Seasonal Sector Trades: Trading Mid-January S&P 500 Weakness
By: Christopher Mistal & Jeffrey A. Hirsch
January 10, 2017
Despite New Year bullishness from our early January indicators and our expectation for full-month January Barometer gains that will support our modestly bullish 2017 Forecast, a mid-January break in equities is looking increasingly likely. Since 1996 this January break has been more pronounced and more consistent. This trade, last featured in the Commodity Trader’s Almanac 2013, is beginning to set up nicely right now.
The stock market has demonstrated a tendency to retreat after the first of the New Year, especially when there has been a strong fourth quarter gain. Once the New Year begins we often see a profit taking correction. Investors tend to sell stocks to lock in profits in order to defer taxes from capital gains after the New Year begins. Even though the best time to be long the overall equity markets lasts from October through late April, this January break can certainly give short-term, nimble traders a nice return. With stocks struggling to move higher this week this trade is setting up a little later this year.
The table below of the “big” S&P 500 contract shows the typical January break. Since 1996 shorting the March contract on or about the second trading day of the New Year and holding for twelve trading has produced gains 12 of the last 21 years for a success rate of 57.1% and a cumulative gain of $81,538 (based upon trading a single contract excluding fees and taxes). 
[Mid-January S&P Short Table]
The results in the above table are based upon specific entry and exit dates with no further analysis being applied. This trade potentially could have been successful in 18 of the last 21 January’s with the application of technical indicators. The average decline from the high in the first seven trading days in January to the low in the last seven trading days in January has been 3.6% since 1996 using the same “big” S&P 500 contract.
[January Break Percent Table]
Also consider that since the New York Stock Exchange began observing the Martin Luther King, Jr. holiday on the third Monday in January in 1998 that the stock market has exhibited strength in the days before the market is closed on that third Monday and weakness after. This also coincides with the pattern of weakness during January’s expiration week. S&P 500 has been down 13 of the last 18 years during the week, while suffering some heavy losses on expiration Friday in 10 of the last 18 years.
In the chart of the S&P 500 below you can see that the blue chip average is pushing up against monthly pivot point resistance around 2280 (red dashed line) and that the Sell-side MACD and the Fast Stochastic have rolled over. A pullback to somewhere between the monthly pivot point level of 2234.60 (blue dashed line) and the 50-day moving average around 2210 is quite possible. There are two leveraged ETFs we are going to suggest to capitalize on this potential break using a tight stop in the event the break fails to materialize.
On today’s close we will add the ProShares UltraShort S&P 500 (SDS), which is two-times the inverse of the daily move of the S&P 500 to the Almanac Investor ETF Portfolio, employing a 3.0% trailing stop based upon daily closing price. We will take profits if we get a 5-7% gain. We will also add ProShares UltraPro Short S&P 500 (SPXU), which is three-times the inverse of the daily move of the S&P 500, employing a 4.0% trailing stop (also based upon daily close) and taking profits if we get a 7-9% gain.
[S&P 500 Chart]
DISCLOSURE NOTE: Officers of the Hirsch Organization do not currently own any SDS or SPXU.