August 2016 Trading & Investment Strategy
July 28, 2016
August Outlook: Rally Lacks Tech and Small Cap Support
By: Jeffrey Hirsch & Christopher Mistal
July 28, 2016
July’s big rally has pushed the DJIA well into incumbent winning territory. As you can see below this has not been typical July market action. The usual second half of July weakness never materialized. Once the market realized that Brexit was no imminent threat or a clear and present danger, stocks quickly erased the two-day post-Brexit selloff and rallied to new all-time highs on the DJIA and S&P 500 in relatively short order.
Since economic data has not impressed the Fed enough and continues to ebb and flow every month, it’s unlikely we’ll see another rate increase until after the election. Earning season went off without a hitch as companies overall did not disappoint Wall Street much, though we were not overly impressed. 
Buoyed also by earnings numbers that mostly beat lowered forecasts and the promise of continued accommodative monetary policy for the foreseeable future, this rally has pushed the DJIA well above any of the rosiest scenarios for an election, which has historically, been a vote of confidence for the incumbent presidential party.
[8th year update chart]
The market had been rocking this July until midway through the Republican National Convention last week and has not budged this week during the Democratic National Convention this week. All the hype about overly raucous, contested conventions with riots in the streets has been largely standard fare with the usual lively and inspired outbursts from enthusiastic constituencies. 
Trump got a standard convention bounce along with the market last week. We will find out next week if Clinton’s convention bounce will appear and propel her odds of winning the White House and the stock market higher. But for now the rally appears to have stalled, making zero headway since last Wednesday.
If anything we should all find at least some solace in the continued civilized, yet enthusiastic and sometimes heated debates of the open political process that this great nation continues to be built on. However, as two of the most unfavorable candidates head into the home stretch of a virtual dead heat presidential election campaign, things are bound to get uglier and spook the market.
August has been a horrible month for the stock market, ranking last for the major indices, DJIA, S&P 500, NASDAQ and Russell 2000 from 1988-2015. August performance improves dramatically in election years, ranking first for NASDAQ and Russell 2000. But election Julys rank poorly, likely due to convention distractions and that did not occur this time around. July may have stolen August’s election year thunder.
The market typically takes a breather in the early part of August and it sure seems out of gas now and ready for a pit stop. With 60 days left until the first Presidential debate and 103 days until they election, we have to imagine the mud will start to fly again and that might derail the rally, at least temporarily. This rally clearly lacks tech and small cap support. Until the NASDAQ and Russell 2000 log new all-time highs of their own, this rally will struggle to gain traction and be prone to summer swoons.
Pulse of the Market
Brexit vote losses were recovered in short order. Momentum carried DJIA and S&P 500 (not shown) to new all-time highs (1), but the rally has stalled. As of yesterdays close the faster moving MACD indicator applied to DJIA is negative (2), confirming the loss of upward momentum. Absent a 100-plus DJIA point gain today, the slower moving MACD indicator will also turn negative.
Dow Jones Industrials & MACD Chart
After declining in three of four weeks in June, DJIA has been up four straight, but gains have been shrinking (3). The current weekly winning streak is under pressure this week. A Down Friday/Down Monday (DF/DM) cluster in June (4) turned sentiment adequately bearish to fuel the recent rally. A DF/DM cluster near the lows or around support has proven in the past to be an excellent short-term long trade opportunity. A similar occurrence near highs or resistance can also mark the end of a rally.
S&P 500 (5) and NASDAQ (6) have also enjoyed gains for four straight weeks. S&P 500 did reach new all-time highs however, NASDAQ has not. We continue to look for NASDAQ and Russell 200 to trade at new all-time highs to confirm this rally has further to go. Absent tech and small-cap support, the rally is not likely to last as long.
NYSE Weekly Advancers and Decliners (7) over the last four weeks have been trending in a direction that confirms the market’s waning momentum. Weekly Advancers have been slowly declining in number while Decliners are rising. NYSE Weekly New Highs peaked and Lows bottomed out (8) during the week ending July 15. This is another possible sign the rally is fading.
Moody’s AAA Rate bottomed at 3.21 (9) in the week ending July 8. This is the lowest level for this key rate on record going back to 1962. This new low was likely part defensive, part optimism for additional central bank liquidity and part hunt for yield. The expectation of further liquidity and lower interest rates was likely the largest force. Thus far, most central banks have not taken any additional action and the rate has begun to drift higher. 
