May 2016 Trading & Investment Strategy
April 28, 2016
Market at a Glance - 4/28/2016
By: Christopher Mistal
April 28, 2016
4/27/2016: Dow 18041.55 | S&P 2095.15 | NASDAQ 4863.14 | Russell 2K 1154.15 | NYSE 10571.83 | Value Line Arith 4719.98
Psychological: Neutral. According to the most recent Investor’s Intelligence Advisor Sentiment survey, bearish advisors have declined to 20.6%. Correction advisors stand at 35.1% and Bullish advisors are 44.3%. This blend is neither excessively bullish nor bearish. This middle-of-the-road reading could simply be the result of the pace and magnitude of the market’s decline to start the year and the rally that ensued. Numerous bears came out to celebrate in February and have struggled through the rally reluctant to change their view while bulls are only mildly comforted by a rally that has not yet delivered new highs.  
Fundamental: Mixed. Aside from the U.S. labor market signs of economic strength are increasingly challenging to find. Housing data has come in below expectations just as Q1 GDP did earlier today. Corporate earnings have been tepid as well with numerous revenue and earnings misses despite the lowered bar of analysts. The consumer was supposed to be enjoying the windfall of lower energy prices and an apparently strong labor market, but that does not seem to be the case. It would seem the extra money is going to higher local and state taxes and/or healthcare expenses. Already there is talk of up to 40% increases in health insurance premiums for 2017. Those 1-2% wage gains and $12 saved on fill ups don’t have much of a chance of being spent on discretionary items when numerous fixed costs are rapidly rising.
Technical: At Resistance. As of today, last year’s all-time highs still stand and the rally off of February’s lows looks like it is beginning to fizzle. MACD and Stochastic indicators applied to DJIA, S&P 500 and NASDAQ are all confirming the loss of upward momentum. Relative strength has also drifted lower. NASDAQ lagged throughout the rally and has been weaker recently. DJIA and S&P 500 golden cross has not delivered on bullish expectations yet. NASDAQ’s chart does not have a golden cross on it.  
Monetary: 0.25-0.50%. As widely expected, there was no rate hike at the Fed’s latest meeting. Based upon the CME Groups FedWatch Tool, the closest month with a probability of a rate increase exceeding 50% is September. Considering recent market gains, stabilization in commodity and foreign markets and strength in the U.S. labor market, this could be an overly optimistic outlook. A 0.25% rate hike before elections in November would definitely show the Fed is not as political as everyone thinks (or just confirm it for some).
Seasonal: Neutral. May officially marks the beginning of the “Worst Six Months” for the DJIA and S&P. To wit: “Sell in May and go away.” In election years, May ranks 11th for DJIA and S&P 500 with average losses of 0.8% and 0.2% respectively. Small caps and tech fair better mostly due to their “Best Months” lasting until June.
May Outlook: Rally Stalling At End of Best Six Months, Time To Get Shorty
By: Jeffrey A. Hirsch & Christopher Mistal
April 28, 2016
Two months ago as the market was still in panic mode, we showed that March and April market strength often follows a back-to-back down January and down February. March delivered well above average gains, up 6.6% on the S&P for the month. While the S&P is off a bit intraday today on Carl Icahn’s disclosure on CNBC’s Power Lunch show that he is out of Apple (AAPL) and no longer has a position, it is still up 1.5% for April at this writing. The billionaire activist shareholder still likes AAPL, but blames China for his exit from the stock position. 
Nevertheless, the market has performed rather true to historical seasonal patterns this year, especially this spring. Last month, we expected the “rally to continue into and through April, but to fall short of new highs.” Now that the market has rallied into the end of April and appears to be stalling, it may be time to put in the prevent defense and consider some short positions. 
After issuing our Best Six Months Seasonal MACD Sell Signal on April 5, the S&P has rallied 2%, but this is not unusual. Our system does not, nor does any, pick exact tops. Both fast and slow MACDs on both the Dow and S&P had gone positive for several days, but they all turned negative again last Friday. 
When we issued the Sell Signal we sold SPDR DJIA (DIA), SPDR S&P 500 (SPY), Vanguard REIT (VNQ) and iPath Bloomberg Copper TR Sub-Index ETN (JJC), added AdvisorShares Ranger Equity Bear (HDGE), iShares 20+ Year Treasury (TLT) and iShares Core US Aggregate Bond (AGG) on dips, and tightened up stops on other positions.
