = +3.7%

Jay Kaeppel

A Quick Look Back at the Biotech Bust

I don’t like to toot my own horn.  Wait, come to think of it, actually I do.  The problem is that I just don’t get the opportunity very often. The truth is that I am just not very good at “predicting” things.  Fortunately, being a trend-follower – or more often a “buyer on a dip in an uptrend”, my shortcomings as a “visionary” aren’t the end of the world.

(See also: Out With the Old, In With the, Uh-Oh)

Still, if you pay close enough attention to the markets eventually you can sort of get a sense when history is repeating.  And every once in a great while – and admittedly in this case, by sheer coincidence – you get one exactly right.  In this article, dated 7/17/2015, I noted that the biotech sector appeared to be was experiencing a blow-off top – similar to, if not even more extreme than the 1998-2000 blow off top.

As you can see in Figure 1 below, the date of that article just so happened to coincide with the exact day that Fidelity Select Biotech topped out.  From there FBIOX plunged -48% in 7 months. Even today – and despite new highs by most of the major stock market average – FBIOX languishes -38% off of its July 2015 high.20a 1Figure 1 – Fidelity Select Biotech(ticker FBIOX)

So does this mean that I am capable of calling tops and bottoms with uncanny accuracy?  Har.  (Pssst, and the truth is there is no one who actually can).  What it does mean is that – at least on occasion – I may have the ability to identify a high risk area for a given security.  Turns out that’s a pretty valuable skill to develop.

Toot toot

Jay Kaeppel

The Sordid Past of Years Ending in “7”

Don’t worry, this story does not involve Russian hookers (nor Blue Dresses).  It is still a pretty sordid tale.

In Months to Beware of in 2017 I included certain months “within Years Ending in 7” as months to be cautious.  The “Years Ending in 7” seems pretty obscure but is founded in the “typical” pattern for the stock market across a given decade.  Figure 1 below is from something written by Martin Pring in 2009 or 2010.  But it shows a chart with the “typical Decennial Pattern” (he draws three lines, one for secular bull markets, one for secular bear markets and one for “All Decades” the blue line in the middle).  Note that Years 7 within a secular bull market tend to take a big hit in the 2nd half of the year.decennial patternFigure 1 – The Decennial Stock Market Pattern (Martin Pring)

(See also The One Asset Class Per Month Strategy)

Note the tendency for a meaningful decline during Year 7.  If you click on the link above and scroll down to Page 11 you can see the decade-by-decade results for the Dow. Here is what you’ll find:

Years that witnessed a meaningful decline:

1907

1917

1937

1957

1977

1987

2007

Year that witnessed intermediate-term tops

1947

1967

1997

Years relatively unaffected

1927

Note that 1927 is the only Year 7 that escaped relatively unscathed.  So that’s why “Years Ending in 7” was included in Months to Beware of in 2017.  Does any of this guarantee a bad year for the stock market in 2017?  Not at all.  But – referencing my earlier article – the months of February and especially September and October has witnessed alot of stock market  mayhem  during Years ending in “7”.

Here’s hoping that 2017 will  be the exception to the rule.

Jay Kaeppel

Months to Beware of in 2017

We are going to go “off the beaten” a bit (or perhaps I should say a bit more than usual) this time out and highlight an anomaly that may be either:

*Potentially very useful

*Completely Random

You make the call.

(See also A Two-Fund Portfolio for the Next 3 Months)

A Tale of Two “Types of Years” and 3 Unfavorable Months Therein

In the realm of the slightly mind-addled world of seasonal trend analysis, 2017 is:

*A Post-Election Year

*Year “7” in the Decennial Calendar

For what follows we will use monthly closing prices for the Dow Jones Industrials Average starting in 1889 (yes, I said 1889).

For reasons I cannot explain the months of February, September and October are the only months that have lost money on the whole during both Post-Election years and during Years ending in “7” (1897, 1907, etc.).

Figure 1 displays the growth of $1,000 invested during the months of February, September and October during Post-Election years starting with 1889.1Figure 1 – Growth of $1,000 invested in Dow Industrials during February, September and October of Post-Election Years only starting in 1889

Figure 2 displays the growth of $1,000 invested during the months of February, September and October during Years ending in “7” starting with 1897.2Figure 2 – Growth of $1,000 invested in Dow Industrials during February, September and October of Years ending in “7” only starting in 1897

As you can see in Figures 1 and 2, for some inexplicable reason during these 3 months during these 2 “types” of years, the Dow just doesn’t seem to ever do much to the upside.

Now let’s put these Years and Months together. For the next test we will assume that:

*We buy and hold the Dow Jones Industrials Average ONLY during the months of February, September and October

*ONLY during Post-Election years and in Years ending in 7.

*We start with $1,000 on 12/31/1888

Figure 3 displays the results.3Figure 3 – Growth of $1,000 invested in Dow Jones Industrial Average only during months of February, September and October during Post-Election years and Years ending in “7”

The net result – a cumulative loss of -84%.

For the record:

*# of times these 3 months showed a cumulative gain = 15 (39%)

*# of times these 3 months showed a cumulative loss = 23 (61%)

*Average gain during positive years = +5.2%

*Average loss during negative years = (-10.2%)

While the chart in Figure 3 suggests a steady long-term decline during these unfavorable months, the reality is that these 3 months only register a net loss in 3 out of every 5 Post-Election years or Years ending in 7.

Summary

The results above fit neatly into the “Well it’s interesting and sort of seems important, but what exactly am I supposed to do with this knowledge?” category.

So what is in investor to do?  Move to cash during February, September and October this year? Well that’s one approach.  Overkill? Perhaps.  Another approach might be to consider hedging if the market begins to roll over, particularly during the often troublesome months of September and October.

The concerns for September and October do dovetail with the cautionary tale told in this previous article.

Jay Kaeppel