Click for larger graphic…
Pulse of the Market Table
Market at a Glance - 7/28/2016
By: Christopher Mistal
July 28, 2016
7/27/2016: Dow 18472.17 | S&P 2166.58 | NASDAQ 5139.81 | Russell 2K 1218.93 | NYSE 10739.77 | Value Line Arith 4891.67
Psychological: Troubling. According to the most recent Investor’s Intelligence Advisor Sentiment survey bullish sentiment is frothy. Bullish advisors stood at 53.9%, Bearish advisors were at 21.6%, while correction advisors are at 24.5%. The spread between bulls and bears is now at its highest level since early 2015 when the market last stalled. There may still be some cash on the sidelines, but the amount is much less than it was just four weeks ago.
Fundamental: Mixed. Brexit will create uncertainty across Europe, potentially for years. Corporate profits are on track for their fifth straight quarterly decline and U.S. GDP seems to be in a rut that is no better than around 2%. Latest Q2 GDP estimates are now around 1.8%. The U.S. labor market has proven resilient though with solid June gains following May’s disappointing report.
Technical: Break out? DJIA and S&P 500 have broken out to new all-time highs; NASDAQ and Russell 2000 have not. For this rally to continue, NASDAQ and Russell 2000 need to catch up and join the new high party. Without broad support the major indices are increasingly likely to slip back into a trading range.
Monetary: 0.25-0.50%. Another meeting and no change was made to the federal funds rate. The board did acknowledge recent improvements in data, particularly the labor market, but inflation is still below 2%. At one point it may have seemed like rates were headed higher sooner rather than later, this is no longer the situation.
Seasonal: Bearish. August is the worst DJIA and S&P 500 month from 1988-2015 with average declines of 1.3% and 1.0% respectively. It is also the worst month for NASDAQ (–0.4%) and second worst for Russell 2000 (–0.7%) over the same time period. However, in election years since 1952, Augusts’ rankings improve: #5 DJIA, #4 S&P 500, #1 NASDAQ (since 1971), #1 Russell 1000 and #1 Russell 2000 (since 1979).
August Almanac: Best NASDAQ & Russell 2000 Election-Year Month
By: Jeffrey Hirsch & Christopher Mistal
Money flows from harvesting made August a great stock market month in the first half of the Twentieth Century. It was the best month from 1901 to 1951. In 1900, 37.5% of the population was farming. Now that less than 2% farm, August is amongst the worst months of the year. It is the worst DJIA and S&P 500 month from 1988-2015 with average declines of 1.3% and 1.0% respectively. August is also the worst month for NASDAQ (–0.4%) and Russell 2000 (–0.7%) over the same time period. However, in election years since 1952, Augusts’ rankings improve: #5 DJIA, #4 S&P 500, #1 NASDAQ (since 1971), #1 Russell 1000 and #1 Russell 2000 (since 1979). This year, the market’s performance in August will likely depend heavily on how July closes.
[August Election Year Stat Table]
Contributing to this poor performance since 1987; the shortest bear market in history (45 days) caused by turmoil in Russia, the Asian currency crisis and the Long-Term Capital Management hedge fund debacle ending August 31, 1998 with the DJIA shedding 6.4% that day. DJIA dropped a record 1344.22 points for the month, off 15.1%—which is the second worst monthly percentage DJIA loss since 1950. Saddam Hussein triggered a 10.0% slide in August 1990. The best DJIA gains occurred in 1982 (11.5%) and 1984 (9.8%) as bear markets ended. Sizeable losses in 2010, 2011, 2013 and 2015 of over 4% on DJIA have widened Augusts’ average decline. A strong August in 2014 of S&P 3.8% and NASDAQ 4.8% preceded corrections of 7.4% and 8.4% respectively from mid-September to mid-October.
The first nine trading days of the month have exhibited weakness while mid-month is strongest. Note the bullish cluster from August 12-17. The end of August tends to get whacked as traders evacuate Wall Street for the summer finale. The last five days have suffered in 13 of the last 20 years with the S&P 500 up only five times on the next to last day in the past 20 years. In the last 19 years, the last five days of August have averaged losses of: Dow Jones Industrials, –1.1%; S&P 500, –0.9%; NASDAQ, –0.6% and Russell 2000, –0.03%.
