Thackray Market Letter (June 2013)
Market Update
As the S&P 500 continued to rise in May, I kept getting asked if “sell in May” was going to work this year. The exit date for the favourable six month period is May 5th, which landed on the weekend this year, making May 3rd the exit date. On this date the S&P 500 stood at 1614. It then continued to rise until May 21st, closing at 1669 for a 3.4% increase since May 3rd. Subsequently, the market has turned back down and stands at 1643 as of June 7th.
May 5th is an average exit date, sometimes the stock market peaks early as it has done in the last couple of years, sometimes it peaks later. The point is that May 5th is typically a good date to start to decrease risk in an investment portfolio. There is nothing to say that this year is any different.
As I have stated before, the S&P 500 typically does not have long sustained bull runs in the unfavourable period for stocks. In the past, large bull runs in the unfavourable season have been the result of the market bouncing off a major bottom (not the case this year), a strong realization that a recession is ending and much stronger economic numbers are being printed (not the case this year), or the Fed is stepping in with a stimulative policy (not the case this year, at least in the US). In other words, investors should not be expecting large gains at this time. There will be rallies in the market and some sectors will outperform, but the broad market is not expected to surprise strongly on the upside.
There is a broad market seasonal rally for nimble investors comprised of two seasonal trades starting towards the end of June and running into mid-July: the Independence Day Trade and the 18 Day Earnings Month Effect.
Independence Day Trade
The stock market tends to perform well a few days before and after US holidays. I am not the fi rst person to write about this phenomenon, nor will I be the last. Independence Day is a bit unique compared to the other holidays in that it occurs at the beginning of the month.
This is important because it occurs at a period when the market is often positive, the fi rst few days of the month. Historically, the best method of optimizing the trade has been to be invested in the broad market for the last two days of June and to stay invested until fi ve days after Independence Day. From 1950 this trade has provided an average gain of 0.8% and has been positive 71% of the time.
18 Day Earnings Month Effect
I have written about this strategy in past newsletters. It is based upon the premise that in the earnings months of January, April, July and October, investors tend to push up the stock market for the fi rst eighteen calendar days as they anticipate the market reacting positively to earnings announcements.
Since 1950, the S&P 500 has produced an average gain of 0.8% and has been positive 63% of the time (for details, see Thackray’s 2013 Investor’s Guide, page 43). If seasonal investors are taking advantage of this strategy, they should pay attention to the technical strength of the market during the fi rst half of July. If the market starts to deteriorate early, investors should be looking to reduce or exit their position.
Gold - Is it going to shine soon?
How can I not talk about gold when it is constantly in the media and we are getting close to the seasonal buy date.
On average, gold bullion has its strong seasonal period from July 12th to October 9th. During this time period, from 1984 to 2011, gold bullion has produced an average gain of 4.3% and has been positive 68% of the time. We are just over a month away from the seasonal buy date for gold, but using a seasonal mandate it is possible to start taking a position a month early based upon strong technicals.
Investors should continue to monitor the technical conditions for gold. If gold is able to start showing continued outperformance relative to the S&P 500, and it is able to break decisively above 1450, then conditions would be considered to be favourable for gold. Investors should also be looking for the full stochastic oscillator to bottom below 20 and then turn above 20 for an early entry into a gold position.
Currently, gold is below $1400 and below its 50 day moving average. It also has a relative strength line compared to the S&P 500 that is still downward sloping, with gold still underperforming the S&P 500. On a short-term basis, the full stochastic oscillator is not giving a short-term buy signal within the seasonal buy date.
Given that the technicals do not support an early entry at this time, investors are best to continue to let gold consolidate.
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