Seasonal Sector Trade: Second Half of July Troublesome for S&P 500 By: Christopher Mistal & Jeffrey A. Hirsch | July 12, 2018 | Email | Print

Selling the September S&P 500 futures contract on or about July 16 and holding until on or about July 25 has a 58.3% success rate registering 21 wins against 15 losses in the last 36 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 10 of 13 years from 2005-2017. 

 

 

In these recent years, weakness did materialize however; it was not well aligned with the window defined by this trade. In some years weakness arrived early and was fleeting while in other years it was later and lasted into the early part of August. In 2015 this trade returned and was nearly perfectly aligned with the seasonal trend. This year the setup is compelling as S&P 500 is struggling to breakout above resistance around 2800. Yesterday’s modest sell off is a reminder of how quickly the market can change direction, especially with ongoing and escalating tariff concerns now that one round sparks another and so on. 

 

 

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 (blue arrow). This trade targets the initial part of weakness (shaded yellow). 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 news” once it 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 of 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 trades back down below its projected monthly resistance (red dashed line) at $276.84. Once added to the ETF Portfolio, a 3.5% trailing stop loss, based upon daily closing prices of SDS, is suggested.