Year of the old saws 2010

[blygh]

I considered four old saws - Santa Claus Rally, January effect, Go away in May and Come back after labor Day.

So you buy the SPY ETF for the S&P 500) for 110 in mid December 2009 in anticipation of a Santa Claus Rally, you sell it at 120 on May 1. and go into 90 days Treasuries - you buy back in after Labor say for 106 and hold till 122.8 today - This 'Old saw' strategy nets you a 25% gain But if you followed simple buy and hold from Jan 1 - you would be up 8%.

These strategies are becoming self fulfilling prophecies

[ira85]

Uncanny how these old maxims worked almost perfectly last year. Now we're at the "sell in May" point again and it's starting out perfectly. Using SPY as a market proxy, SPY hit it's peak for the past 12 months exactly on que, April 29, at 136.43. It's closed below that price every day in May since then. Could the blow out in silver and commodities, the rebound in the dollar, higher interest rates abroad, and the end of quantitative easing here mean the stars are aligning for a broad market correction? I'd say it's looking like "go away in May" could be a good strategy again this year. -ira

[blygh]

You called it Ira - I cut back but not nearly enough - stops are hitting every day and puts are usually profitable. I am into energy investment trusts (sbr, bpt, hgt, sjt, pgh, pbt,) - real estate investment trusts - cpt, slg, bxp, avb, ) and recently getting into utilities (ed, duk, eix, dte). Buying puts on industrials - especially chemicals (dow, dd, ce, wmn, wlk)

[ira85]

The "sell in May" signal remains spot on. The SPY closed yesterday at 126.81, down 7% since April 29. The low point for 2011 is 126.175 on March 16. So the SPY is just a hair from breaking through that low.

Even with all the safe haven buying of bonds due to the Europe debt crisis and Euro fears, treasuries seem to be losing momentum. TLT peaked on June 1. It's been flat since then, despite ongoing Greek fears. Could it be vulnerable to a possible U.S. debt crisis? If the world is in a dither about the risk of Greece defaulting, could there be some risk in U.S. treasuries if a showdown and brinksmanship awaits in the debate on raising the debt ceiling? The inverse long bond ETF TBT has what looks like a triple bottom. Kinda looks like there could be downside in the stock market and the bond market. Maybe its sell in May and go away from stocks and bonds this years. -ira

[sd]

IRA- Your assessment looks to be correct-and I'm essentially short the market this week-
Bond market is weak.
Consider that the predominant trend of the inverse is down, and a potential base is being made at the triple bottom. ($32.50) The base has an upper range near the $34.00 level on the prior reactions.
an entry near this low end of the range provides a relatively tight stop- However the price action-despite a 3x bottom- does not support going long TBT, that may come, but the prevailing trend is down and price action has not indicated it is ready to rally significantly higher. -As a tight range trade it may be feasible-
As a reversal of trend , price action has not yet proven a strong reversal may be underway. The 60 minute chart suggest $33 as an entry level-
At this point, an entry in TBT is based on a "belief" about what 'should'occur- Likely could be correct, and has a minimal loss - but does not qualify for a reversal of trend.
( reading Al Brooks' -Price Charts Bar by Bar" this week.)
Low Risk & early trade -
Good Luck- SD

[sd]

As a follow-up , (practicing my price action analysis)
Consider:
While the daily chart looks as though there have been 3 swing-low's/ bottoms all near the $32 range, and 2 resistance levels hit at $34 , it could be that we are simply seeing a range or sideways channel consolidating. We won't know until the range is actually broken ($34.oo) and closed above. This would also break the down trend line of the daily. The price action on Friday on the daily was a bullish reversal candle , but we're going sideways at present- so this is not a big reversal candle at the bottom of a downtrend - Potentially it's a range/channel.

Previous post I suggested $33 as an entry, but that could/should be tightened to improve the Risk to Reward of the trade.

I have attached a 60 minute chart - What it shows is that Thursday price pushed down on one bar to almost $32 and closed back higher (long tail, buyers stepped in.) This was repeated on Friday, and ended with a second push lower where the bar also closed higher, and then bullishly closed even higher above the day's range.
This looks very promising for a move higher on Monday.
It also sets up a very good early entry with a tight stop at the $32.00 level. Say a $32.60 buy-stop entry has a 2% risk where a sell at $34 has a 4% reward.. Risk to reward 1:2- with a stop close enough that it won't break the bank ($60.00 /100 shares) or if I was trading it with a $1500.00 avg position size, my risk would be closer to $30.00 . Good potential low risk trade IMO. Consider if filled - sell half near $34 and move the stop to Break even =+ opn the remainder.
It would be important to use a buy-stop with limit on the entry, and not buy outright. The reason is , you want the price to have to go higher before getting filled. and the limit will keep you from getting filled on a gap higher open way high.

