In recent articles (here and here) I’ve written about the historical tendency for health care stocks and long-term treasuries to rise during the middle part of the calendar year.

As with any seasonal trend, there are absolutely no “sure things” and of course, “this time may be different.” That being said, let’s look at the historical results of combining the two during May through August.

The Components

*For health care we will use Fidelity Select Health care (ticker FSPHX) as a proxy

*For long-term treasuries we use the Bloomberg Barclays Treasury Long-Term Index from January 1981 through May 1986 and then ticker VUSTX (Vanguard Long-Term Treasury) from June 1986 through March 2019 (ETF alternative: ticker TLT)

The Test

Starting on 1982, every year we put 50% into health care and 50% into long-term treasuries on May 1^st and hold those position through the end of August.

Figure 1 first displays the cumulative growth of equity achieved by holding the two components separately during May through October.

Figure 1 – Growth of $1,000 invested in ticker FSPHX (blue) and long-term treasuries (orange) held ONLY May through August; 1982-2018

*VUSTX started trading in July 1986; prior to then Bloomberg Barclays Treasury Long-Term Index is used

As you can see, both have trended higher over time, health care stocks with more volatility but also a higher return.

Lesson in Diversification #256

The age-old investment adage suggests that if you combine a more volatile security with a less volatile security you get a more consistent performance.  This one example certainly seems to make that case.

Figure 2 displays the growth of equity achieved by combining health care and long-term treasuries with a 50/50 split on May 1^st and holding through August 31^st.

Figure 2 – Growth of $1,000 invested 50/50 in health care stocks and long-term treasuries ONLY May through August; 1982-2018

*VUSTX started trading in July 1986; prior to then Bloomberg Barclays Treasury Long-Term Index is used

For the record, the combined portfolio showed a May through August gain 86.5% of the time (32 out of 37 years).

Figure 3 displays some relative performance measures.  Note that the “Combined” portfolio has the:

*Lowest standard deviation of returns (i.e., the lowest volatility)

*The highest Average/Standard Deviation results (i.e., the highest risk adjusted return

*The smallest “Worst May-Aug%” result (-4.5% in 1983)

Figure 3 – Comparative Results

*VUSTX started trading in July 1986; prior to then Bloomberg Barclays Treasury Long-Term Index is used

Figure 4 displays the year-by-year % +(-) for the combined portfolio.

Figure 4 – Year-by-Year % +(-); Health Care stocks plus LT Treasuries – May through August; 182-2018

Summary

So, is it time to “load up” on health care stocks and long-term bonds?  While history suggests “Maybe so”, as I mentioned at the outset, when it comes to seasonal trends each “go round” is its own flip of the coin.

What could go wrong in the future?  Looking ahead, if a serious move to socialized medicine ever truly takes hold, health care company profits would likely be impacted for the worse (whether you consider that to be a good thing or a bad thing is not the point – the point is that the performance of health care stocks would likely be impacted).  Likewise, if we enter a sustained period of higher interest rates, the risk associated with holding long-term bonds – even for only a few months at a time – will rise.

Ah the markets – never a dull moment.

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.

Is there seasonality in the bond market?  How about we look at the numbers and you decide for yourself?  You know, some good old, “We report, you decide” type of journalism versus the more widely prevalent “We decide, then we report (our slanted view)” style of reporting that tends to dominate all news these days.

Jay’s Bond Market Calendar

The calendar reads like this:

*December through April = High-yield corporate bonds

*May through August = Long-term treasuries

*September through November = Intermediate-term treasuries

Vehicles:

*For high yield corporate we use ticker VWEHX (Vanguard High-Yield Corporate) from January 1979 through March 2019 (ETF alternatives are HYG and JNK)

*For long-term treasuries we use the Bloomberg Barclays Treasury Long-Term Index from January 1979 through May 1986 and then ticker VUSTX (Vanguard Long-Term Treasury) from June 1986 through March 2019 (ETF alternative: ticker TLT)

For intermediate-term treasuries we use the Bloomberg Barclays Treasury Intermediate Index from January 1979 through October 1991 and ticker VFITX (Vanguard Intermediate-term Treasury) from November 1991 through March 2019 (ETF alternative: ticker IEI)

As a Benchmark we use the Vanguard Aggregate Bond Index from January 1979 through September 2003 and ticker AGG (iShares Barclays Aggregate Bond Fund) from October 2003 through January 2019 (ETF alternative: ticker AGG)

Figure 1 – Jay’s Bond Market Calendar

The Results

Figure 2 displays the cumulative growth of $1,000 using our switching calendar.

