As I wrote about last week (http://jayonthemarkets.com/2013/08/19/september-looms-and-why-you-should-care/), the month of September has a well earned reputation as the worst month historically for the stock market.  However, Wayne Whaley of Witter & Lester, Inc. in Huntsville, AL and a colleague of mine in the American Association of Professional Technical Analysts (AAPTA for short, mercifully) recently posted a fascinating insight regarding the month of September.  Now I don’t want to try to steal his thunder so I am going to leave out most of the numbers.  But here is the gist: Since 1950, if the S&P 500 index is up in July and down in August, then the S&P 500 has showed a gain in September 11 out of 15 times, including the last 8 in a row.  The last occurrence was 2010, when the S&P gained 8.76% during September.

Unless the market rallies very sharply in the last few days of August this year, the pattern will be in place once again, suggesting a bullish September rather than the “traditional” bearish one.  That being said, there is still the “early September” versus “late September” effect.

Bullish Setup Septembers

Figure 1 displays the growth of $1,000 invested in the Dow Jones Industrials Average during those Septembers since 1950 that were preceded by an up July and a down August as follows:

-The blue line represents the growth of $1,000 invested in the Dow during the first 11 trading days of September during these “bullish setup” years.

-The red line represents the growth of $1,000 invested in the Dow during September trading days after the 11^th trading day of the month during these “bullish setup” years.

Figure 1 – If July is up and August is down, growth of $1,000 invested in Dow during first 11 trading days of September (blue line) versus trading days 12 through 21 (red line)

As you can see, typically the bulk of the strength occurs in the first 11 trading days of September, with the days after that being kind of “hit or miss.”  So if August 2013 closes with a loss for the S&P 500, it might make sense to look for favorable stock market action through September 17^th (trading day #11).  After that, all bets are off.

Non Bullish Setup Septembers

One other interesting (OK, interesting in a “Hi, my name is Jay and I am a numbers geek” kind of way) thing to note is that Wayne’s finding helps uncover one of the most persistently bearish seasonal trends around.

Figure 2 displays the growth of $1,000 invested in the Dow Jones Industrials Average during those Septembers since 1950 that were preceded by anything other than up July and a down August as follows:

-The blue line represents the growth of $1,000 invested in the Dow during the first 11 trading days of September during these “non bullish setup” years.

-The red line represents the growth of $1,000 invested in the Dow during September trading days after the 11^th trading day of the month during these “non bullish setup” years.

Figure 2 – If something other than “July is up and August is down”, growth of $1,000 invested in Dow during first 11 trading days of September (blue line) versus trading days 12 through 21 (red line)

As you can, if Wayne’s up July, down August pattern is not in force, the first 11 trading days of September are nothing to write home about, but more significantly, the performance of the Dow during September trading days 12 through 21 represent something resembling an escalator to hell.

Summary

If any of this holds true to form this year, then:

-If the S&P 500 closes down for the month of August, the market may surprise to the upside at least through September 17^th.

-(Ironically) if the S&P 500 musters a significant rally in the next several days and closes August with a gain, some sort of defensive action – whether selling something to raise cash or hedging with options – would appear to be in order, particularly during the second half of September.

As I said last time, just in case, please keep those seatbelts fastened.

Jay Kaeppel

Sometimes its not “what” you invest in but “when” you invest in it.  Seasonal trends can be very useful, particularly to those who are,a) willing to trade short-term, and b) have the discipline to follow a strategy consistently over time.

To wit, the three day period comprised of the last two trading days of the month and the first trading day of the next month has showed a long-term tendency to be bullish for gold stocks.  In Figure 1 you see the growth of $1,000 invested in Fidelity Select Sector Gold (ticker FSAGX) during this three day period every month since October 1988.

Figure 1 – Growth of $1,000 invested in ticker FSAGX last two days and first day of every month since 1988

The good news is that hypothetically $1,000 initial investment would now be worth $8,098.  The bad news is that due to Fidelity’s fairly strict switching restrictions you can’t actually make this trade every month using FSAGX without racking up some significant fees (and ultimately having your switching privileges suspended.)