Keep in mind that the predominant trend is down, and while there are often 'reversal' signals' in downtrends, until price confirms the change of trend by price action closing above the downtrend line or a resistance level, entering a trade early should be planned as a quick trade within a range or channel, and if it develops that price does make it through and confirms a reversal, you've got a great starting point.
Caveat emptor- this is just my opinion and analysis. SD

[ira85]

SD, I appreciate your analysis of TBT. My view of TBT is based on macroeconomics more than technicals. I bought in a little early, in early June. I sold last week after it went above $34 and then dipped back under $34. Made a small gain. I think there is a good chance for a big move again in the next three weeks based on politics. So far the price action in TLT and TBT seems to be based on the traditional view of TLT as a safe haven. So when the Greek debt looks shaky, treasuries rise. When that situation calms, the stock market rises and treasuries see some sell off. It seems like the action in TLT and TBT is not yet showing any fear of a the U.S. not raising the debt ceiling.

My sense is if we get down near the deadline and there is no agreement to raise the debt ceiling, both the stock and bond markets are at risk for a sharp sell off. No on will want to be holding either asset if the U.S. defaults on treasury debt, even for a day. Overnight interest rates could shoot up with dramatic consequences for the markets.

We've seen a similar scenario before, September 2008. With the major banks teetering on the brink of insolvency and the risk of a major world wide financial implosion, congress was tasked with passing a bailout bill. On Sept 29, 2008 the house rejected the $700 billion bailout bill. The Dow fell 7% in one day. This time if congress had another last minute rejection it could trigger the bond rating agencies to downgrade U.S. treasuries and wreck havoc in the markets. Maybe not Armageddon, but maybe 10% or more moves in just a day or two.

With congress deadlocked and no common ground for compromise, it seems there's at least a realistic chance an agreement won't be reached and it may take a nasty reaction from the financial markets to make congress reach an agreement.

I know such analysis is highly prone to error. An agreement may be reached with days to spare and there will be no big negative reaction in the markets. But the risk reward ratio seems to me to favor taking a defensive position just in case a major drama does play out. It seem s a position in TBT to try to profit from a sharp rise in interest rates and a short on the broad market would be prudent. If nothing bad happens, those positions could be exited with minor losses. If something bad happens, one might be very grateful for the defensive hedge. Any different thoughts. -ira

[sd]

Hi IRA,
I can appreciate having a view of the macro economics that guide one's trading decisions. I find I'm rather left footed in that arena-
I think that having a viewpoint of the markets supported by a technical price action makes for a compelling rationale for entry and exit.
I think you made a timely exit on your June entry as well.
I find that with my limited insight/information about what "should" drive the markets- I am often finding myself on the wrong side of the equation due to mis interpretation, or market manipulation and 'news' that the Fed will do such and such- or pull some rabbit out of the hat .......
Why is the EURO not a disaster and the EUO a screaming "BUY" with all the news of potential further defaults- Italy, Spain etc. .

I would not disagree that taking a defensive posture in view of the upcoming confirmation or lack of is prudent.
While I don't have the understanding / rationale/ of how this product should be used defensively in the event you forsee, I think this would be a perfect time to combine both your fundamental beliefs and the technicals of price action to determine an entry /exit scenario..
We tend to trade the markets in a way that conforms to our belief of what the market will or 'should' do. That belief is our analysis of what will happen in the future- and our expectation is that the majority of other traders will also come to the same conclusion - If this should occur, and other traders interpret the market in a similar view, price action will show up on the technicals confirming that view.
I don't disagree with your "view" of this product- I would only suggest that you consider using the technicals and price action to support an entry /exit. It was interesting that the chart I posted 6-24 proceeded to see price exceed the $34 level, and since break down lower-
When we take a stand based on a belief that we will have a counter trend rally of the predominant trend, that will provide a reversal of the prevailing trend, we are drawing a line in the sand -

When we add technicals of price action to our beliefs, it establishes levels of entry/exit/stops etc. We may prove to be "right" in our expected market reaction- but we may be way early in our position.

