In this article I wrote about something I referred to as the “September Barometer” applied to Fidelity Select sector funds.  In this piece we will apply the same principle to single country funds.

The Test

*For non domestic U.S. stock indexes the International Power Zone (IPZ) extends from November 1^st through April 30^th.

*I used ONLY a list of the original 17 iShares single country ETFs  that started trading in 1996 (many other single country ETFs have been opened since then, but they are NOT included in this test – only the original 17).

*Using total monthly return data from the PEP database from Callan Associates, I ranked the single country ETF performance ONLY during the month of September.

*Whichever ETF performed best during the month of September was bought on the last trading day of October and sold six months later at the close on the last trading day of April the following year.

The Results

*Figure 1 displays the annual “International Power Zone” results for the selected fund versus simply buying and holding the broader international MSCI EAFE Index during the same seven-month period each year (i.e., returns for May through October are excluded).

Figure 1 – September Barometer ETF performance versus EAFE Index – Nov. through April; 1996-2019

Figure 2 displays the cumulative equity curve for both the September Barometer and the EAFE Index during the International Power Zone months starting in 1996.

Figure 2 – September Barometer ETF performance versus EAFE Index – Nov. through April; 1996-2019

Things to Note:

*Since 1996 the September Barometer ETF has significantly outperformed the EAFE during the Power Zone months of November through April

*Both the September Barometer ETF and the EAFE Index showed a gain in 19 of the past 23 International Power Zone periods

*The median September Barometer ETF 7-month gain was +12.4% and the median 7-month loss was -4.7%

*The median EAFE Index 7-month gain was +6.8% and the median 7-month loss was -5.5%

*The September Barometer ETF outperformed the EAFE Index during the International Power Zone in 16 of the past 23 years, or 70% of the time

*If we look at 5-year rolling returns, the September Barometer ETF outperformed the EAFE Index in 18 out of 19 completed 5-year periods.

Summary

Does the month of September really “foretell” anything?  And is the idea presented here actually a viable approach to investing?

Repeating now: Hey, this blog just thinks up the stuff.  You take it from there.

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.

Most investors are at least vaguely familiar with the “January Barometer”, first presented by Yale Hirsch, the founder of The Stock Trader’s Almanac, in the early 1970’s.  The gist of the January Barometer can be summed up in the phrase “As January goes, so goes the rest of the year.”

The September Barometer – such as it is – is a little different.  It can be summed up in the following jumble of words: “The top performing Fidelity Select Sector fund during the month of September will tend to perform exceptionally well during the following Power Zone period of November through May.”

Note: I refer to the months of November through May as the “Power Zone” for U.S. stocks (“Power Zone” sounds sexier than “November through May”, no?)

The Test

For the record I arbitrarily excluded two commodity-based funds – Select Gold (FSAGX) and Natural Gas (FSNGX).

*Using total monthly return data from the PEP database from Callan Associates, I ranked the rest of the Fidelity sector funds every year for performance only during the month of September.

*Whichever fund performed best during the month of September was bought on the last trading day of October and sold seven months later at the close on the last trading day of May the following year.

The Results

*Figure 1 displays the annual “Power Zone” results for the selected fund versus simply buying and holding the S&P 500 during the same seven-month period each year (i.e., returns for June through October are excluded).

Figure 1 – September Barometer fund performance versus S&P 500 Index – Nov. through May; 1982-2019

2019* – approximate through 5/14/2019

Figure 2 displays the cumulative equity curve for both the September Barometer and the S&P 500 Index during the Power Zone months starting in 1982.

Figure 2 – September Barometer fund performance versus S&P 500 Index – Nov. through May; 1982-2019 (Growth of $1,000)

Two things jump out from the chart in Figure 2:

*Since 1981 the September Barometer has significantly outperformed the S&P 500 during the Power Zone months of November through May (+11,555% for the September Barometer versus +2,879% for the S&P 500 Index)

*Results are extremely volatile and not for the faint of heart

Other things to note:

*As of 5/14/19 the 2018-2019 September Barometer fund – ticker FSTCX – is down roughly -1.7% versus a gain of +5.6% for the S&P 500 Index since 10/31/2018

*Both the September Barometer fund and the S&P 500 Index showed a gain in 32 of the past 37 years (this assumes FSTCX ends May 2019 with a 7-month loss and the S&P 500 Index with a 7-month gain)

*Through May 2018 the average September Barometer fund 7-month gain was +14.4% versus +9.9% for the S&P 500 Index

*The “big disaster” for the September Barometer was Select Regional Banks (FSRBX) which was the top performer in September 2008 (with a loss of -1.92%).  It then lost -51% in 4 months before ending with a 7-month loss of -24.9%.  This suggests the potential for improvement with, a) a stop-loss of some sort, and/or, b) making no trade if the “best” performer showed a loss in September.

