Seasonal Sector Trade: Second Half of July Troublesome for S&P 500 in Pre-election Years
By: Christopher Mistal & Jeffrey A. Hirsch
July 11, 2019
Selling the September S&P 500 futures contract on or about July 15 and holding until on or about July 24 has a 56.8% success rate registering 21 wins against 16 losses in the last 37 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. Since then it has nearly the opposite record, posting losses in 11 of 14 years from 2005-2018. However, in the last nine pre-election years this trade has been successful seven times. Losses were registered in 1983 and in 2011. In 2011, a longer holding period would have allowed the trade to turn profitable as S&P 500 dropped 16.8% from July 22, 2011 through August 8, 2011.
[S&P Trade History Table]
In recent years when this trade did not work, 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. This year the setup is compelling as S&P 500 is struggling to breakout above 3000. Growth and earnings are slowing while the race for the White House in 2020 is beginning to heat up. Rate cut enthusiasm could also fade as quickly as it materialized.
[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 (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 Sector Rotation 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 Sector Rotation ETF Portfolio if SPY trades back down below $295.00. Once added to the ETF Portfolio, a 3.5% trailing stop loss, based upon daily closing prices of SDS, is suggested.  
[SDPR S&P 500 (SPY) Daily Bars & ProShares UltraShort S&P 500 (SDS) Line Chart]