A Unique Seasonal Study to Forecast 2015 Returns

I’m a big fan of seasonality and it’s something we incorporate within the portfolios managed at my firm. While I read many books on trading and technical analysis, there is one that I always have on my desk and that’s the Stock Trader’s Almanac. While the book by Hirsch is an excellent resource for studying seasonality, there’s one study I came across that takes a unique view at using a period of trading to forecast returns for the following year.

Steve Deppe tweeted out on Tuesday about the Turn of Year timing model that begins on November 19th. After reading an article by its creator, Wayne Whaley at Futures Magazine, I found his research pretty interesting. Whaley was the 2010 Charles Dow Award winner by the Market Technical Association for his paper, Planes, Trains, and Automobiles.

While many traders have focused on the first five trading days of the year as a good predictor of whether that year for the equity market will be positive or negative, Wane Whaley looks at the time period between November 19th and January 19th. While studying different time periods, this specific two months predicted the market’s direction since 1949 with an 80.65% accuracy, according to Whaley’s paper written for NAAIM.

Whaley found the resulting performance of the S&P 500 during this time period and breaks it up into three categories: greater than 3%, 0% to 3%, and less than 0%. The table below shows the results of the two month period and the following twelve months performance for the equity index.

TT_W_Trigg

Whaley found that by looking at the two month period starting on November 19th, the timing model did a good job at forecasting negative and positive years for the stock market:

There was only one losing year (1987) out of 30 after a 3% plus bullish Turn of Year setup. In defense of that case, the S&P actually was up 20% from Jan. 19 through mid-August before succumbing to the double digit interest rates that fall that led to Black Monday (Oct 19). Conversely, there have been eight occasions since 1950 when the post-Jan. 19 year finished with a double-digit loss, and six of those eight occurred after one of the negative Turn of Year periods. All three of the -20% post-Jan. 19 years followed a negative Turn of Year period.

 

Wayne goes on in the article to show how he incorporates this new method of forecasting along with the notion of ‘sell in may.’ His findings are pretty interesting and the whole article is well worth a read for those interested in seasonality.

Source: Trade less, earn more with Turn of Year timing model (Futures Magazine)
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

A Potential Shift From Technology to Energy

When we started the year, energy was one of the best performing sectors until June when the relative performance between the SPDR Select Energy ETF ($XLE) peaked against the S&P 500. Meanwhile, Technology has been a solid sector for the bulk of 2014; tech hasn’t shot the lights out but it’s stayed steady as a top four sector performer YTD. After the multi-month downturn in oil prices, are we seeing a possible shift out of tech and back into energy?

The following chart shows the ratio between $XLE and the SPDR Technology ETF ($XLK).When the price movement rises we know that $XLE is outperforming $XLK, whether it’s rising more or falling less. Back in June the ratio between these two sectors put in a false break of the prior high from May. This created a shift in relative performance favoring technology for the next five months.

At the start of November we had another false break, this time it was a false break of a prior low. While Energy trailed Technology, it began to improve at the start of the month. This also happened while a bullish divergence was setting up in the Relative Strength Index (RSI), as show in the top panel of the chart. However, when making a second run at the prior high in the RSI indicator but momentum was unable to break above, creating a more defined level of resistance.

xle xlk

Going forward I’ll be watching to see if the movement out of the ratio between $XLE and $XLK can push above its falling trend line while also getting momentum to break above its own level of resistance. This could lead to a shift favoring energy while technology takes a backseat. If energy bulls are unable to create a bullish setup with the trend line and resistance breaks, then we may see the ratio fall back below its October/November lows as the market continues to favor Tech.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

The Most Important Chart Right Now For Equities

It’s always nice to see the equity markets make a new all-time high. Journalist are happy because it draws more views, traders rejoice in the rise in their portfolios, and consumers get a warm feeling as they associate the stock market with the economy. However, when I see we have a new high one of the first things I do is look for confirmation. We can’t forget that the stock market is truly a market of individual stocks. How many of those stocks also made new highs? How many were advancing? Was momentum strong? What about volume? Which sectors helped lead things higher? These are the questions I ask.

I discussed many of these topics in my Technical Market Outlook on Monday as well as my post from a few weeks ago, We Haven’t Seen a Market Top Yet. However, there is currently one chart that I think is extremely important, and could ‘unlock’ the bear market that many traders have been pining for and that the market internals have been attempting to warn us of.

Below is simple chart of the S&P 500 ($SPX) over the last six months. I’ve put a green box around the prior high, including the closing and intraday levels. The markets inability to stay above this high is very concerning to me, and could be creating a false break. If the bulls are unable to keep the S&P above the prior high, the idea that stocks will rally into year-end may not come to fruition.

SPX

There are many similarities to the current market environment compared to 2007. We have breadth, as measured by the Advance-Decline Line putting in a series of lower highs as fewer stocks participate in the rally. Momentum, as measured by the Relative Strength Index, on a weekly chart has also created a bearish divergence with a grouping of lower highs. Like in July 2007, the S&P dropped down to its 50-week Moving Average before rallying to a new high. Unfortunately, as in October 2007, the bulls couldn’t maintain control and price fell lower – eventually breaking through the prior support of the long-term Moving Average.

I didn’t think the September high was the peak for the year, we hadn’t seen enough damage done to the internals (breadth and momentum) yet. But at this point, we may now have. I’m now watching to see if the psychologically important 2000 level holds for the S&P 500. It seems like traders, both professional and retail like round numbers as their levels to watch (don’t ask me why). A break and follow-through past 2000 may just be what the bears need to carry things lower.

While I prefer to be positive and bullish, the way the market is acting right now, it’s hard to make that argument. There just seems to be too high of a level of positive sentiment with traders pointing to strong seasonality, mid-term elections, and Japanese stimulus as reasons to ignore the deteriorating market internals. I hope we see price hold above 2000 and is able to regain the September high, but if it doesn’t then things may get ugly. We’ll see what happens.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.