Subsequent, to our Sell Signal and the portfolio adjustments we made at the time, we have recently suggested several downside/bearish/short trades. The gold stock Direxion Daily Jr Gold Miners Bear 3X (JDST) trade was a bust and was stopped out quickly, but the Financials, Transports and Materials sector shorts are still in play. And our Five Seasonal Sector Shorts are set up well.
The market has been rather forgiving this earnings season, giving many stocks a pass (except AAPL) on misses and lower numbers, attributing it all to a tepid economy. But it has failed to breakout or breakdown, until perhaps today. So the $64,000 question is: What will knock the market down if all the disappointing news has not done so already?
Maybe its Apple and Icahn, but Apple was already down. 
Perhaps a surprise hike from the Fed in June might be the straw. While the FOMC cleared the way this week in their announcement for a hike in June, the futures market has the odds very low. Many pundits have been haranguing the Fed for not being independent or prescient. So maybe June is the time the Fed stakes its ground and hikes a quarter point as Oil is up 75% since February and inflation is brewing and the market is still near all-time highs. This could set up a typical summer swoon.
Pulse of the Market
Since issuing our Tactical Seasonal Switching Strategy MACD Sell Signal after the market’s close on April 5, DJIA and S&P 500 meandered 2.5% and 2.4% higher as of yesterday’s close. As of yesterday, both the slower and faster moving MACD indicators applied to DJIA (1) and S&P 500 were negative. Recent market resiliency has provided an opportunity to unwind some long positions as it still appears there is significant resistance at the all-time highs of last May.
For the second time in about four months, DJIA’s 50-day moving average has crossed back above its 200-day moving average (2). This crossover is known as a golden cross and has been traditionally a bullish omen, except that was not the case four months ago nor many of DJIA’s other recent occurrences.
Dow Jones Industrials & MACD Chart
One reason why this golden cross could be a false sign of further is gains is the fact that the market has been running in streaks recently and the current winning streak is looking quite long in the tooth (3). After declining in seven of ten weeks from week ending December 11, 2015 through February 12, 2016, DJIA and S&P 500 (4) have been up in eight of the last ten weeks. NASDAQ has one more week of losses (6) over the past ten weeks and is currently on track for two losses in a row.
Aside from two weeks when DJIA and S&P 500 were down, NYSE Weekly Advancers have outnumbered NYSE Weekly Decliners (7) by a healthy margin. This confirms broad participation in the rally which is a healthy sign. However, weekly New Highs (8) peaked during the week ending April 1. This would suggest that the market’s recent push toward all-time highs has run out of steam. An expanding number of New Highs will be needed for the market to make any meaningful move higher. Last year’s DJIA/S&P 500 peak in May was also accompanied by a decline in New Highs.
Weekly CBOE Put/Call remains modestly elevated at 0.69 last week (9). This suggests that there is plenty skepticism about the current rally or it could mean traders and investors are anticipating some weakness once “Sell in May” officially arrives next week.
Click for larger graphic…
Pulse of the Market Table
May Almanac, Vital Stats & Strategy Calendar: Near the Bottom in Election Years
By: Jeffrey A. Hirsch & Christopher Mistal
April 26, 2016
May has been a tricky month over the years, a well-deserved reputation following the May 6, 2010 “flash crash”. It used to be part of what we called the “May/June disaster area.” From 1965 to 1984 the S&P 500 was down during May fifteen out of twenty times. Then from 1985 through 1997 May was the best month, gaining ground every single year (13 straight gains) on the S&P, up 3.3% on average with the DJIA falling once and two NASDAQ losses. 
In the years since 1997, May’s performance has been erratic; DJIA up eight times in the past eighteen years (three of the years had gains in excess of 4%). NASDAQ suffered five May losses in a row from 1998-2001, down – 11.9% in 2000, followed by eight sizable gains in excess of 3% and four losses, the worst of which was 8.3% in 2010. Election Year Mays rank at or near the bottom, registering net losses on DJIA and S&P 500 (since 1952), NASDAQ (since 1972) and Russell 1000 and 2000 (since 1980).
