FuturesTechs Blog

‘Sell in May and go away, come again on St. Leger’s Day’, or so the ancient wisdom goes. According to convention, investors do well by exiting the stock markets during the quiet summer months, only returning in mid-September.

Not satisfied with old wives’ tales here at FuturesTechs Towers, we decided to do a little bit of empirical research and find out for ourselves if this had worked in years gone by.

In order to spice it up a little bit, and to add some “timing” to the whole affair, we also decided to consider the amendment offered by another technician (the excellent and well-respected Axel Rudolph at Dow Jones): “Sell in May and go away, come again on St. Leger’s Day so long as there is a Stochastic crossover sell signal.” Ooh-err!

The results?

It turns out that this rule hasn’t been too bad at all, looking back for the last 20 years.

We put the start of the summer period as the day of the first Stochastic crossover sell signal in May or, if there was none, as May 31^st. The end of the summer was defined as the day of the St. Leger Stakes, the horse racing meet in Doncaster that’s been running since the 18^th century, and which is always held in mid-September. We use the Slow Stochastic indicator with the typical parameters.

So here’s a simple comparison: the returns for each of the last twenty years (blue) versus the annualised returns for each summer (red):

Fig 1.

The chart shows that the red series was quite a bit lower than the blue series on a couple of occasions (1992, 1998, 2001, 2002, for example), meaning that summer returns were much worse than the annual returns in each of those years. And we also see that the years in which the summer significantly outperformed the year as a whole weren’t very common.

So now let’s compare the same annual returns versus the returns achieved by sitting out during the summer period (selling in May and coming back in September). The annual returns are in blue again, with the returns from the “Sell in May” strategy in purple:

Fig 2.

This shows that the returns from sitting out for the summer months were better than for the year as a whole in 1990, 1992, 1998, 2001, 2002, 2006, 2007 and 2008.

What’s also going on here, though, is that the returns from summer were greater than zero for 11 of the 20 years in question, so that for each of these years you were better off staying invested rather than sitting out. Even if the summer returns weren’t that great, they were better than the zero gained by doing nothing for that time.

In general, though, the records show that there has been some good success in leaving the fray for summer, as illustrated by this summary:

1989-2008                          Average Returns

Annual                                      6.03%

Summer (annualised)          -1.03%

Sell in May Strategy                7.39%

The average return for each of the past 20 years has been 6.03% but, by employing the Sell in May strategy, the average return rises to 7.38%. The average of the annualised returns for the summers has actually been negative.

Now let’s look at the suggested amendment to the rule, and use the Stochastic sell signal. We find that when you only sell out in the years when there was a sell signal, the strategy does improve a little. This is illustrated by Figure 3, where we simply stayed invested for the years when there was no signal:

Fig 3.

Waiting for a Stochastic sell signal meant that you would still have been protected from summer losses in 1990, 1992, 2001, 2002, 2006, 2007 and 2008 (you would have suffered pretty big losses last year anyway, of course). This strategy performed worse than simply staying invested for the year in 1989, 1991, 1993, 1995, 1997 and 2005. The average return from this strategy, however, is still an improvement on simply selling out (which was already an improvement on staying invested):

1989-2008                                  Average Return

Annual                                             6.03%

Sell in May                                      7.39%

Sell Signal Strategy                      7.49%

Looking exclusively at the years when there was a sell signal, the worst return (except for 2008) was -3%! Some people might consider this to be good value risk management, even if it means missing out on some growth during good years

Our summary box looking only at the years with a sell signal helps to prove how the rule made a big difference:

Sell Signal Years                     Average Return

Annual                                              5.75%

Summer (annualised)                  -3.64%

Sell in May Strategy                         8.01%

This isn’t a very formal analysis, of course, but could be worth thinking about. In terms of this year, we had a Stochastic sell signal for the FTSE on the 13^th of this month (the vertical line on the chart below).

Fig 4: Stochastic sell signal for the FTSE-100 index, 13^th May 2009

The market has gained a little more since the signal, but anybody who thinks that the rally is probably over now might take encouragement from the historical record of weak summer trading. That would make this an opportunity to get out, only coming back for race day in Doncaster next autumn.

Graham Neary (graham@futurestechs.co.uk)

Neither, I suspect, is the answer to the above question, at least not as far as where we are at this very moment is concerned:

We have been bullish since early March, and have seen the market “climbing the wall of worry” as we predicted, with no-one quite believing the rally. We are not doing the “Harry Hindsight/told you so” bit here. Just ask one of our clients, or feel free to check our “Media” page on our website and listen to what we’ve said on CNBC in recent months.

But just now everyone (else) we seem to see and hear on CNBC and Bloomberg TV is getting bullish. So we’re starting to think we’re near a top for now on that basis (when too many people are getting bullish it’s time to find the exit!), and the last few days have seen some pretty uncertain price action to back this up.