Fortunately there are alternatives.  One of the best is ticker ProFunds Gold mutual fund Growth of $1,000 (ticker PMPIX) which tracks the Dow Jones U.S. Precious Metals index times 1.5.  While leveraged fund returns can get a little dicey over longer periods of time, they can be ideal for short-term trades such as this.  Figure 2 displays the growth of $1,000 invested in PMPIX only during this 3-day bullish month end period every month since its inception of trading in June 2002.

Figure 2 – Growth of $1,000 invested in ticker PMPIX last two days and first day of every month since 2002

Other alternatives include ETF ticker GDX and GDXJ – unleveraged funds that track well established gold mining companies (GDX) and “junior” gold mining companies (GDXJ), respectively.

One last alternative – for the daredevils out there – is Direxion Daily Gold Miners Bull 3X (ticker NUGT).  As explained in its prospectus, ticker NUGT “seeks daily investment results, before fees and expenses, of 300% of the price performance of the NYSE Arca Gold Miners Index.”  In other words, if that index rises 3% today, ticker NUGT should rise roughly 9%. 

Triple leveraged ETFs are very tempting to many individuals thanks to their potential for outsized returns.  But no one should hold a triple leveraged fund without being fully aware of the dangers involved.  The only real appropriate way to use a 3x fund is in the very short-term if you fell you have an edge.  Now for something of a “magic trick”, take a look at Figure 3. 

The blue line depicts the growth of $1,000 invested in NUGT only during the 3-day seasonal bullish period each month since NUGT started trading on 12/8/10.  As you can see, $1,000 tripled in under 3 years times, before suffering a sharp -15% loss in just three trading days during the “bullish seasonal period” in July-August 2013.  All told, a gain of +153% since December 2010, still clearly not for the faint of heart, nor for a significant portion of anyone’s portfolio.

Figure 3 – Growth of $1,000 invested in ticker NUGT during bullish seasonal period (blue line) versus $1,000 invested in ticker NUGT during all other trading days (red line) since December 2010

Still this performance is fairly impressive considering the performance of the red line in Figure 3.  What is this you might ask?  The red line depicts the performance of $1,000 invested in ticker NUGT during all other trading days (i.e., NOT the last two trading days or the first trading day of each month) since inception in December 2010.  So how much of the original $1,000 is left?  Not much.  $19.21 to be exact.

This represents a loss of -98.1% (which is what we “quantitative types” refer to as “statistically significant”).  This clearly illustrates the potential dangers of buying and holding 3x funds for long periods of time.  It also illustrates the potential benefits of paying attention to seasonal trends.  A gain of +153% versus a loss of -98%.  You decide.

Summary 

The next “bullish seasonal period” for gold stocks starts at the close of trading on Wednesday, August 28th and extends through the close of trading on Tuesday, September 3^rd.  Are gold stocks “guaranteed” to rise in price during this time.  Not at all.  Gold stocks should always be viewed as a risky investment.  But for the person who is willing to speculate, this simple seasonal trend offers the potential for capital appreciation over the longer term. 

But you better fasten your safety belt just in case.

Jay Kaeppel

It’s never to late to start…….http://tinyurl.com/md2c7jt

Not my work – someone elses.  And I am not quite sure I am ready to jump on this bandwagon, but as a student of seasonal trends I find this fairly interesting – “10 stocks that go up in late August” http://tinyurl.com/mmvpr27

Yes, September is still a few weeks away – thank goodness, because I for one am NOT ready for summer to end.  But it’s always a good idea to plan ahead.  With the stock market having staged a big advance so far this year and with a few supposed signs of “topping action” (whenever I hear that phrase it always makes me think about chocolate, but enough about my addictions), it makes sense to note the by now not little known fact that historically the month of September has by far been the worst performing month for the stock market.

Figure 1 displays the grim tale quite clearly.  This chart displays the cumulative gain or loss registered by the Dow Jones Industrials Average during each calendar month starting in 1955.