Figure 2 – Growth of $1,000 invested using the Calendar versus buying and holding an Aggregate bond index; 12/31/1978-3/31/2019

Figure 3 displays some relevant facts and figures

Figure 3 – Comparative Results

Some things to note:

*The System appears to show a huge edge over time.  Yet it should be pointed out that all the “edge” occurred after February 1990.  Figure 4 displays the System equity divided by the Benchmark equity.

Figure 4 – Calendar approach equity divided by Aggregate bond index equity

Note that from January 1979 through February 1990 the System was mostly in line with buying and holding the aggregate index.  Since then the relative returns have been sharply higher.

*Long-term bonds are a question mark going forward if and when we enter a truly “rising rate environment”.

Summary

So, is our “Bond Calendar” a viable approach to bond investing?  Should bond investors prepare to sell high-yield bonds at the end of April and switch to long-term treasuries?

None of that is for me to say.  Here is what we can say for sure: From January 1979 through February 1990, this Calendar-based approach performed in line with an aggregate bond index and from March 1990 through March 2019 this Calendar-based approach outperformed an aggregate bond index by a factor of 5.1-to-1 (+2,150% for the Calendar versus +423% for the aggregate bond index).

Does any of this mean anything?

We’ve reported.  You decide.

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 big news in the stock market of late was the beating absorbed by the health care sector.  Virtually every subgroup within the broader health care umbrella sold off heavily last week.  As you can see in Figure 1, to a lot of technical analyst types, this looks like a breakdown form a “classic” multiple top formation.  And they may be on to something.

Figure 1 – Ticker XLV (Courtesy ProfitSource by HUBB)

Definitely, not a pretty picture.  But is the end nigh for health care stocks?

For the record:

*In general, I am not a fan of buying into “things” that have just broken down.

*I am not “predicting” an imminent turnaround, nor am I “recommending” the health care sector.

*What I am doing is highlighting the historical tendency for health care to perform well during the period of May through July.

The Funds

For testing purposes, I am using the Fidelity health care regulated sector funds.  The test starts in 1981 with just FSPHX, with other funds added as they came into existence.

FSPHX – Health Care (July 1981)

FBIOX – Biotech (December 1985)

FSHCX – Health Care Services (June 1986)

FSMEX – Medical Technology and Devices (April 1998)

FPHAX – Pharmaceuticals (June 2001)

For each year we look at the performance for these funds during May through July.

Figure 2 displays the cumulative growth of $1,000 invested only in these healthcare related funds during May, June and July.

Figure 2 – Growth of $1,000 invested in Fidelity healthcare-related sector funds May-July ONLY (1982-2018)

Figure 3 displays the year-by-year results

Figure 3 – Year-by-Year May-July % +(-)

Some things to note:

Figure 4 – Summary Results (1982-2018)

Summary

So, is healthcare certain to “bounce” in the months ahead?  Not at all.  While the results shown here display a positive bias there is no “sure thing” edge built in.

Still, the main point is that history does seem to suggest that now may not be the ideal time for investors to panic and dump their healthcare holdings.  Likewise, shorter-term traders might look for some buying opportunities in this sector in the near-term.

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.

With the stock market indexes flirting with new highs I am starting to hear “mentions” of a potential “meltup” in stock prices.

I am always dubious of such prognostications (sorry, it’s just my nature).  And I am definitely not very good at making those types of projections myself.  Still, if the stock market “wants” to take off and run to sharply higher ground I certainly have no objections.  And in fact, I would like to go along for the ride.  Now chances are if you are reading this article, first off – well, Thank You very much, but more importantly chances are you already have at least some money in the stock market.  And chances are you too are a little dubious of making a big bet on a “shooting star” type of market move.