On Monday of expiration the Dow has been up 14 of the last 21 times with four up more than 1%, while on expiration Friday it has dropped in 10 of those 21 years, down five of the last six years (–3.1% in 2015). Expiration week as a whole is down slightly more than half the time since 1990, but some of the losses have been steep (-2.6% in 1990, -2.3% in 1992, -4.1% in 1997, -4.0% in 2011, 2.2% in 2013 and 5.8% in 2015). The week after expiration is mildly stronger up 16 of the last 26.
August Vital Stats (1950-2015)
  DJI SP500 NASDAQ Russell 1K Russell 2K
Rank   10   11   11   10   9
# Up   37   36   24   23   21
# Down   29   30   21   14   16
Average %   -0.2   -0.1   0.1   0.2   0.2
4-Year Presidential Election Cycle Performance by %
Post-Election   -1.8   -1.5   -1.5   -1.5   -0.7
Mid-Term   -0.7   -0.4   -1.8   -0.1   -1.9
Pre-Election   0.9   0.5   0.7   0.3   -0.0001
Election   0.8   1.0   2.9   2.2   3.5
Best & Worst August by %
Best 1982 11.5 1982 11.6 2000 11.7 1982 11.3 1984 11.5
Worst 1998 -15.1 1998 -14.6 1998 -19.9 1998 -15.1 1998 -19.5
August Weeks by %
Best 8/20/82 10.3 8/20/82 8.8 8/3/84 7.4 8/20/82 8.5 8/3/84 7.0
Worst 8/23/74 -6.1 8/5/11 -7.2 8/28/98 -8.8 8/5/11 -7.7 8/5/11 -10.3
August Days by %
Best 8/17/82 4.9 8/17/82 4.8 8/9/11 5.3 8/9/11 5.0 8/9/11 6.9
Worst 8/31/98 -6.4 8/31/98 -6.8 8/31/98 -8.6 8/8/11 -6.9 8/8/11 -8.9
First Trading Day of Expiration Week: 1990-2015
#Up-#Down   17-9   20-6   22-4   21-5   19-7
Streak   U2   U2   U6   U2   U3
Avg %   0.3   0.4   0.5   0.3   0.4
Options Expiration Day: 1990-2015
#Up-#Down   11-15   12-14   13-13   13-13   13-13
Streak   D3   D3   D1   D1   D3
Avg %   -0.3   -0.3   -0.3   -0.2   0.01
Options Expiration Week: 1990-2015
#Up-#Down   12-14   15-11   16-10   15-11   17-9
Streak   D1   D1   D1   D1   D1
Avg %   -0.5   -0.2   0.3   -0.1   0.4
Week After Options Expiration: 1990-2015
#Up-#Down   16-10   18-8   17-9   18-8   17-9
Streak   U2   U3   U3   U3   U3
Avg %   0.4   0.5   0.7   0.4   0.07
August 2016 Bullish Days: Data 1995-2015
  12, 17, 22, 29 12, 15, 16, 17 12, 15, 16, 17 15, 16, 17 12, 16, 17
    22, 29 22, 29 22, 29 25, 29
August 2016 Bearish Days: Data 1995-2015
  1, 11, 19, 30 11, 18, 19, 30 5, 8, 18, 19 11, 19, 30 2, 5, 8
August 2016 Strategy Calendar
By: Christopher Mistal
Annual, Monthly, Weekly & Holiday Volume Patterns
By: Jeffrey Hirsch & Christopher Mistal
July 21, 2016
Looking at the average daily trading volume of SPDR S&P 500 (SPY) on Yahoo! Finance (the new layout and format is going to take time to get accustomed too), it is just under 100 million shares per day over the past three months. SPY volume recently spiked as high as 333 million shares on June 24, 2016, Brexit sell-off, to a recent low of just a little over 54 million this past Tuesday. If volatility remains subdued, average daily volume is likely to continue to trend lower as the calendar heads toward August.
We refer to the summer months as the doldrums due to the anemic volume and uninspired trading on Wall Street. The individual trader, if they are looking to sell a stock, is generally met with disinterest from The Street. It becomes difficult to sell a stock at a good price. That is also why many summer rallies tend to be short lived and are quickly followed by a pullback or correction.
