The month of September is the only calendar that has seen more down months than up month for the stock market.  Using the S&P 500 Index since 1950, there have been 29 “up” Septembers and 37 “down” Septembers, with an average loss of -0.68%.

All told, 44% of the time September has been up and 56% of the time it has been down.  So to imply that September of 2016 is “doomed to be a downer” is hardly accurate.  Still, a closer look at the “internals” for September suggests that investors might consider using more caution as the month progresses.

A Tale of Two Time Periods

For our purposes we will break the month of September into two periods:

*All the days prior to the last 13 trading days of the month

*The last 13 trading days of the month

Figure 1 displays the growth of $1,000 invested in the Dow Jones Industrials Average only during the two periods listed above.  The red line displays the growth (er, decline) during the last 13 trading day of September and the blue line displays the growth of all trading days prior to the last 13 trading days.Figure 1 – Growth of $1,000 invested in Dow Industrials during the last 13 trading days of September (red line) versus all prior days of month (blue line); 1955-2015

Clearly the last 13 trading days of September has not been the time to expect great things from the stock market.  Figure 2 displays some of the particulars and Figure 3 displays the year-by-year results for the two time periods.

Figure 2 – Relative Performance

Things to note regarding the last 13 trading days of September:

*This period showed a loss 64% of the time

*The largest losses were -11.8% (2001) and -11.5% (2002)

*Gains of +3% or greater occurred 3 times

*Loss of -3% or greater occurred 12 times

Figure 3 displays the year-by-year results for both periods since 1955

Figure 3 – Year-by-Year Results for September

Summary

The numbers presented here paint a grim picture regarding the latter portion of the month of September.  Still the reality is that each year is a new roll of the dice (and remember that in 1973 the last 13 days of September witnessed a gain of +6.9%).

In the end the results presented here merely suggest that investors and traders who are nervous about their holdings and/or are willing to consider hedging might look to take some precautionary action by the close of trading on 9/13/16.

 Jay Kaeppel

In this article dated April 7, 2016, I wrote about a hypothetical option trading opportunity in MRK.  The gist of the idea was to “risk a little, in hopes of making a lot.”  Unlike many option trades that focus on using short-term options, this one used call options with over 6 months left until expiration – in order to give MRK a lot of time to stage some sort of move.

Well MRK moved and the time to “do something” appears to be at hand.

Figure 1 displays the initial trade and the initial risk/reward outlook.Figure 1 – Initial MRK call backspread trade (Courtesy www.OptionsAnalysis.com)

Figure 2 displays the initial trade as of the close on 8/24.  As you can see, MRK stock advanced from$55.63 to $62.73 and the option trade was sitting with an open profit of $743 (+89.8%). Figure 2 – MRK call backspread as of 8/24 (Courtesy www.OptionsAnalysis.com)

The good news is that this trade has a nice percentage profit and retains further upside potential.  The bad news is that the trade could easily turn back into a loser if MRK stock backs off from here.  On 8/23 MRK failed to break out to the upside and the next day fell back hard.

So let’s consider a simple adjustment to lock in a profit while still allowing for further upside potential.

The Adjustment

The truth is that there are an endless number of ways to adjust any option trade.  The choice should be based on one’s outlook going forward for the underlying security in question.  In this case, I have no real opinion one way or the other regarding where MRK is heading next.  But I do know that I do not want to see the current open profit vanish, and I am willing to give MRK the opportunity to move higher still. As a result, the adjustment below involves:

*Buying 1 Oct2016 MRK 50 strike price call

*Selling 4 Oct2016 MRK 50 strike price calls

*Buying 1 Apr2017 MRK 65 strike price call

This adjustment simply exits the original trade and buys a single long call option that can allow us to make more if MRK does in fact move higher between now and April 2017 expiration (240 days from now).  The risk curves appear in Figure 3.Figure 3 – Adjusted MRK trade (now long Apr2017 65 strike price call) (Courtesy www.OptionsAnalysis.com)

Things to note:

*This adjusted trade locks in a minimum profit of $523 if MRK is at $65 a share or below 240 days from now.

*The upside potential remains unlimited.

*If MRK rise 2 standard deviations (to roughly $83 a share, the profit can swell to $2,200 or more.

*If MRK collapses the worst case is still a locked in profit of $523.

Summary

One advantage to trading options is the ability to adjust your initial position in order to obtain a more favorable reward-to-risk ratio.  Hopefully this MRK example makes that assertion a little easier to understand.

Jay Kaeppel

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 (and bond market for that matter), 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.

(See also The World is Your Oyster – 11 Days a Month)

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.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).Figure 2 – Growth of $1,000 invested in the Dow ONLY on the 7^th to last, 6^th to last and 5^th 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

I hate to whine but Murphy (of Murphy’s Law fame) really hates me.  To wit, on 3/11/15, I wrote about a very pronounced tendency for t-bonds to rise during the last 5 trading days of the month (and to basically suck wind the rest of the time).

On 3/15/15 I wrote about an even more aggressive strategy using triple-leveraged ticker TMF that tracks long-term t-bonds using leverage of 3-to-1.

So of course the bond market rewarded my “brilliance” with a swift kick in the you know where in the months of March and April 2015 and especially in August 2015.

This would typically be enough to cause many people to go, “Well that guy’s and idiot” and to move on.  But fortunately in this case, the market is a marathon and not a sprint.

Update

Figure 1 displays the results generated by:

*Holding long 1 t-bond futures contract ONLY for the last 5 days of each month since 12/30/1983

*Holding long 1 t-bond futures contract during all other days since 12/30/1983Figure 1 – Long 1 t-bond futures contract ONLY during last 5 trading days of month (blue) versus long 1 t-bond futures contract on all other days  (red); 12/31/1983-8/12/2016

The results sort of speak for themselves.

After I wrote about my aggressive TMF strategy, TMF (of course) got hit very hard (as triple leveraged ETFs will do from time to time, hence the use of the words “aggressive” and “risky”), in March 2015 (-4.5%), April 2015 (-5.3%) and especially in August 2015 (-11.5%).

Still, as you can see in Figure 2, things have rebounded nicely since (hmmm, maybe I should be worried).Figure 2– Growth of $1,000 Long ETF ticker TMF ONLY during last 5 trading days of month (blue) versus long TMF all other days; (red); 12/9/2009-8/12/2016

So far the “Long TMF on the last 5 day of each month” strategy is up +31.8% for the year in 2016.

*-Starting 4/16/2009 when TMF started trading

**-Through 8/12/2016

Summary

So did this odd little strategy “weather the storm” and “take the market’s best shot” in 2015 and now it is “smooth sailing”?  Probably not.  Make no mistake – this is a strategy that entails a great deal of risk.  Still, for aggressive traders looking for an “edge”, it might be worth a closer look.

Jay Kaeppel