Seasonal Sector Trade: S&P 500 Drops Mid-July
By: Christopher Mistal & Jeffrey A. Hirsch
July 07, 2016
Selling the September S&P 500 futures contract on or about July 15 and holding until on or about July 24 has a 61.8% success rate registering 21 wins against 13 losses in the last 34 years. The best win was $19,150 in 2002, and the worst loss was in 2009, posting a $12,650 bereavement. This trade had been successful in 13 of 15 years from 1990 to 2004. However since then it has nearly the opposite record, posting losses in 8 of 10 years from 2005-2014. 
[S&P Trade History Table]
In these recent years, weakness did materialize however; it was not perfectly aligned with the window defined by this trade. In some years weakness arrived early and was fleeting wile in other years it was later and lasted into the early part of August. In 2015 this seasonal weakness trade returned and was nearly perfectly aligned with the seasonal trend. Typical summer weakness continued well into August and September, fueled by the Chinese bear market and the Greek Default.
This year the setup is compelling again as the market continues to struggle as it has since December 2014. In addition to the continuing weakness in Asian and European markets; Brexit, US Presidential politics, tepid economics, heightened global terrorism and domestic turmoil, this market is on shaky ground. The post Brexit selloff snapback rally is losing steam and the real seasonal weak period begins mid-July. 
[S&P 500 (SP) Weekly Bars (Pit Plus Electronic Continuous contract) & Seasonal Pattern since 1982]
Looking at the chart above, you will see the average price tendency is for a summer sell-off that usually begins in mid-July and lasts until mid-October. Part of the reason is perhaps due to the fact that July starts the worst four months of the year for NASDAQ and also falls in the middle of the worst six months for DJIA and S&P 500. Mid-July is also when we typically kick off earnings season, where a strong early month rally can fade, as active traders may have “bought the rumor” or bought ahead on anticipation of good earnings expectations and then turn around and “sell the fact” once the news hits the street.
For the Almanac Investor ETF Portfolio, our top choice to execute a trade based upon this seasonality is ProShares UltraShort S&P 500 (SDS). This trade is not for the faint at heart or those without the desire or ability to routinely monitor as SDS is leveraged two times the daily move of the S&P 500. This relationship can be seen in the following chart comparing SDPR S&P 500 (SPY) (daily bars) to SDS (solid black line). We will add SDS to the ETF Portfolio if SPY breaks down below its projected monthly pivot point (blue dashed line) at $206.51 or near last month’s resistance (red dashed line) at $211.66. Once added to the ETF Portfolio, a 5% trailing stop loss, based upon daily closing prices of SDS, is suggested.  
[SPDR S&P 500 (SPY) Daily Bars and ProShares UltraShort S&P 500 (SDS) Line Chart]