Around Holidays
In the table below we have beefed up the holiday trading table from page 88 of the Stock Trader’s Almanac to illustrate the effects of dramatic changes in trading volume before and after holidays. As with all the graphs and charts in this study, the volume numbers in this table are based on the deviation from the annual average daily volume. But first we need to take into consideration the shortened trading days that occur around certain holidays. 
Thanksgiving has the most consistent “half day” of all the holidays. Since 1992 the New York Stock Exchange (NYSE) has closed early and the roughly 50% reduction in trading should not be surprising as many people stay home recovering from the previous day’s feast and spend time with family. However, it seems that those that do trade are in good spirits, generally driving prices higher on the best post-holiday trading day of the bunch.
The day before and after Independence Day and Christmas do not close early as regularly, but have many early closings; when the respective holiday lands on a weekday. In any event all these annual average daily volume deviations provide a useful benchmark for evaluating the relevance or importance of a market move surrounding a holiday.
[Holiday Volume Table]
3-Day Weekends
Monitoring market performance on the individual days of the week has been revealing over the years. The insights were so inspiring that our iconoclastic founder and resident consigliere, Yale Hirsch, entitled his 1986 book Don’t Sell Stocks on Monday. In the following charts we have lined up the performance on each day of the week from pages 141 and 142 of the Almanac with annual average daily volume deviations for each day.
Not surprising, Monday, or the first trading day of the week shows substantially reduced trading volume on both the NYSE and NASDAQ of 9% below the average. Friday is also below average for NASDAQ. This underscores the recent trend of market gains being concentrated midweek and weakness at the beginning and end of weeks.
Apparently, traders and investors prefer long weekends; or at least not being exposed going into the weekend and being more tentative about taking new positions upon their return. Picking up stocks on Monday weakness and unloading during midweek strength on higher volume would appear to be a prudent strategy for the most part. It also pays to be keen to price and volume action on Fridays and the following Monday for indications of future market direction. Strong volume and price advances tend to be bullish, while back-to-back weakness on normal or elevated volume is frequently bearish.
[S&P 500 Daily Performance & NYSE Volume]
[NASDAQ Daily Performance & Volume]
Volume Lags
Examining the typical monthly price patterns from pages 145 and 146 of the Almanac in conjunction with the annual average daily volume deviations for each day below exposes the “follower” tendencies of market participants. Note how volume picks up after the usual month-end price gains and even more substantially following the normal mid-month surge.
Similar to the days of the week pattern, it makes sense to go against the crowd. Going long or covering shorts after mid month into higher volume and selling or shorting the last few days of the month and into the first half as prices rise and volume declines appears to make the most sense.
[S&P 500 Cash Flows & NYSE Volume]
[NASDAQ Cash Flows & Volume]
Big Picture
Below we have plotted the one-year seasonal volume patterns since 1965 for the NYSE and 1978 for NASDAQ against the annual average daily volume moving average for 2016 so far. The typical summer lull is highlighted in yellow. Note the spike in volume that occurred in late June as a result of the Brexit vote sell-off. Prior to then volume had been slowly, but steadily declining since late April. As of last Friday, volume has already sunk to pre-Brexit spike levels.
An atypical surge in volume this summer, especially accompanied by outsized gains, would be an encouraging sign that the bull market will continue. However, should traders lose their conviction and participate in the annual summer exodus from The Street, a market pullback or correction could quickly unfold. 
[NYSE 1-Yr Seasonal Volume Chart]
[NASDAQ 1-Yr Seasonal Volume Chart]
Stock Portfolio Updates: Rally Stalling, Maintaining Defensive Posture
By: Christopher Mistal
July 19, 2016
Even though today’s DJIA gain was a modest 25.96 points, it was enough to extend DJIA’s daily winning streak to eight consecutive days. The last such DJIA daily winning streak was in March 2013 when it advanced for 10 straight days. Prior to the current streak of eight, there have been just 47 DJIA daily winning streaks of eight or more days since 1950. The longest was 13 straight in January 1987. Of those past 47 streaks, 24 of them ended at eight days (51.06%), 12 streaks lasted until a ninth day (25.53%), 7 streaks went 10 days (14.89%), 2 streaks lasted 11 days (4.26%) and 1 each lasted 12 and 13 days (2.13%). The average loss on the day the streak ended was 0.5%.