*The other “rough” years were the bear market years ending in 2002 and 2003.  Again, this suggests that some sort of stop-loss or possibly a trend-following filter may add value.

*Probably the key statistic is that the September Barometer fund outperformed the S&P 500 Index during the Power Zone in 27 of the past 39 years (including 2018-2019 and assuming that FSTCX will end May underperforming SPX during the last seven months), or 69% of the time.

Summary

Does the month of September really “foretell” anything?  And is the idea presented here actually a viable approach to investing?

Hey, this blog just thinks up the stuff.  You take it from there.

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.

2018 witnessed something of a “fake out” in the bond market.  After bottoming out in mid-2016 interest rates finally started to “breakout” to new multi-year highs in mid to late 2018. Then just as suddenly, rates dropped back down.

Figure 1 displays the tendency of interest rates to move in 60-year waves – 30 years up, 30 years down.  The history in this chart suggests that the next major move in interest rates should be higher.Figure 1 – 60-year wave in interest rates (Courtesy: www.mcoscillator.com)

A Way to Track the Long-Term Trend in Rates

Ticker TNX is an index that tracks the yield on 10-year treasury notes (x10).  Figure 2 displays this index with a 120-month exponential moving average overlaid.  Think of it essentially as a smoothed 10-year average.

Figure 2 – Ticker TNX with 120-month EMA (Courtesy AIQ TradingExpert)

Interpretation is pretty darn simple.  If the month-end value for TNX is:

*Above the 120mo EMA then the trend in rates is UP (i.e., bearish for bonds)

*Below the 120mo EMA then the trend in rates is DOWN (i.e., bullish for bonds)

Figure 3 displays 10-year yields since 1900 with the 120mo EMA overlaid.  As you can see, rates tend to move in long-term waves.

Figure 3 – 10-year yield since 1900 with 120-month exponential moving average

Two key things to note:

*This simple measure does a good job of identifying the major trend in interest rates

*It will NEVER pick the top or bottom in rates AND it WILL get whipsawed from time to time (ala 2018).

*Rates were in a continuous uptrend from 1950 to mid-1985 and were in a downtrend form 1985 until the 2018 whipsaw.

*As you can see in Figure 2, it would not take much of a rise in rates to flip the indicator back to an “uptrend”.

With those thoughts in mind, Figure 4 displays the cumulative up or down movement in 10-year yields when, a) rates are in an uptrend (blue) versus when rates are in a downtrend (orange).

Figure 4 – Cumulative move in 10-year yields if interest rate trend is UP (blue) or DOWN (orange)

You can see the large rise in rates from the 1950’s into the 1980’s in the blue line as well as the long-term decline in rates since that time in the orange line.  You can also see the recent whipsaw at the far right of the blue line.

Summary

Where do rates go from here?  It beats me.  As long as the 10-year yield holds below its long-term average I for one will give the bond bull the benefit of the doubt.  But when the day comes that 10-year yields move decisively above their long-term average it will be essential for bond investors to alter their thinking from the mindset of the past 30+ years, as in that environment, long-term bonds will be a difficult place to be.

And that won’t be easy, as old habits die hard.

Figure 5 is from this article from BetterBuyandHold.com and displays the project returns for short, intermediate and long term bonds if rates were to reverse the decline in rates since 1982.Figure 5 – Projected total return for short, intermediate and long-term treasuries if rates reverse decline in rate of past 30+ years (Courtesy: BetterBuyandHold.com)

When rates finally do establish a new rising trend, short-tern and intermediate term bonds will be the place to be.  When that day will come is anyone’s guess.  But the 10-year yield/120mo EMA method at least we have an objective way to identify the trend shortly after the fact.

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.