[Election May Table]
May begins the “Worst Six Months” for the DJIA and S&P. To wit: “Sell in May and go away.” Our “Best Six Months Switching Strategy,” created in 1986, proves that there is merit to this old trader’s tale. A hypothetical $10,000 investment in the DJIA compounded to $838,486 for November-April in 65 years compared to $221 loss for May-October. 
Monday before May option expiration is much stronger than expiration day itself albeit weaker for small caps. Big caps have only registered seven losses in the last twenty-six years. Expiration day is a loser across the board. The full week had a bullish bias that has faded in recent years. The week after options expiration week now favors tech and small caps. DJIA has fallen in eleven of the last seventeen weeks after.
On Friday before Mother’s Day, DJIA has gained ground fourteen of the last twenty-one years and on the Monday after the blue-chip average has risen in fifteen of those years.
The first two days of May trade higher frequently, but DJIA has been down three of the last five first-trading days. Weakness often appears on the third, fourth and fourteenth trading days for large cap stocks but the middle of the month tends to be rather strong. NASDAQ and the Russell 2000 take the lead the last three days of May.
May (1950-2015)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank 9 8 6 6 6
# Up 34 38 37 25 24
# Down 32 28 18 12 13
Average % -0.02   0.2   0.9   1.0   1.3
4-Year Presidential Election Cycle Performance by %
Post-Election 1.3   1.7   3.4   3.2   4.6
Mid-Term -0.7 -0.9 -1.2 -0.1 -1.9
Pre-Election 0.1 0.2 1.9 1.2 2.7
Election -0.8 -0.2 -0.7 -0.5 -0.2
Best & Worst May by %
Best 1990 8.3 1990 9.2 1997 11.1 1990 8.9 1997 11.0
Worst 2010 -7.9 1962 -8.6 2000 -11.9 2010 -8.1 2010 -7.7
May Weeks by %
Best 5/29/70 5.8 5/2/97 6.2 5/17/02 8.8 5/2/97 6.4 5/14/10 6.3
Worst 5/25/62 -6.0 5/25/62 -6.8 5/7/2010 -8.0 5/7/10 -6.6 5/7/10 -8.9
May Days by %
Best 5/27/70 5.1 5/27/70 5.0 5/30/00 7.9 5/10/10 4.4 5/10/10 5.6
Worst 5/28/62 -5.7 5/28/62 -6.7 5/23/00 -5.9 50/20/10 -3.9 5/20/10 -5.1
First Trading Day of Expiration Week: 1990-2015
#Up-#Down   19-7   19-7   16-10   18-8   14-12
Streak   D1   D1   D1   D1   U2
Avg %   0.4   0.3   0.3   0.3   0.1
Options Expiration Day: 1990-2015
#Up-#Down   12-14   13-13   12-14   13-13   11-15
Streak   U3   U3   D1   U3   D1
Avg %   -0.1   -0.2   -0.2   -0.1   -0.1
Options Expiration Week: 1990-2015
#Up-#Down   15-11   14-12   15-11   13-13   15-11
Streak   U1   U1   U3   U1   U1
Avg %   0.3   0.2   0.4   0.2   -0.1
Week After Options Expiration: 1990-2015
#Up-#Down   14-12   16-10   17-9   16-10   20-6
Streak   D1   U2   U2   U2   U2
Avg %   -0.2   0.1   0.2   0.1   0.4
May 2016 Bullish Days: Data 1995-2015
  2, 3, 9, 11, 27 2, 11 2, 3, 9, 18, 27 2, 11, 31 2, 3, 11, 26, 27
May 2016 Bearish Days: Data 1995-2015
  4, 5, 19, 20 4, 5, 19, 20 6, 19, 24 4, 5, 19 None
May 2016 Strategy Calendar
By: Christopher Mistal
April 26, 2016
Almanac Investor Stock Trades: Five Select Seasonal Shorts
By: Christopher Mistal
April 21, 2016
As of yesterday’s close DJIA was up 3.9% year-to-date; S&P 500 was up 2.9%, NASDAQ down 1.2% and Russell 2000 was up just 0.6% which creates the relatively unique situation where DJIA and S&P 500 are outperforming both NASDAQ and Russell 2000. In 45 years since 1971, DJIA and S&P 500 have bettered NASDAQ and Russell 2000 just eleven times (Russell 2000 eight times since 1979) over the course of the full year. Seven of those eleven years were flat to downright ugly. Only 1975, 1986, 1989 and 1997 were above average years.