[30 Trading Days Before and 60 After 8 or more Day DJIA Winning Streak]
In the above chart the 30 trading days before and the 60 trading days after all 47 previous DJIA winning streaks of eight or more days have been plotted. There are approximately 21 trading days in an average calendar month. Based upon the above chart, even after the current streak ends further gains are likely over the next 1-, 2- and 3-calendar month periods. If NASDAQ and Russell 2000 can join DJIA and S&P 500 in record territory, further gains would be more likely, absent confirmation, less likely.
Portfolio Updates
In the five weeks since last update, S&P 500 was up 4.2% and Russell 2000 gained 5.0% as of yesterday’s close. The Almanac Investor Stock Portfolio’s sizable cash position and short positions held its performance in check. Overall, the entire Stock Portfolio climbed 1.3% higher over the same time period. Large-cap positions, up 3.7%, in the portfolio were responsible for the majority of the overall gain. Mid-Caps and Small-Caps also contributed, up 1.4% and 0.7% respectively.
Per last month’s update, Sunoco Lp (SUN) was sold and closed out of the portfolio using it average price on June 15 for a 10.7% loss. SUN is slightly higher today, but with crude oil slipping back into the mid-forties SUN’s struggles are likely to persist.
Last week’s basket of Summer Shorts have been inputted into the Stock Portfolio table below. Of the 16 new short ideas presented then, four have satisfied their respective shorting criteria and have been officially added to the Portfolio’s holdings. Terra Nitrogen (TNH), Vermilion Energy (VET), Praxair (PX) and Union Pacific (UNP) were all shorted near resistance and could still be considered near current levels. All other “Summer Shorts” have not yet meet their shorting criteria and can still be considered near resistance (the price listed in the Buy Limit column) or on a breakdown through support (level found in Current Advice column). All short trade ideas are labeled with “(S)” and are also shaded grey in the table below.
DJIA and S&P 500 have broken out to new all-time highs, but NASDAQ and Russell 2000 have not. Earnings season has commenced and we have already seen a mixed bag. The momentum off of June’s lows appears to be fading. Long positions remain on Hold. Please note many stop losses have been increased. New short trade ideas can still be considered. Many of them were from the energy sector where seasonality is turning unfavorable.
[Almanac Investor Stock Portfolio – July 18, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control did not hold any positions in the stocks mentioned, but may buy or sell at any time.
Mid-Month Update: Bullish Sentiment Heating Up
By: Christopher Mistal
July 14, 2016
Contrary to past election-year July’s, this year is well above average even with more than half a month’s trading remaining. As of today’s close, DJIA is up 3.2%, S&P 500 3.1%, NASDAQ 4.0% and Russell 2000 has gained 4.4% thus far. If we include the gains from the last three days of June, the results more than double across the board; 8% for DJIA, 8.2% S&P 500, 9.6% NASDAQ and 10.4% for the Russell 2000. DJIA and S&P 500 are trading at new all-time highs while NASDAQ and Russell 2000 are not. New all-time highs by NASDAQ and Russell 2000 would provide further evidence that this rally is for real and would likely put DJIA 18000 and S&P 500 firmly in the rearview mirror.
[DJIA Daily Chart]
[S&P 500 Daily Chart]
[NASDAQ Daily Chart]
[Russell 2000 Daily Chart]
The explosive move higher off of June’s Brexit low on June 27 is clear in the above charts. All four indices plunged below their respective 50- and 200-day moving averages when the vote tally was announced, but quickly rebounded as the reality of the Brexit process became clearer and central banks around the globe became even more dovish. The surge higher has pushed all but NASDAQ through projected monthly resistance (red dashed lines) and sent Stochastic, relative strength and MACD indicators towards overbought.
So far, there has actually been very little central bank action. Even the Bank of England decided not to cut rates today which came as a surprise for many as traders had priced in a more than 80% probability of a cut today. Canada’s central bank did nothing on Wednesday. If the rally is being fueled principally by central bank stimulus hopes, it could fizzle as quickly as it began.