When the predominant trend is Down, the momentum is also to the downside. Counter trend rallys should be expected to retest or fail . It would seem you took a good exit on the countertrend rally of your position.
Point is that as long as the market can be manipulated by the Fed or news, technicals provide a day by day interpretation of what is fair value for the underlying instrument- We don't have to agree, but we should be aware of the market's perception of value. That is where we win or lose.-

For a long term trader/investor, these minor market blips up and down mean little- For my style of trading, this is the bottom line. Regardless, I'm not optimistic about the gov't - but will play defensively with tight stops on active positions.
Good luck, Sd

[ira85]

Very well reasoned points sd. My TBT pick is definitely speculative. I got back in TBT this week at 32 and change. Seemed like a decent entry, but I'm no where near as sophisticated about technical analysis as you. Seems to be a fairly low risk entry. Agreed predicting a scenario of what a security is "supposed" to do is highly prone to error. But when you hit one right, it can also be highly rewarding. And if the entry seems cheap, the risk seems fairly low. In my speculative thinking the TBT could be a win either way the debt ceiling deal works out. If congress agrees on a debt ceiling increase, the markets breath a sigh of relief and risk assets are favored over Treasuries. TBT goes up. And if congress doesn't agree on a debt ceiling deal the rating agencies downgrade U.S. debt, interest rates go up and TBT goes up. Of course the risk is something unforeseen happens to ruin the scenario. Maybe a European country defaults first and there is a flight to U.S. treasuries. We shall see soon enough. Thanks for your thoughtful comments. -ira

[blygh]

What's happening now - Jim Krammer is fond of saying there is always a bull market somewhere but I think that now that is false. With all the debt crises - I thnk we are headed for severe deflation - this makes paying back debt even harder - which is why I think the banks are getting hit hard and the 10 year Treasury is 3%. I am moving more into short term treasuries until the clowns in DC getr their act together. Taking trillions out of the economy is going to put a lot of people out of a job or into jobs at much lower wages.

[blygh]

If we are still following the 2007 and 2010 patterns, this should be a big upweek ("Go away in May-
come back after labor day'") - last year the week before Labor Day saw the big run up kick off.
I think enough people believe this ("come back after labor day") that it will be a self fulfilling prophesy.
But I still plan on existing the market in mid- September (except for stable dividend players) - on
the assumption that the US is abandoning stimulus in favor austerity. In 2007 the market peaked around Oct 1 - and the bull market that started March 9 2009 peaked at Dow 12800 in April - we may test that again before a sell off In 2006. The Dow started the year 2006 around 10,600
- - it started 2010 around 10,500. The Dow ran up for 18 months till
in 2007 to a top of 14,000 in July 2007and 14,150+ on Oct 4 2007. Then the bull market
ended and the Dow fell to 6600 +. In 2009 to now we had the same kind of run up to a double top
May 4 2011 to 12800 - the second top at 12500 on July 23rd. The Bull market is long in the tooth and there is nothing obvious to drive it higher and a lot to drive it lower (excessive debt,
lack of demand.liquidity preference, financial instability among the world's major banks, a near universal
emphasis on austerity )- Deflation seems inevitable which will make debts more expensive to pay
(in terms of purchasing power) - a repeat of the 1930's.

[sd]

It's a couple of days since Blygh posted and the news is all about Europe continuing to head for a potential systemic financial crisis -which would also affect Us financials -Yes?-
The Us financials are now being sued for fraudulent lending advice by a gov't agency- About a dozen banks are involved I think-
And the Jobs report comes out today with 0 new job growth- not seen since 1945- and the prior 2 months job growth has been adjusted lower-
The President is coming out this Thursday with a major speech on Jobs- With an election hanging in the balance, the jobs issue was all it took to drop the market across the boards today-
The Recession word is being spoken, and people I speak with are indeed without conviction that there is a "solution" to our situation.
I cannot think of a compelling reason for the market to turn and rally because we are "oversold"- Perhaps the ECB will come up with some inspiring policy for the European crisis-
We still lack a policy in the US that can make any of us believe there is a "plan" that will guide us out of this malaise.
SD

[blygh]

The only thing we have to fear is fear itself - And quite frankly I am scared to death of the fear that is gripping the public. Fear has consequences. We can't get out of this funk without getting a million homes off the market. That is going to take a couple of years. I am short financials (SKF) - short Real EState (SRS) and short industrials (SJI) and small caps (TWM) as well as being short Oil (DTO DUG) - for the first time in my life I am net short the market

[blygh]

My shorts are working out - I have added EUM LHB SMN -to my short ETF list - how low can it go ? I have learned the hard way that if I say to myself "It can't go any lower" - that it inevitably goes lower - I call it the inconceivability criterion - When you can't conceive of a stock going any lower - short it! The hardest thing to do in investing is picking a bottom in a down market. I am still holding to 9500-9800 on the Dow - The only way out of the present malaise that I can see is inflating away the debt. I read someplace that in some ancient society debts were written off after ten years (if anyone knows the particulars on this I would appreciate he/she telling me) - we do the same thing with inflation and bankruptcy.

[blygh]

I recall another old saw - If you find yourself saying "It can't go any lower" - Sell and/or short the heck out of it! there could I have added RUSS - MYY SSG PTD to my short lists - I am sticking with ETF shorts because at these prices with all the corporate cash out there - takeovers could occur. I am rereading Karl Marx's Das Capital - as I recall from my reading 45 yrs ago - the present situation was predicted.