Don Vialoux: 9 Rewarding Seasonal Equity Trades

by Don Vialoux, Tech Talk

(Based on reports published by www.globeandmail.com. Reports were forwarded to Globe and Mail each weekend and published early in the following week).

June 11:Accumulate the Leisure & Entertainment sector

ETF:PEJ at$20.73. Current price: $21.57

Comment: Continue to hold. Technical profile remains positive. Units continue to trade above their 20, 50 and 200 day moving averages. Short term momentum indicators continue to trend higher.

June 22: Accumulate the Fertilizer sector

ETF: SOIL at $12.20. Current price: $13.94

Comment: Continue to hold. Technical profile remains positive. Units continue to trade above their 20, 50 and 200 day moving averages. Units hit a new high yesterday. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index remains positive.

July 2: Accumulate the Software sector

ETF: IGV at $62.18. Current price: $62.32

Comment: Continue to hold. Technical profile remains positive. Units remain above their 20, 50 and 200 day moving averages. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index turned positive at the beginning of July.

July 6^: Accumulate gold bullion

Gold price: $1,578.90. Current price: $1620.20

Comment: Continue to hold. Technical profile continues to improve. Gold recently broke above a triangle pattern and moved above their 20 and 50 day moving averages. Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index is neutral.

July 13: Accumulate Canadian gold equities

ETF: XGD at $18.01. Current price: $18.45

Comment: Continue to hold. Technical profile continues to improve. The TSX Gold Index recently moved above its 20 day moving average. Short term momentum indicators are trending higher. Strength relative to the TSX Composite Index has been positive since mid-July.

July 20: Accumulate the Canadian energy sector

ETF: XEG at $15.12. Current price: $16.16

Comment: Continue to hold. Technical profile continues to improve. The TSX Energy Index recently broke above a reverse head and shoulders pattern. The Energy Index remains above its 20 and 50 day moving averages and just moved above its 200 day moving average. Short term momentum indicators are trending higher. Strength relative to the TSX Composite has been positive since the last week in June.

July 27: Sell the U.S. Transportation sector

Dow Jones Transportation Average at 5,126.65. Current price:5,048.23

ETF:IYT at $91.56. Current price: $90.17

Comment: Continue to avoid (hold short). The Dow Jones Transportation Average fell below its 20, 50 and 200 day moving averages during the past few days. Strength relative to the S&P 500 Index remains negative.

August 6: Sell the Airline sector

ETF: FAA at $28.66. Current price: $28.43

Comment: Continue to avoid (hold short). A break below $27.94 completes a double top pattern. Units trade below their 20 and 50 day moving average and moved below its 200 day moving average during the past few days. Strength relative to the S&P 500 Index has been negative since early July.

Eric Wheatley’s Column

Preamble: Every time I mention the fact that I’ve written options and investment guides or write something particularly controversial (not liking hockey is a salient example) I get a bunch of emails, which means SOMEONE is reading these ramblings. When I DO get messages, folks seem to think they’re bothering me so, to be clear: I work from home, have the business channel on all day, read financial stuff, work on spreadsheets for the Boss and myself and otherwise crave human interaction. We’re a long-term investing company, so contrary to your average broker, we don’t really need to spend all our time calling clients asking them to sell their BMO to buy BNS. If anyone is curious about options or investing and has questions, I promise to respond with joyful alacrity.

…yeah, there was no way this preamble was going to be anything less than full-on pathetic.

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Good morning,

We’re continuing with our options basics lessons which started a few weeks ago. We’ve already looked at the factors which affect options prices and how buying in-the-money calls is an efficient, low-cost alternative to buying shares outright. This week, let’s look at what really happens when options expire.

(Please note that I’ll be skipping over the few weekly options that are listed on the CBOE and sticking with regular, plain-vanilla options in this commentary).

All normal stock options expire on the Saturday following the third Friday of the expiry month (or on the Friday if it falls on a holiday on which the markets are closed). To illustrate, this month, the third Friday is the 17^th, so all trading in August options will cease at the close of the markets on that day and contract holders will be able to order their brokerages to strike the options or to let them expire until the following day at noon.