Investor and trader sentiment is also quickly approaching frothy levels. Investor’s Intelligence Advisors Sentiment survey showed bulls surging to 52.5% in their most recent release. This was the first time since early 2015 that the bulls exceeded 50%. Correction advisors shrunk to 22.8%. Bears ticked slightly higher to 24.7%. This sent the bull/bear difference to its highest level since early 2015 as well. When the crowd is bullish, risk rises as capital on the sidelines is most likely dwindling. 
Mid-July Short S&P 500 Update
Today marks the end of NASDAQ’s mid-year rally and is the last bullish day on the July Strategy calendar ahead of the frequently volatile week after options expiration week. Tomorrow marks the start of July’s short S&P 500 trade detailed last week. Technical indicators are stretched, sentiment is near frothy levels and so far, additional promised central bank liquidity is a no show which improves the odds of this trade succeeding.
ProShares UltraShort S&P 500 (SDS) was added to the ETF Portfolio on July 8 when SPDR S&P 500 (SPY) first traded above $211.66. SDS average price on that day was $17.39 and an initial trailing stop of 5% equals $16.52. Continue to Hold SDS. Stop only if SDS closes below its stop loss price.
Stock Trades: Sizzling Summer Rally Setting Up Short Basket
By: Christopher Mistal
July 12, 2016
Most years, especially when the market sells off during the first half or is flat, prospects for the perennial summer rally become the buzz on the street. Parameters for this “rally” were defined by the late Ralph Rotnem as the lowest close in the Dow Jones Industrials in May or June to the highest close in July, August, or September. Such a big deal is made of the “summer rally” that one might get the impression the market puts on its best performance in the summertime. Nothing could be further from the truth! Not only does the market “rally” in every season of the year, but it does so with more gusto in the winter, spring, and fall than in the summer. From its June 27, closing low of 17140.24, DJIA has rallied 7% as of today’s close which was also a new all-time DJIA closing high.
Winters in 53 years averaged a 12.7% gain as measured from the low in November or December to the first quarter closing high. Spring rose 11.4% followed by fall with 11.0%. Last and least was the average 9.0% “summer rally.” Even 2009’s impressive 19.7% “summer rally” was outmatched by spring. So beware the summer rally hype as it is usually the smallest rally of the year and can fade just as quickly as it began. S&P 500 and DJIA have managed to break out to new highs, but NASDAQ and Russell 2000 continue to lag. Without tech and small-cap support, large-cap stocks could soon run out of momentum.
[Summer Rally Table]
Short Stock Basket
This basket of 16 possible stocks to short spans the three market cap ranges in the Almanac Investor Stock Portfolio. There are three Small-Cap stocks (less than $1billion), six Mid-Cap stocks (greater than $1 billion but less than $5 billion) and seven Large-Cap stocks (greater than $5 billion in value). Our screening process involved an in-depth review of fundamentals, such as revenues and earnings, valuation metrics like price-to-earnings and price-to-sales ratios, each stock’s technical situation as well as price and daily trading volume. Seasonally weak sectors, like materials, transports and cyclicals (and oil which begins in September) were also given extra attention and produced more than half of the stocks in the basket. 
The broad criteria for inclusion on this list relied primarily on revenues and earnings (past and future estimates). Generally, stocks that are exhibiting decelerating, flat or negative revenues ranked high on our list of short candidates. From this batch earnings also needed to be decelerating, flat, negative or estimates are weak. Out of this trimmed list, stocks with elevated P/E and/or P/S ratios were retained. Finally share price and volume were considered. From a list of several thousand stocks, these 16 remained. There are worse stocks out there, but many of them had already fallen a substantial distance. Whereas, this basket still appears to offer plenty of downside potential in coming months, especially if energy prices begin to weaken early. Some are trading near 52-week lows while others maybe just a few percentage points off of 52-week highs. 
Remain patient as the first half of July is historically bullish, but afterwards the worst-two-consecutive-month span, August through September, begins. Like past short trade ideas, there are two possible prices presented to establish a short position. The first is labeled “Short @ Resistance” in the table below. Should a stock rally toward this price then stall and loss momentum a short trade can be considered. Look for corresponding weakness by MACD, Stochastic and relative strength indicators to confirm. The second price to consider shorting the stock is listed in “Short on breakdown below”. This is the stock’s current projected support level. If the stock breaks support a short trade can be considered. Regardless of short trade entry price, the suggested stop loss is the same initially. All 16 short stock ideas will be tracked in the Almanac Investor Stock Portfolio which is currently scheduled to be fully updated on July 19 (sooner if conditions warrant).