[Annual Percent Change Comparison	]
Generally the Russell 2000 and NASDAQ tend to be comprised of U.S. orientated companies of smaller size which are generally more sensitive to local economic conditions. Poor performance from these companies is suggestive of either current weakness or a tepid U.S. outlook. Additional strength from NASDAQ and Russell 2000 would go a long ways to confirm that the current rally has further room to run.
New Short Ideas
Today we will look to take another step at shoring up the Almanac Investor Stock Portfolio with the consideration of five new short trade ideas. Our screens looked for negative revenue and earnings trends. Further restrictions included: a minimum average daily trading volume of at least 100,000 shares over the past 20 trading sessions, share price above $10 and a minimum market cap of $500 million. In addition, we focused on sectors that enter seasonally weak periods in the month of May as previously discussed in this month’s ETF Trades Alert; Banking/Finance, Gold/Silver, Materials and Transportation. All five trade ideas will be tracked in the Almanac Investor Stock Portfolios with a hypothetical $2000 allocated to each.
Invesco Ltd (IVZ) is a publicly-owned financial investment manager. The market’ struggles over the past year and a half or so have translated directly to declines in revenue and earnings. IVZ has missed earnings estimates for the last two quarters. IVZ could be shorted near projected monthly pivot point resistance at $32.55 or a breakdown below support at $29.77 with confirming negative stochastic, MACD, and relative strength indications. If shorted, set an initial stop loss 8% above the entry price.
[Invesco Ltd (IVZ) Daily Bar Chart]
Knight Transportation (KNX) is a trucking company doing business primarily in the U.S. Sluggish growth, here and abroad, is tempering demand for freight and associated services. KNX did miss revenue and earnings estimates for the most result quarter and EPS estimates for the rest of the year are falling. KNX could be shorted near resistance around $27.58 or on a breakdown below support at $24.24 with confirming negative stochastic, MACD, and relative strength indications. If shorted, set an initial stop loss 8% above the entry price.
[Knight Transportation (KNX) Daily Bar Chart]
Lindsay Corp (LNN) is technically not a member of one of the four previously mentioned sectors, but it is closely tied to the materials sector. Its two basic segments are water management and road infrastructure. Its irrigation equipment sales have been hit by the slump in commodity prices and the stronger U.S. dollar. LNN could be shorted near resistance at $76.99 or on a breakdown below $68.46 with confirming negative stochastic, MACD, and relative strength indications. If shorted, set an initial stop loss 8% above the entry price.
[Lindsay Corp (LNN) Daily Bar Chart]
Methanex Corp (MEOH) produces and supplies methanol globally. Revenue and earnings have been falling faster than analysts’ estimates. Earnings have missed for four straight quarters. Production has also been hindered in some areas by a lack of raw materials. MEOH could be shorted near resistance at $36.35 or on a breakdown below $29.28 with confirming negative stochastic, MACD, and relative strength indications. If shorted, set an initial stop loss 8% above the entry price.
[Methanex Corp (MEOH) Daily Bar Chart]
Virtus Investment Partners (VRTS) is another publicly traded investment manager that has struggled with the investment landscape over the past year plus. Revenue and earnings are forecast to decline this quarter and beyond. VRTS could be shorted near resistance at $81.45 or on a breakdown below $67.29 with confirming negative stochastic, MACD, and relative strength indications. If shorted, set an initial stop loss 8% above the entry price.
[Virtus Investment Partners (VRTS) Daily Bar Chart]
Stock Portfolio Updates: Passover & Not Chasing Market
By: Christopher Mistal
April 19, 2016
Although Passover is not an observed official market holiday, it is a holiday that is observed. This year Passover begins on this Friday evening (4/22) and lasts until the evening on Saturday, April 30. In the table below, DJIA’s performance the three trading days before and three trading days after Passover appears. When the first full day of Passover falls in a weekend the day after is used otherwise DJIA’s performance on the first full day of Passover is used.