2019 has been a terrible year for grain bulls.  The typical first half seasonal strength in soybeans and corn has turned into a rout.  Given the sharp downtrend combined with the fact that that typical seasonal strength is now about to turn into seasonal weakness, makes a very powerful case that grain bulls are “beaten” and should walk away.

And then that ol’ speculative devil on the other shoulder opens his big mouth.

Soybeans

A quick glimpse of Figure 1 pretty much illustrates the devastation.

Figure 1 – August 2019 Soybean futures (Courtesy ProfitSource by HUBB)

Trading wisdom is pretty clear that attempting to pick a bottom in anything is a fool’s game.  And especially so when a security is in a relentless decline with no clear end in sight.  But at some point things get overdone.  There is some evidence that may be near that point with beans.

Figure 2 is from www.sentimentrader.com and shows that trader sentiment is about as bearish as it ever gets for the bean market.  In other words, the bulls are finally throwing in the towel.  As a contrarian signal, this type of capitulation has historically been short-term (2 months) bullish for beans.Figure 2 – Sentiment for Soybeans plummets (Courtesy: Sentimentrader.com)

According to Sentiment Trader “With an Optimism Index at 16, we’re seeing some of the least optimism for any commodity in 29 years. For beans, only 15 other days since ’90 have seen optimism this low. According to the Backtest Engine, that preceded rebounds all 15 times two months later.”Figure 3 – Low optimism tends to be bullish for Beans over the next 2 months (Courtesy Sentimentrader.com)

So, does this mean that soybeans are guaranteed to rally like crazy for the next two months and that we should pile in?  Not at all.  But it does suggest that an opportunity may exist for those “extreme speculative contrarians” (“Hi, my name is Jay”).

The purest play is to buy soybean futures.  In reality, buying soybean futures is something that most trader will never – and should never – do.  An alternative for “the rest of us” is an ETF ticker SOYB which is intended to track the price of soybean futures.  As you can see in Figure 4, it has also been in a relentless decline for quite some time.

Figure 4 – ETF Ticker SOYB (Courtesy AIQ TradingExpert)

Buying shares of SOYB here is pretty much the definition of trying to catch a falling knife.  To make matter worse, note in Figure 5 that the typical “bullish for beans” first part of the year has been a bust AND we are soon to enter the typically bearish part of the year.Figure 5 – Soybean annual seasonality (Courtesy Sentimentrader.com)

As I have said, a pretty good case can be made for NOT playing the bullish side of beans.

Still…..

….for that “wild-eyed speculator” this setup smacks of a short-term bottom:

*The relentless decline

*The big gap lower followed by an intraday reversal

*Sentiment at one of the lowest levels ever

So what to do?  What follows is NOT a recommendation but simply one example of a way to play a (let’s be honest here, ridiculously) speculative situation.  One possibility is to consider the August 14 strike price call option on ticker SOYB.  The particulars appear at the top of Figure 6 and the risk curves appear at the bottom. Figure 6 – SOYB Aug 14 strike price call (Courtesy www.OptionsAnalysis.com)

It should be noted with great caution that this option is very thinly traded and has an extremely wide bid/ask spread ($0.95/$1.15).  For our purposes we assume Figure 6 that we get filled at the midpoint price of $1.05.  This may or may not be possible.

But consider this:

*The trade cost $105 to enter (if filled at the midpoint, $115 is filled at the ask price), which is the maximum risk on the trade.

*If beans do in fact follow the historical trend of rallying in the next two months this option has the potential for a large percentage gain.

*If beans do in fact advance this option would enjoy point for point movement above $15.05 a share (SOYB is at $14.76 a share as this is written).

Summary

Is it a good idea to try to pick tops and bottoms?  Generally speaking – absolutely not!  Is it a good idea to try to pick a bottom now in soybeans?  There is every chance that the answer is – absolutely not!

But markets go to extremes, and when traders “give up” on something that something often has a way of throwing everyone a curve and doing what no one expects.

That being said, the real point of all of this is simply that if you are going to “speculate” on something, put the emphasis on minimizing risk and NOT on maximizing profit.

If your “crazy idea” works out you will make plenty of money.  That’s not the primary area of concern.  The primary area of concern is ensuring that your “crazy idea” doesn’t completely blow up in your face.

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 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.