When I say “starting to think we’re near a top” I don’t mean the top of a bear market rally, though. We think there will be a pullback some time soon, which may well last the whole summer (“Sell in May and go Away” is a pretty watertight strategy if you don’t take it completely literally, and if you exercise some finesse or process re timing your “sell”!). During this time you will see many commentators saying “told you so” with respect to the bear market rally story (probably the same guys who this week have been saying we’re going up; Hmmm…).

But we will not make a new low. In fact we don’t think the S&P will drop below 766, or the Dow below 7240 , and we will look for the FTSE 100 to hold above 4000 or at worse 3850 on any retracement move. The sell off will only go on long enough to get the weak longs panicking out, and only long enough to have the “bear market rally” camp saying “told you so”. THEN we will start to rally again, and we will end 2009 in fine fettle.

Our customers will benefit from knowing if and when our views change, because we WILL happily change our skew if we are proved wrong, such is the flexibility of a short term approach utilising Technical Analysis.

For now I am preparing to “Sell in May…” and it will be interesting to see what happens this week, prior to my appearance on CNBC on Thursday evening (May 14th). For now key supports are holding and we’re still short term Bullish, but this could change very quickly, and evidence is mounting in favour of a pullback.

Fibonacci retracements have worked like a dream of late in the Dow, and they’re currently causing our recent bullishness a bit of trouble. Let’s first of all reproduce the commentary we’ve put out today for the Dow:

Now lets go through that and work out what Fibonacci has got to do with it. We have several articles on this blog and in our Website members area concerning Fibonacci so this time round I’ll just assume that you’re happy with the idea that when a market is in recovery mode it quite often recovers 38.2% or 61.8% of the previous move. The sell off from January 6th to March 6th took us from 9048 to 6460. The 38.2% retrace of this move is 7450. See how this featured as a target once we started rallying. The 61.8% retrace of this same move is 8060. This, again referencing back to our commentary, was the next target once 7450 was seen off. We hit this level today. In fact it’s the high of the day. This is a slight worry. This may be just a temporary “blip”, and this is how we’ll treat it for now. But there is now a chance we can move back to 7450, and if this level were to break we’d have to forget being bullish and look for further weakness, back to 7071. We don’t expect any selling from here to get below 7450, let alone 7071 (for lots of other reasons besides the Fibonacci work). But If it did we’re totally wrong about the March low being THE low. You can see the symmetry of these numbers in harmony from the charts we’ve posted. Because today’s high is BANG ON the 61.8% retracement of the Jan-Mar sell-off, the 38.2% retrace of the recovery is EXACTLY THE SAME as the old 38.2% retrace (of the Jan-March selling): 7449. One last interesting thing that will shape the bigger picture outlook: The 38.2% retrace of the selling seen between May 2008 and March 9th is up at 9012. And what is the year’s high from January, the start of the last big down-leg? 9048… Making for a pretty important area of resistance, wouldn’t you say? Have a good week.

We are often asked how we use Fibonacci retracements, and what time frames they are best used on.

Let’s look at the FTSE Futures chart right now to try and give a flavour of how they can help us.

Since last Tuesday (as we suspected, and as was flagged to our clients) we have seen a recovery rally in the FTSE from the lows just above 3450 set at the start of March.

There have been many commentators who are calling this a “bear market rally”, and are waiting for the first signs of weakness to pounce upon and use as a selling opportunity. As our customers know we’re not quite in this camp, but there you go. We have an article recently written in our members area that expands on our thoughts as to whether this is a market bottom or not.

Anyway, back to our magic Fibonacci numbers.

The Fibonacci retracements commonly watched are 38.2% and 61.8%. If a market has been selling off then we always call off the hounds on the down-leg if we can retake the 38.2% level, at which point we target a move to the 61.8% level. In this instance, as the market started rallying off the lows we looked up to see where the market would have taken back 38.2% of the weakness seen since the start of the year (see chart 1). This level was 3904. We got to here this morning… and promptly fell over.

Chart 1: FTSE Futures Daily Candlestick chart since the start of 2009

So does that mean we’re right back in bed with the bears and looking for a fresh test of the lows? It could well be, but the slightly more cautious can use Fibonacci levels on a shorter term chart to help them with that one as well, because it could be argued that unless we give back 38.2% of the recovery, then maybe the recovery is still going on!

So we start at the low and measure up to the high and find the 38.2% retrace of that move. This is 3738 (and coincides with Friday’s low) so we are using this level as a reference now to see what the market wants to do next. A break below here and sure, the bears are back in charge, and we’ll look to head back down, targeting 3625 (the short term 61.8% retracement) first, then 3443 (the year’s lows), as per the second chart, below.