Since 1971, the second and third days before have a bullish bias average gains on both days. The day before however, has an average loss of 0.02% even though there have been more advancing days than declining days. On or after the first full day of Passover, DJIA is generally positive with average gains on the day, two and three days after. Since 2012, the three days before Passover have been notably weaker and could represent a new or developing trend. With Passover landing in either late March or April right around the time the market is at or near its highs, it would not be out of the question for those that observe the holiday to take profits and square positions prior to taking any time off.
[Passover Holiday Table]
Portfolio Updates
Over the past two weeks since last update, S&P 500 has climbed 1.4% and Russell 2000 2.8% as of yesterday’s close. Once again, the portfolios sizable cash balance held its performance in check. The entire Almanac Investor Stock Portfolio edged just 0.4% higher. This overall gain was essentially spread equally across its three market-cap ranges; Small- and large-caps added 0.4% and Mid-caps moved 0.5% higher. Of the 13 stocks currently held, only Hanesbrands Inc (HBI) has a modest loss of 0.6%.
The January/February market rout very effectively removed the weaker positions from the portfolio this year well ahead of our usual thinning that normally occurs when, or not long after, issuing our Tactical Seasonal Switching Strategy Sell signal for DJIA and S&P 500. It is tempting to try and take advantage of recent market strength and the run towards all-time highs. However, we believe the portfolio would be better served by sticking to our tried and tested strategy that has consistently outperformed the broader market since inception back in July of 2001. Should the market fail at resistance at its previous all-time highs, which it is likely to do, the sizable cash holding will no longer be a drag on performance.
Currently the best performing open position, Global Brass and Copper Holdings (BRSS) has resumed its march higher. Again today it is trading at new 52-week and all-time highs. A weaker U.S. dollar is lifting copper prices and giving many commodities a boost. Even Southern Copper (SCCO) has seen in healthy rally over the past three months from just over $22 per share in mid-January to over $29 today. Both BRSS and SCCO are on Hold.
Stein Mart Inc (SMRT) was a Free Lunch stock added to the Small-Cap Portfolio last December. Other than a brief pop at the start of March, shares have done little less. Current strength has pushed SMRT back into positive territory and now is a good time to close it out. Sell SMRT.
Spring has arrived bringing with all warmer weather and yard work. Scotts Miracle-Gro (SMG) is a direct beneficiary and that fact is reflected in its recent performance. SMG traded at a new 52-week and all-time high in late March and remains within striking distance today. SMG is on Hold.
Also benefiting from the arrival of spring and soon the summer driving season is Sunoco Lp (SUN). As a fuel wholesaler and retailer SUN is less exposed to the daily ups and downs of crude oil. Overall U.S. fuel demand and refining margins are what matters. Motor fuel demand will be on the rise again soon once driving season officially kicks off Memorial Day weekend. In the meantime shares pay a handsome dividend. Hold SUN.
United Health Group (UNH) reported first quarter earnings earlier today. Revenue rose 25% and adjusted earnings increased 17% despite losses from participating in Affordable Care Act (ACA) exchanges. UNH plans to exit all ACA exchanges in 2017. The company also enjoyed solid results from its Optum, health service business. UNH is on Hold.
Please note stop losses for several positions have also been increased. All other positions not previously mentioned are on Hold.
[Almanac Investor Stock Portfolio – April 18, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in CNC, CVS, HBI, SMG and TSCO. 
Mid-Month Update: Breaking Out or Faking Out
By: Christopher Mistal
April 14, 2016
Last week on Tuesday after the market had closed, we issued our Tactical Seasonal Switching Strategy Sell Signal for DJIA and S&P 500. Faster and slower moving MACD indicators applied to DJIA and S&P 500 were all negative. MACD indicators do not pick exact tops (or bottoms); they are useful in showing shifts in momentum. That momentum can shift back the other way again as it has does this week. From the close on April 5 through yesterday’s close DJIA has gained 1.7%, S&P 500 1.8%. From April 6, the first day that one would have been able to act upon the Sell Signal, DJIA is up 1.1% and S&P 500 just 0.8%.