The preceding statement is one of the frequent justifications for not using options. “They’re too complicated” or “they require me to always look at them! I don’t have the time”. False. Even the most indolent loafer can use options because there is a safety switch built into the system. If you hold an option at expiry and you completely forget, the clearing corporation will automatically strike your option if it’s in-the-money (in Canada, it has to be in-the-money by at least five cents). This means that, for a call option, you will receive 100 shares per contract in your account three business days later. For put options, you have to deliver 100 shares (your brokerage will handle things if the shares aren’t in your account, but you should check with it to determine its procedures).

Fine and dandy. You can lounge by the pool in full-on lethargy mode knowing that the system works. Except…

So, you own a call option. It has a strike price of $50. You’re swimming with your dog in the pool having a grand time and your spouse enjoys making his/her horribly addictive margaritas for you and you’ve completely ignored the call’s expiration. At the close, the stock is at $50.25. “Great!” you tell yourself. “The call’ll be struck with or without my intervention and I’ll make a quarter. I’ll have another please honey. Go easy on salting the rim though. Please. Love you”.

…slight problem, though: you’ll be getting the shares in three business days. When you finally get them, who knows where the stock will be at? The smart thing (which is done by professional options traders in this situation) would be to short-sell the shares which will be delivered to you. This locks in the current price, which means that when you eventually get your shares a few days hence, you’ll be able to deliver the shares, close the short sale and pocket the amount the shares were in-the-money when you shorted them. Of course, all this adds up in terms of transaction costs. The easy way out? Before diving into the pool, sell your options prior to expiry.

Now, what happens if your call expires out-of-the-money, but news comes out at 4:05 p.m. on expiry Friday? Really, really good news. News which will almost certainly lead to a big open the following Monday. As mentioned before, the options’ official expiration is at noon on the SATURDAY following the third Friday. This means that you can call up your brokerage and put in an order to have them strike your call, which you can do even if they’re out-of-the-money. You’ll get the shares in three business days and be able to sell them at a nice profit.

The point to remember is that whether or not your option is in-the-money or out-of-the-money by a small amount at expiration is of little relevance. Unless you lock-in the current price, you can’t be assured of making money. This also means that there are NEVER any straight lines in options trading, even on those hockey stick graphs that bug me so much.

In this week’s French-language blog: explaining lending rates with references to agricultural tractors and a colourful red-eyed cousin.

Cheers!

P.S. You’ll notice that, as of this week, I’ve added a Twitter address to my signature line (@jchood_eric). Yes, I’ve joined the silly-update revolution. It’ll be bilingual and, for now, I’m just having fun with the medium, but if you can tolerate a bit of French in your feed, help me spread the gospel of proper investing techniques! (You’ll be assured that my tendency to go on forever in my writing will be constrained).

Éric Wheatley, MBA, CIM

Associate Portfolio Manager, J.C. Hood Investment Counsel Inc.

eric@jchood.com

514.604.2829; 1.855.348.2829

Twitter: @jchood_eric

Blogue en français : gbsfinancier.blogspot.ca

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Little known fact about John Charles Hood #38

John Charles Hood goes on forever too. In a completely different context, but still.

(Clarification: I was referring to his passion for big-game hunting and the subsequent verbosity if you ask him about it).

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Special Free Services available through www.equityclock.com

Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.

To login, simply go to http://www.equityclock.com/charts/

Following is an example:

Agnico-Eagle Mines Ltd. (TSE:AEM) Seasonal Chart

FP Trading Desk Headline

FP Trading Desk headline reads, “Small cap golds on a run”. Following is a link to the report:

http://business.financialpost.com/2012/08/09/small-cap-golds-on-a-run/

Disclaimer: Comments and opinions offered in this report at www.timingthemarket.ca are for information only. They should not be considered as advice to purchase or to sell mentioned securities. Data offered in this report is believed to be accurate, but is not guaranteed.

Don and Jon Vialoux are research analysts for Horizons Investment Management Inc. All of the views expressed herein are the personal views of the authors and are not necessarily the views of Horizons Investment Management Inc., although any of the recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management Inc

Horizons Seasonal Rotation ETF HAC August 9^th 2012

Copyright © Don Vialoux, Tech Talk