But what about a small wager?

Risking a Little to Make Alot

The hypothetical trade that appears next is NOT a recommendation, only an example of one way to make a low dollar cost play on a big move in the market.  The trade involves:

*Buying 1 SPY Dec2019 325 call @ $1.20

*Selling 1 SPY Sep2019 325 call @ $0.40

The particulars appear in Figure 1 and the risk curves in Figure 2.Figure 1 – SPY Calendar Spread details (Courtesy www.OptionsAnalysis.com)

Figure 2 – SPY Calendar Spread risk curves (Courtesy www.OptionsAnalysis.com)

In a nutshell, if SPY does in fact “meltup” (and again, I am not implying that it will, only highlighting a cheap way to speculate on the possibility) this trade will make money until SPY reaches $325 a share (roughly 12% above current prices), at which point some sort of action would be needed since above that price the risk curves “roll over”.

If SPY reaches $325 a share the open profit will likely be between $170 and $610 – depending on whether the move occurs sooner or later (and can be affected by changes in implied volatility).

Summary

As the major indexes approach and test their previous highs, there is a lot hanging in the balance.

*If they test these levels and fail then all of a sudden everyone will be talking about “double and/or triple tops” and things could change for the worse.

*Another possibility is that the indexes stage a “false breakout” and then drop back below their previous highs.  This too could spell trouble.

*One other possibility is the “breakout and meltup” scenario we’ve already discussed.

Is this last possibility likely to happen?  It beats me.  But the real question is “are you willing to risk $80 bucks on the chance that it might?”

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.

When it comes to investing, opportunity is wherever you find it.  And one of the keys to investing success is finding an “edge”, however slight.  So let’s talk about a slight edge in the bond market.

The Period

Let’s look at the performance of long-tern treasuries only during the months of May through August compared to all 4-month periods.

For testing purposes we will use the Bloomberg Barclays Treasury Long Index monthly total return data starting in 1973.

Figure 1 displays:

*Average 4 month return

*Median 4-month return

*Standard Deviation of 4-month returns

*Average 4-month return divided by standard deviation of 4-month returns (i.e., reward divided by volatility)

*Worst 4-month performance

*% of times the 4-month period showed a gain

Figure 1 – Long-Term Treasuries: May through August versus all 4-month periods; 1973-2019

As you can see, the May through August period has – on average – outperformed the “average” of all 4-months periods

Figure 2 displays the cumulative growth of $1,000 invested in the index ONLY during May through August.

Figure 2 – Cumulative % return for LT Treasuries held May through August ONLY; 1973-2019

Figure 3 displays the year-by-year gain/loss for long-term treasuries during May through August.

Figure 3 – Year-by-year May through August; 1973-2019

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 purpose of this article is not really to talk about EBAY.  The truth is I don’t really have an opinion about EBAY’s near-term prospects one way or the other.  The real purpose of this article is to highlight the potential to make an inexpensive play (please note how I skillfully avoided the use of the word “bet”) on a given security via the use of options.

In Figure 1 we can see that EBAY has a had a pretty good run of late.  In addition, if one wanted to one could make an argument that price is at or near a resistance level.  Finally, earnings are due on or around 4/24.

Figure 1 – EBAY (Courtesy AIQ TradingExpert)

So, let’s suppose a scenario where a trader felt that there was a decent chance that EBAY was going to “pause” in the current price area, and possibly pull back for at least a short period of time.  This is not an out and out bearish projection, so buying a put option may not be the most optimal play.

So, let’s get creative.

The Example

The example trade involves:

*Buying 4 EBAY May17 36 puts @ $0.66

*Selling 2 EBAY Apr26 36 puts @ $0.52

*Selling 2 EBAY Apr 26 35 puts @ $0.31

The particulars for this trade in Figure 2 and the risk curves in Figure 3.Figure 2 – EBAY Calendar Spread (Courtesy www.OptionsAnalysis.com)

Figure 3 – EBAY Calendar Spread Risk Curves (Courtesy www.OptionsAnalysis.com)

A few key things to note:

*The cost and maximum risk on this trade is $98.  So, we are talking about some really cheap speculation here

*If EBAY does NOT pause – i.e., if it moves higher, a 100% loss of the entire $98 is the most likely outcome.