Our Sell Signal on April 5 applied only to DJIA and S&P 500 related positions. NASDAQ’s “Best Eight Months” last until June. We continue to hold technology and small-cap positions in both our Almanac Investor ETF and Stock Portfolios. Our Sell Signal for DJIA and S&P 500 is used to remind us to lighten up on long positions and begin looking at tightening stop losses and other defensive positions such as Treasury bonds as the historically “Best Six Months” of the year are nearing their end and the odds of further significant gains are beginning to fall. 
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
The double-digit market rally off the February lows is clearly visible in the charts above. At the start of April Stochastic, relative strength and MACD indicators were all stretched and signaling overbought conditions. A few days of minor losses turned MACD and Stochastic indicators negative and relative strength also dipped. DJIA and S&P 500 have essentially recovered all of their respective losses from late last year and early this and are roughly back at Q4 highs. NASDAQ has lagged. Whether or not the market fails at resistance or breaks out above its Q4 highs will depend largely on earnings and incoming data.
Odds Are...
Seasonally, April is the best month for DJIA with an average gain of 1.9% since 1950. April has been up in 44 of the last 66 years. However, average election-year performance over the same period has been weaker, 0.9% gain with 9 advances and 7 declines in election-year Aprils. April’s week after options expiration also has a solid track record, up 10 of the last 12 years with and average gain of 0.7%. This strength is echoed by S&P 500 with five straight bullish days beginning April 15 and running until April 21. April’s seasonal strengths do support some further market gains.
Economic data remains mixed though and could halt the rally in its tracks. Just this week, U.S. retails sales fell 0.3% in March versus an expected rise of 0.1%. Consumer spending accounts for more than two-thirds of U.S. economic activity. This tepid result helps explain the Atlanta Fed’s GDPNow model forecast of just 0.3% real GDP growth in the first quarter. Considering lower energy costs and the apparently strong labor market something would seem amiss. 
Today’s initial weekly jobless claims were just 253,000, the lowest since 1973. This appears to be an outstandingly firm data point or is it? Digging deeper reveals the labor force participation rate, at 63% is also the lowest it has been since the late 1970s. It would seem, and the lack of meaningful wage growth also tends to support, that there is more slack in the labor market than the headline numbers indicate. The employed are also confronting higher healthcare and higher education costs. In many areas substantially higher state and local taxes are absorbing the savings from lower energy and any wage gains.
Corporate earnings and revenue, on a year-over-year basis, are also concerning. Early reporter, JPMorgan Chase (JPM), reported earnings that beat expectations, but total revenue was down 3% and earnings actually declined 6.7%. They did beat the obviously low expectations of The Street, but it was mostly due to cost cutting measures. While Bank of American (BAC) reported a 6.7% drop in revenues and a 13% decline in earnings despite a 6.4% drop in expenses. Loan-loss provisions increased at both banks. Both reports seemed to lack any real catalyst for their recent share price strength other than they were not as bad as expected. Negative year-over-year results, mixed data and tepid growth could halt the rally at any point.
Then there is the Fed that seems overly focused on concerns outside of the U.S. They hiked the benchmark rate in December and have taken no action since citing recent global weakness and a dependence on incoming data and forecasts. Most recent PPI and CPI data suggest inflation is cooling again. There was not much inflation or growth before they moved to raise rates in December and there is even less today. As a result, CME Group’s FedWatch tool has the highest probability of the next hike being in December. Just further uncertainty that could disrupt the market.
Positive seasonal factors are winding down and the Presidential Election is heating up. Earnings, economic data and the Fed are mixed and unclear. The market gave us all a brief glimpse of how fast it can unravel earlier this year and the rally off the February lows has been brisk. Taking some risk out of portfolios seems to be the prudent course of action at this junction. This can be done through outright sells, tighter stop losses and the rotation into other typically defensive positions. It has been nearly a year since DJIA or S&P 500 traded at their highs and current strength is likely to fade before they do again.
Seasonal Sector Trades: Long Bond Late April Rally
By: Jeffrey A. Hirsch & Christopher Mistal
April 12, 2016
The long bond tends to bottom sometime during Q2, typically around the time the stock market reaches its highs, and then enjoys a solid run of strength into Q3 and beyond in some years. Note seasonal strength shaded in yellow in chart below.  Bonds are also a relatively safe place to park capital during the “Worst Six Months” of the year, May through October.
