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.

Is Natural Gas About to Breakout?

Natural gas has been in a period of consolidation for the last two months. However, it appears we may be getting ready for a breakout based on the recent price action, bullish COT data, seasonality and positive divergences that are currently taking place in the nat gas market.

Below is a chart of the United States Natural Gas Fund ($UNG) going back the last nearly ten months. After the 22% drop from the last high made in June, price has been trading in a fairly tight range. This type of consolidation can produce some large moves as if it were a coil that was being pushed together. While this consolidation has been taking place, the Relative Strength Index has been putting in a series of higher lows. This bullish divergence has also led to the RSI making a higher high after Monday’s close.

In the bottom panel of the chart we have the On Balance Volume Indicator which simply adds the volume on positive days and subtracts the amount of shares traded on negative days. This tool can help us see if there is a bias towards buying or selling. Since the indicator has been rising its July low, we know that more shares have been traded when $UNG has been advancing compared to when it has been falling – a positive sign for nat gas bulls.

We’ll see if these bullish indicators of momentum and volume lead to price breaking above its August high.

UNG

Commitment of Traders 

The next chart I want to show is of the Commitment of Traders (COT) data for Natural Gas. The red line in the bottom panel of the chart shows the Commercial Traders, which are often company’s that deal with natural gas within their own business, so they are often considered the ‘smart money’ within a market. After going net-short the commodity earlier this year right before price peaked, the Commercial Traders have been slowing building back their net-position towards a historically high level. Even during this period of consolidation, the ‘smart money’ appears to have been picking up contracts in Natural Gas.

Nat gas COT

Seasonality

This final chart comes from Signal Financial Group and shows the 10-year seasonal trend for Natural Gas. Interestingly enough, the 5-, 10-, 15-, and 20-year seasonal trends all mirror one another, which in my opinion helps re-enforce the significance of this seasonal pattern. Like we have seen somewhat this year, price has put in a low in early September while showing slight strength during the last month. What catches my attention with this seasonal study is the large move towards the end of October that crates the historical first point of a double top before price has weakened into year-end and the first few months of the following year.

Nat gas seasonality

So it appears we have price getting ready to breakout of its two month consolidation. While at the same time momentum and volume are creating bullish divergences and the ‘smart money’ has been increasing their net-long position in Natural Gas based on COT data.

(At the time of this writing my firm holds shares of UNG in certain client accounts and may sell those holdings at any time. However, this is not a recommendation to buy or sell UNG, other natural gas-related or any investment vehicle.)

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.