[Summer Shorts Stock Table]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control did not hold any positions in the stocks mentioned, but may buy or sell at any time.
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]
ETF Trades: Two New Longs & Defense Pays Off
By: Christopher Mistal
July 05, 2016
Last week’s rally had virtually erased all losses from the Brexit vote market rout. As of last Friday, DJIA had bounced back and was effectively following the historical seasonal pattern associated with incumbent party victories. This would suggest Hillary Clinton will be the next President. S&P 500 is back on track and following the typical all-election year pattern. NASDAQ continues to lag DJIA and S&P 500 and is still negative year-to-date. 
[DJIA 8th Year Seasonal Chart]
[S&P 500 8th Year Seasonal Chart]
[NASDAQ 8th Year Seasonal Chart]
New Trade Ideas for August Seasonalities
Biotechnology sector enters its historical favorable season in August. iShares NASDAQ Biotech (IBB) could be bought on dips below $242.50. The stop loss is $229.90 and auto sell is $350.24. A 16.0% average gain has occurred over the last 15 years while an average gain of 31.3% has taken place the most recent 5 years. Biotech had been hot in recent years and even though valuations are still arguably elevated, this is where growth can still be found. It is also quite likely that this sector will play a significant part in the next secular bull market. Unlike other areas of the market, IBB has not recovered fully from its January plunge. It has traded below $250 per share on several occasions over the past four months and each time it did it proved to be a good time to buy.
[iShares NASDAQ Biotech (IBB) Daily Bar Chart]
Over the last 15 years, High-Tech has generated an average return of 10.8%, and for the last five years the average has improved to 16.1% during its bullish season from mid-August to mid-January. Our top ETF within this sector is iShares DJ US Tech (IYW). A buy limit of $100.05 and stop loss of $94.95 are appropriate. If high-tech produces above average gains, profits will be taken at the auto sell of $127.77. Similar to the broader market, IYW has largely been in a holding pattern since the end of March. It was hit hard by the Brexit sell off and has bounced back. Technical indicators are improving, but we will look to take advantage of any future weakness.
ETF Portfolio Updates
Since doubling down on defensive positions in HDGE, TLT and AGG when we issued our official Seasonal MACD Sell for NASDAQ, the market has taken a turn for the worse. This has benefited these defensive positions. As of last Friday’s close, TLT was performing best, up 5.9%. AGG was up 1.5% while HDGE is still off 1.9%. HDGE’s performance can vary from anticipated as it is rather concentrated in a select basket of stocks. There have been, and will be, days when the market is down and HDGE is also down however, HDGE usually does perform well when there is a sizable market pullback.
Seasonal strength is oil stocks usually comes to an end in early July. Crude oil has a similar seasonal pattern and has been exhibiting weakness. As a result, Sell United States Oil (USO). For tracking purposes, it will be closed out of the portfolio using tomorrow’s average price.
Seasonal weakness in Banking and Natural Gas sectors also comes to an end in July. Cover the short positions in SPDR Financials (XLF) and First Trust ISE-Revere Natural Gas (FCG). FCG is down over 4% today and XLF is down nearly 2% which will improve the modest gains these short positions had last Friday. For tracking purposes, both will be closed out of the portfolio using their respective average price tomorrow.
Rising political uncertainty and the increasing number of countries with negative or near negative rates has boosted demand for gold. The run up in gold translated into a brisk move for gold mining stocks. Regrettably the buy limit for Market Vectors Gold Miners (GDX) was never reached and it has run away. Long GDX trade idea is cancelled
The surprising Brexit vote outcome brought havoc upon the NASDAQ Mid-Year Rally trade. The rally did begin on the third to last trading day of June, but at a much lower level than expected. PowerShares QQQ (QQQ) was added on the open on June 24 and was closed out the following trading session when it closed below its tight 1% trailing stop at $103.25.
With the exception of today’s new trade ideas and the positions that will be closed out, the rest of the portfolio is on Hold. See table below for updated stop losses.
[Almanac Investor ETF Portfolio – July 1, 2016 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held a positions in AGG, HDGE and TLT.