As featured in Commodity Trader’s Almanac 2013 (perhaps a 2017 edition will be produced), when investors feel threatened with a potential decline in the stock market, they often allocate more money into bonds. This is often referred to as the “flight to safety” trade. Investors and traders 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 26, and exiting the position on or about August 21, we discovered in the last 38 years a respectable 68.4% success rate. This trade has a history of 26 wins with 12 losses; the largest win was $20,250 in 2011, and the largest loss was $17,031 in 2013. The trade’s track record of the last 27 years (shaded in grey in table below) is even better with 20 gains and a success rate of 74.1%.
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 2.6% does compare quite favorable to Germany’s 0.87% or Japan’s 0.40%.
[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 nearly $10 billion in assets, typically trades more than 9 million shares per day and has a reasonably deep and liquid options chain available. TLT’s expense ratio of just 0.15% is very reasonable and its yield of around 2.4% is also attractive. 
[iShares 20+ Year Bond (TLT) Daily Bar Chart]
Stochastic, MACD and relative strength indicators applied to TLT had improved substantially since mid-March, but have begun to turn less positive. TLT’s current pullback appears to be setting up a much better entry point for new long positions. Economic growth is tepid, wage growth is sluggish and inflation remains subdued which is likely (and highly expected) to slow or perhaps even delay future rate hikes by the Fed. This trade overlaps nicely with last week’s trade idea of adding a half position in TLT to the Almanac Investor ETF Portfolio on dips below $129.75. This trade is tracked in the ETF Portfolio.
ETF Trades: Renewed Growth Concerns + Weak Seasonal Period = 4 Short Trade Ideas
By: Christopher Mistal
April 07, 2016
April, DJIA’s best performing month of the year since 1950, has not gotten off to a great start. April 1 and April 6 were solid, but the other three trading days were losers and DJIA is down 0.8% for the month as of today’s close. Once again, earnings and global growth concerns are at the top of the list of reasons for today’s selloff.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
Just a few days of weakness has caused Stochastic, relative strength and MACD indicators applied to DJIA, S&P 500 and NASDAQ to turn negative. The shift in momentum also occurred within a few percentage points of the highs from Q4 of last year for DJIA and S&P 500. NASDAQ’s rally off the February lows was not as strong and it came up well short of its highs. It now appears the market’s next move will be lower. DJIA 17000, S&P 500 1993 and NASDAQ 4725, last month’s monthly pivot point resistance level (red dashed line in March on each chart above), appear to be the first area of support.
May Sector Seasonalities
Three sectors begin seasonally weak periods in May: Banking, Gold & Silver (stocks) and Materials. Over the past 15 years, all three sectors have declined on average 6.6 to 7.6% which sets them up as good short trade candidates during the spring and early summer months. Although not published in the Stock Trader’s Almanac 2016 on page 94, Transports also exhibit seasonal weakness from early May through late June with an average loss of 5.7% over the past 15 years.
Typically we like to take advantage of sector weakness through the use of inverse or bearish sectors. By doing so, the trade is similar to any other long trade that we choose to execute. One of the drawbacks of inverse ETFs is they frequently employ leverage and only track the daily performance of the underlying benchmark. As holding periods get longer, these types of funds often exhibit performance that differs significantly from the underlying security or index’s performance due to compounding and tracking errors. Three out of today’s four new trade ideas are going to be short trades. An “(S)” follows each ETF name in the portfolio table to denote it is a short trade. Only in the case of Gold & Silver will we use a leveraged inverse fund as its seasonally weak period is only about six weeks long.
[SPDR Financial (XLF) Daily Bar Chart]
SPDR Financial (XLF) could be shorted under $22.00 as it has fallen below its monthly pivot (blue dashed line) and its technical indicators are all negative. Should XLF bounce back above $22.00, it could be shorted at $23.15, monthly resistance (red dashed line). Set an initial stop loss at $24.05 and take profits at $18.30. Rising interest rates and a steepening yield curve were expected to lift banks’ profits, but the Fed appears to be on hold and the yield curve is flattening.
