Seasonal Sector Trades: Long Bond & S&P 500 Late April Rallies
By: Christopher Mistal & Jeffrey A. Hirsch
April 14, 2015
As featured in Commodity Trader’s Almanac 2013 (a 2016 edition is under consideration), there exists an inverse relationship between bond yield and price. When yield or interest rates go up, bond prices go down and vice versa. When investors feel threatened with a potential decline in the stock market, they allocate more money into bonds. This is often referred to as the “flight to safety” trade. Investors will also allocate more money to bonds when they believe the yield is more attractive than other shorter-term investment options.

There is no doubt that both of those conditions were met in late 2008 through early 2009. However, even in that unprecedented time, 30-year bond price action did respect a seasonal supply-demand cycle. By going long, the September 30-year bond on or about April 27, and exiting the position on or about August 22, we discovered in the last 37 years a solid 70.3% success rate. This trade has a history of 26 wins with only 11 losses; the largest win was $20,250 in 2011, and the largest loss was $17,031 in 2013. In recent years, 30-year Bond strength has lasted even longer, until yearend and even into January.
The 2009 stock rally off the bottom of the worst bear market since the Depression drove bonds lower. However, if one waited and used timing tools then we would have seen substantial gains. In 2013, this trade was a bust as the Federal Reserve began telegraphing a reduction in QE and stocks were having their best year in over a decade driving demand and prices for the 30-year bond lower. Although the specter of Fed interest rate hikes looms large, this trade will likely still perform this year as our bond yields remain attractive to foreign buyers. Our 30-year Treasury bond yielding 2.5% does compare quite favorable to Germany’s 0.58% or Japan’s 1.35%.

[30-Yr Treasury bond September Futures Contract – Trade History]
[30-Yr Treasury bond Continuous Contract Daily Bar Chart & 1-Yr Seasonal Pattern]

Stock traders may consider the exchange-traded fund, iShares 20+ Year Bond (TLT), as a replacement for the futures contract. TLT has in excess of $6.4 billion in assets, typically trades more than 9 million shares per day and has a reasonably deep and liquid options chain available.

[iShares 20+ Year Bond (TLT) Daily Bar Chart]

Stochastic, MACD and relative strength indicators applied to TLT have been negative since the second half of March, but are beginning to show signs of improvement. Despite fears of the Fed possibly raising rates later this year, TLT has held up well. It has remained above its 200-day moving average since last February and any dips below its 50-day moving average have ultimately proven to be a good entry point for new long positions. This trade overlaps nicely with last week’s trade idea of adding TLT to the Almanac Investor ETF Portfolio on dips below $124.88. This trade will be tracked in the ETF Portfolio.

Late April Long S&P 500 Trade

The best six months for owning stocks can begin in October or early November and typically lasts until April for DJIA and S&P 500. However, seasonal strength for technology stocks, measured by NASDAQ, tends to last until June (“Best Eight Months”, see page 60 Stock Trader’s Almanac 2015). Due to its substantial weighting in technology, the S&P 500 also demonstrates a tendency to rally from late April until early June.

[S&P 500 (SP) Continuous Contract Daily Bar Chart & 1-Yr Seasonal Pattern]

Although this trade has been profitable 66.7% of the time over the longer-term, its recent track record has been rough, declining six times in the last nine years. However, going long the September futures contract on or about April 27 and holding until on or about June 7 has worked 22 times in 33 years. The key to this trade is overall market trend and proper trade management as numerous sizable losses and gains have occurred over trade’s history. This is a shorter-term trade, for nimble traders, and is not related to our Seasonal Switching Strategy.

[S&P 500 September Futures Contract – Trade History]

There are several ways to take advantage of this Spring rally. One is through the futures markets traded at the CME. Stock traders may wish to explore trading SPDR S&P 500 (SPY), which allows one to use options. The length of time this seasonality is in play makes leveraged ETFs like ProShares Ultra S&P500 (SSO) worth consideration as well. Any weakness toward month’s end could make a possible entry point to this trade.

[SPDR S&P 500 (SPY) Daily Bar Chart]