*If EBAY drifts sideways to slightly lower, this trade holds some decent profit potential on a percentage basis.

*If EBAY drops out of the sky, this trade can earn roughly 100% return on investment.

Summary

So, if this type of trade in general – and this EBAY trade in specific – even a good idea?  That’s not for me to say.   As I intimated above the purpose of this piece is simply to highlight the possibilities.   But just to round out this particular example, the relevant questions in this case are:

1) Do you think EBAY may temporarily run out of steam and possibly experience a short-term pullback?

2) Do you have $98 bucks?

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.

This article is intended to be a quick update to this article.  The original idea is based on the theory propounded by Ken Fischer that suggests that one should not worry about a “top” in the stock market until after the market goes at least 3 months without making a new high.

Three things to note:

*Like all trend-following methods the one detailed in the linked article will experience an occasional whipsaw, i.e., a sell signal at one price followed some time later by a new buy signal with the market at a higher price.

*Like any good trend-following method the real purpose is to help you avoid some significant portion of any major longer-term bear market, i.e., 1973-74, 2000-2002, 2007-2009).

*The secondary purpose is to relieve an investor of that constant “Is this the top, wait, what about this this, this looks like the top, OK never mind, but this, this time it definitely has to be the top” syndrome.

The Rules

For a full explanation of the rules please read the linked article.  In general, though:

*A “Sell alert” occurs when the market makes a 6-month high, then goes 3 full calendar months without piercing that high

*The “trigger” price is the lowest low for the 3 months following the previous high

*A “Sell signal” occurs at the end of the month IF the “trigger” price is pierced to the downside during the current month

*The “trigger” is no longer valid if the S&P 500 makes a high above the high for the previous 6 months prior to an actual “Sell signal”

*If a “Sell signal” occurs then a new “Buy signal” occurs when the S&P 500 makes a high above the high for the previous 6 months

Sounds complicated, but its’s not.  Figure 1 displays the signals and alerts and trigger prices since 2005.

Green Arrows = Buy Signal

Red Arrows = Sell Signal

Red horizontal lines = Sell trigger price

Figure 1 – One Minute a Month Trend-Following Alerts, Trigger prices and Signals (Courtesy AIQ TradingExpert)

Note that actual sell signals occurred in 2008, 2011 and 2015.  The signal in 2008 was a life-saver, while the signals in 2011 and 2015 resulted in small whipsaws.  Sorry folks, that’s just the nature of the beast.

Interestingly, there have been two “Sell alerts” in the last year.  The first occurred at the end of April 2018, however, that alert was invalidated at the end of August 2018 when the S&P 500 pierced the previous 6-month high.  Another alert occurred at the end of December 2018.  The “Trigger price” is the December 2018 low of 2346.58.  That trigger is still active but could be invalidated if the month of May 2019 makes a high above whatever the high for April 2019 turns out to be.

The key point here is that despite the volatility and painful sell-offs in October and December of 2018, the “system” has remained on a buy signal.

Where to from here?  We’ll just have to wait and see.

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.

Anecdotally, I am going to guess that roughly 98% of all articles I read about the housing market are negative regarding the (short-term and long-term) future of housing.  Maybe I am extrapolating but it just seems like an easy thing for people to be negative about.  And given the housing bubble in 2008 and the re-inflation of housing prices in certain locations maybe they are not wrong.

But for now, the stock market does not seem to care.  Since the Christmas Eve low home builder stocks are up roughly 30%.  For people who pay attention to “financial news” this probably comes a surprise.  For people who pay any attention at all to seasonal trends, it should not

Ticker FSHOX

As a proxy for housing stocks we will use Fidelity Select Construction and Housing sector fund, which began trading in 1986.  What we will find is that this sector has a, ahem, large seasonal bias.  Let’s keep it short and sweet.

Figure 1 displays the growth of $1,000 invested in FSHOX ONLY during the months of November through April every year starting in 1986.

Figure 1 – Growth of $1,000 invested in FSHOX Nov 1 through Apr 30; 10/31/1986-3/31/2019

For the record, FSHOX gained +8,584% during November through April since 1986.