Figure 1 – Cumulative % Gain for each calendar month (January 1955-Present)

As you can see, while May, June and August also registered net losses (of -10.6%, -20.9% and -11.6%, respectively), the Dow has lost a cumulative -49.1% during the month of September.  So the obvious question is “should we sell now and buy back on September 30^th?”  Well, not necessarily.  For the record, the Dow has gained ground in 6 of the last 8 years during the month of September, gaining at least +2.3% or more on 5 of those occasions.  So remember, the message here is not that the stock market is sure to lose ground during September.

Still the overall performance of the Dow during the month of September – as displayed in Figure 2 – has not been a very pretty picture.

Figure 2 – Cumulative Dow % Loss during September (1955-Present)

 September – Labor Day Period versus Rest of Month

A closer at September look reveals that if something good is going to happen in the stock market during September, it is far more likely to happen before mid-month.  The early part of September revolves around Labor Day and as I wrote about in my book “Seasonal Stock Market Trends”, the stock market has showed a strong tendency to perform well during the three days before and the three days after market holidays.

Figure 3 displays the growth of $1,000 invested in the Dow during all pre and post Labor Day trading days that fall in the month of September (blue line) versus all other September trading days (red line).

Figure 3 – September Trading days that are within 3 trading days of Labor Day (blue line) versus all other September trading days (red line)

-The “holiday” trading days witnessed a meager cumulative gain of +10.6%

-All other September trading days registered a cumulative loss of -54.0%

 September – A Tale of Two Time Frames

With the obvious caveat that there is no guarantee that history will hold true this time around, the fact is that the latter part of September can be a pretty brutal affair.  Figure 4 displays the cumulative loss for the Dow during Trading Days #1 through 14 during September (blue line) versus Trading Days 15 through 21.  As you can see, the red line has had very few big “ups” and a whole lot of “downs”.

Figure 4 – Growth of $1,000 invested in Dow during September Trading Days #1-14 (blue line) and September Trading Days 15-21 (red line)

-September Trading Days #1 through 14 have registered a cumulative loss of -6.7%.

-September Trading Days #15 through 21 have registered a cumulative loss of -45.4%.

Summary

So back to the original question – “should we sell everything now and come back at the end of September?”  Well, the truth is that there is no way to know what will happen during the month of September this time around. But history strongly suggests that a bit of caution may be in order.  Some choices to consider include:

-Selling some stock positions and moving the proceeds to cash.

-Selling covered calls to generate some income in case your stocks move sideways to lower.

-Buy an inverse stock index fund (to make some money if the stock market declines).

-Do nothing and hope for the best.

Hey, have a nice month!

Jay Kaeppel

Hi,

For the last 9 years I wrote a weekly column titled “Kaeppel’s Corner” for Optionetics.com. Optionetics built a great organization and taught a lot of people a great deal about how to become more successful traders.  Even though I was one of the instructors the truth is I learned a lot in my time there and am grateful for the knowledge.

This blog – JayOnTheMarkets – is basically the new “Kaeppel’s Corner”.  I decided to change the name because of that pesky “e” that is the third letter in my last name, the fact that there are two letters “p” and the fact that so many people think the last two letters should be “LE” and not “EL”.  It’s been trouble my whole life.

Me: “That’s K-A-E”

Other person: “wait, did you say E?”

Me: “Yes E”

Other Person: “OK wait, K-A-E?”

Me: “Yes, then P-P”

Other person:  “Wait, did you say two P’s?”

Me: (sigh), “Yes two P’s, then E-L”

Other person: “Wait, are you sure it’s E-L?  I would think it is L-E?”

Me: “Ugh”

How much simpler my life would have been had it simply been spelled “KAPLE”.  Oh well.  So anyway, I figured if I had a site called kaeppelscorner.com about 93% of the people who tried to type it in would eventually give up.  Let’s be honest, just about anyone can figure out how to spell jayonthemarkets.

I don’t have a set schedule yet for posting info but like the old Kaeppel’s Corner I will be touching on a idea variety of topics including, but not limited to “the stock market, gold, bonds, futures, options currencies, ETFs, mutual funds, trading systems, and, well you get the idea.”

So please do me the honor of “Bookmarking” me now and check back every once in awhile.

Jay Kaeppel