[iShares DJ Transports (IYT) Daily Bar Chart]
iShares DJ Transports (IYT) could be shorted on a rally toward resistance near $147.94 or on a break down below $137.00. Stochastic, MACD and relative strength are all currently weak. IYT could easily bounce or just fall apart. Crude oil’s price could provide an early indication of which way it may be. The initial stop loss is $150.07 while profits can be taken at $112.88. Tepid global growth should mean less trade which means fewer shipments for the transports to move.
[Direxion Daily Jr Gold Miners Bear 3X (JDST) Daily Bar Chart]
Direxion Daily Jr Gold Miners Bear 3X (JDST) can be bought on dips below $4.45. JDST is volatile due to its 3x leverage and frequently trades in a wide daily range. If purchased set an initial stop loss at $4.15. Consider taking profits on any jump above $6.17.
[SPDR Materials (XLB) Daily Bar Chart]
SPDR Materials (XLB) could be shorted on a rally back toward resistance near $46.36 or on a break down through its 200-day moving average currently at $43.67. XLB had enjoyed a solid rally from late January till roughly now, it’s Stochastic, MACD and relative strength indicators have all turned negative though. A stop loss at $47.05 is suggested and profits can be taken at $36.47.
ETF Portfolio Updates
In accordance with Tuesday’s Alert, existing positions in VNQ, JJC, DIA and SPY have been closed out of the portfolio. For tracking purposes these positions were exited at their respective “open” prices on April 6.
Now that the “Best Six Months” for DJIA and S&P 500 have officially come to an end, we are shifting the portfolio toward an overall market neutral stance. Continue to Hold long positions associated with the NASDAQ’s “Best Eight Months” while considering some defensive bond and bearish ETF (HDGE) positions. We will consider a more defensive posture when NASDAQ’s favorable period ends or sooner should the market begin to unravel in earnest.
[Almanac Investor ETF Portfolio – April 6, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in USO and XLU.
Tactical Seasonal Switching Strategy Update
By: Jeffrey A. Hirsch & Christopher Mistal
April 05, 2016
As of today’s close, both the slower and faster moving MACD indicators applied to DJIA and S&P 500 are negative (arrows in charts below point to a crossover or negative histogram on the slower moving MACD used by our Seasonal Switching Strategy to issue a sell). At this time, we are issuing our official Best Six Months MACD Seasonal Sell signal for DJIA and S&P 500. NASDAQ’s “Best Eight Months” last until June.
[DJIA Daily Bar Chart]
[SP500 Daily Bar Chart]
Current technical, fundamental, seasonal, sentiment and monetary policy outlooks are aligning to signal increasing odds of a turbulent “Worst Six Months” this year. Year-to-date gains, in an election year, are about in line with historical averages for this time of the year, but the ride to get here in Q1 is troubling. Lower lows and lower highs in Q1 compared to Q4 and the pace that losses accumulated in Q1 could be a sign of further trouble.
SELL SPDR DJIA (DIA), SPDR S&P 500 (SPY), Vanguard REIT (VNQ) and iPath Bloomberg Copper TR Sub-Index ETN (JJC). In addition, the remaining open buy idea in the Almanac Investor ETF Portfolio, iShares U. S. Technology (IYW) is cancelled.
Continue to HOLD technology and small cap related ETFs as NASDAQ’s “Best Eight Months” ends in June.
BUY half positions in AdvisorShares Ranger Equity Bear (HDGE) on dips with a Buy Limit of 10.70, iShares 20+ Year Treasury (TLT) on dips with a Buy Limit of 129.75 and iShares Core US Aggregate Bond (AGG) on dips with a Buy Limit of 110.35
Traders/investors following the Best 6 + 4-Year Cycle switching strategy detailed on page 62 of the Stock Trader’s Almanac 2016 can ignore this signal, but should strongly considering tightening stop losses and adding some downside protection.
[Almanac Investor ETF Portfolio – April 4, 2016 Closes]
In addition to the above moves in the ETF Portfolio, the two remaining open trade ideas in the Almanac Investor Stock Portfolio are cancelled. Newtek Business Services (NWT) & Standex International (SXI) buy ideas are cancelled. All other stock positions are on Hold. Please note updated stop losses in the following table.
[Almanac Investor Stock Portfolio – April 4, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held a position in CNC, CVS, HBI, QQQ, SMG, TSCO, USO and VNQ.