Figure 2 displays the growth of $1,000 invested in FSHOX ONLY during the months of May through October every year starting in 1987.

Figure 2 – Growth of $1,000 invested in FSHOX May 1 through Oct 31; 10/31/1986-3/31/2019

For the record, FSHOX lost -63% during May through October since 1987.

Figure 3 displays the summary for both the favorable and unfavorable seasonal periods.

Figure 3 – Summary of FSHOX performance (10/31/1986-10/31/2018)

The results in Figure 3 do NOT include the latest bullish period that started on 10/31/2018 and will end on 4/30/19.  From 10/31/18 through 3/31/19 FSHOX is up roughly +13.6%.  Barring an unforeseen collapse, FSHOX will register its 30^th “Up” bullish period in the past 33 years (i.e. 91% winners) at the end of April 2019.

The other key thing to note is that while FSHOX has lost a lot of value during the Bearish months of May through October over the years, on a year-by-year basis it is a 50/50 proposition.

Summary

So, is the housing market about to “collapse” – as so many pundits seem to love to predict?  It beats me.  All I know is that history suggests that the outlook for housing stocks in the next 6 months (starting May 1^st) is less favorable than it was 6 months ago.

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.

In just 3 months and 2 days the OTC Composite Index is up over 18% so far in 2019.  Given where things stood on Christmas Eve 2018 this has come as a surprise to most investors.  But it should not have.

Based on research presented by Jeffrey Hirsch and The Stock Traders Almanac, we know that the OTC Composite Index has showed a historical tendency to exhibit strength from January 1^st through the 10^th trading day of July during pre-election years.

Figure 1 displays the hypothetical growth of $1,000 invested in the OTC Composite Index only during this roughly 6 and ½ month period of each pre-election year starting in 1975.

Figure 1 – Growth of $1,000 invested in OTC Composite Jan 1^st through July Trading Day #10 of Pre-Election year

Hard to beat that for consistency.  One thing to note is that during the last 3 previous pre-election years (2007, 2011, 2015) the total results were far less than in previous pre-election years.

Figure 2 – Jan 1 through July Trading Day #10 during Election Years

*-Jan 1 through July Trading Day #10

**-Jan 1 through April 2, 2019

Is 2019 a “return to form”?  Or is there trouble ahead?

As always, time will tell.

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,

It’s April.  So, it “should” be a good time to own energy related stocks.  IMPORTANT NOTE: “Should” is definitely the key word in the previous sentence.

To take a look back, we will consider four Fidelity Select funds that deal in energy-related securities.

*Energy (FSENX) launched in 1981

*Energy Services (FSESX) launched in 1986

*Natural Gas (FSNGX) launched in 1993

*Natural Resources (FNARX) launched in 1997

During each year starting in 1982, we will take the average performance of any of the four that were trading at the time only during the month of April.  So:

*From 1982 through 1985 FSENX was the only fund.

*From 1986 through 1993, we use the average of FSENX and FSESX

*From 1994 through 1996 we average FSENX, FSESX and FSNGX

*And since then we take the average of all four of the above

Figure 1 displays the cumulative growth of $1,000 invested in energy (as described above) ONLY during the month of April each year.

Figure 1 – Growth of $1,000 invested ONLY during April in Fidelity Select Sector energy-related funds

Figure 2 displays the year-by-year results for the month of April

Figure 2 – Annual April % +/- ONLY during April in Fidelity Select Sector energy-related funds

Things to note:

*# times UP = 28 (76% of the time)

*# times DOWN = 9 (24% of the time)

*Average UP month = +6.1%

*Average DOWN month = (-2.5%)

*Largest UP month = +17.0% (2009)

*Largest DOWN month = (-6.8%) (2005)

Summary

The Fidelity energy sector funds have showed a gain during the month of April 76% of the time since 1981.  The average up month has been 2.4 times that of the average down month.

So, does this mean that energy funds are “a sure thing” during April 2019?  Far from it.  The reality is that anything can happen.  But successful investing has a lot to do with putting the odds on your side as much as possible.

Historically, the odds seem to favor energies in the month of April.

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.