Chart 2: FTSE Futures, Hourly Candlestick Chart, 9th - 18th March

So you can see we use Fibonacci levels on lots of different time-scales, and they can all have a use in telling us where we are, and what the market’s thinking.

Be safe,

Cheers,

Clive.

I have been bearish of this market for a good while now and it’s proved fruitful, but today I am thinking that shorts should be covered.

Why, when the Dow has just printed it’s lowest price since 1997, would I suddenly start to think bullish thoughts?

Because I read the papers and listen to the financial news channels, and upon making this new multi-year low the world seemed to collectively shrug it’s shoulders. Ambivalence is the order of the day? Dow to 6000? Yeah, why not (you hear people say in a resigned tone).

(The FTSE is faring slightly better, holding above last years low for now, and when I trawl through the FTSE 100 stocks I see many stocks that are nowhere near making new lows compared to last years)

If you are regular readers of this Blog you’ll recall the “Sentiment Cycle” chart we posted back in October. Here it is again.

This was first published in a book called “The Nature of Markets” by a New York based Technical Analyst, Justin Mamis, back in 1991.

Note that the bottom of the cycle, when markets ultimately bottoms out, is “Discouragement” - -I think that’s what it feels like now…. and I think we’re hitting bottom.

Remember, when everyone’s sold who’s gonna sell, when everyone’s short who can be short, there’s no one left to sell it, and the market cannot go down any more if there aren’t any sellers left!

Have we got the banner headlines of doom, gloom and despair on the front cover of things like Newsweek and the like? Are Taxi drivers telling you that the Stock Market is finished? Let me know!!!

Be Safe,

Cheers,

Clive.

We were asked by a trader today (like we often get asked with respect to Banking Stocks) where a good place to buy Barclays would be? For those looking at this after the event let me briefly set the scene:

Barclays topped out just shy of £8 in February 2007. Last week we hit 47p, and have since bounced, failing at 117.50 yesterday (28th January). Interestingly, this was the low/bounce back in November, so we have seen an old support level turning into resistance, something us Technical Analysts always look out for, and place importance upon.

All the way down we have been asked if it is a good time to buy banks, and all the way down we’ve said “No”.

Our clients who have access to all of the media appearances and magazine articles featuring our Analysts will be well versed with our thinking, and our standard response to these sort of questions, but the reply I crafted to today’s chap caused a bit of a chuckle around the office, as well as clearly illustrating our thoughts on this question.

So I thought I’d share it with you! Here it is:

_________________________

1p is the only safe place to buy BARC!!!

Yesterday’s failure at old support at 117.50 is a clear signal that the road to higher prices is going to be a tough one in this stock.

Failing to hold £1 today is bad news, surely?!

85p-88p might act as support.

This isn’t catching a falling knife, it’s catching a falling FRIDGE.

You don’t need Technical Analysis for this sort of trade; just jump in and cross your fingers…

Casinos give you free tea/coffee/lemonade, and in Las Vegas you can even get free beer… much more fun than “trading” Barclays.

__________________________

Good luck today with whatever you decide to do, be it in the markets or down the Casino!!

Cheers,

Clive.

PS. We are currently offering significant discounts on website membership if you join for 6 or 12 months. Click here for details!

If you are a regular reader of our reports, or if you’ve seen me on CNBC any time in the last few months you’ll know that we’re staying right out of the rush to pick a bottom on this equity market sell-off, a rather thankless task that so many people appear to be happy to do. This is how it works: If you are a market commentator and you’ve been calling the bottom all the way down, you may as well carry on, because at some point you’ll be right. Then you can say for the next three years “I picked the bottom”. It upsets me that these so called experts are happy to continue to give dud advice to people just to try and save their own face.

Here’s something else: The market will only bottom out once all of these people STOP calling it. When the towel is thrown in by the majority, and most commentators start talking about doom and gloom downside targets, is when we’ll get a bottom. Maybe that’s why Hugh Hendry was given an entire hour on Channel 4 last night to pick over the wreckage of the sub-prime crisis. It was a great bit of TV and you can’t but love the man!

As per last week’s Blog on the sentiment cycle, the bottom will most likely come when people give up trying to call it, and when the market resigns itself to a future of pain and misery. So we’re probably not quite there yet…

I looked back at our analysis in 2003 and saw that we were around 400 points off the low before we called started saying bullish things.

The DAX is certainly well off the lows over the past two sessions, on the back of the world’s most spectacular short squeeze. VW shares jumped from 200 Euros to 1000 Euros in two days. I don’t even want to start to explain the ins and outs so here’s a link to the story on Bloomberg’s website.

http://www.bloomberg.com/apps/news?pid=20601085&sid=aWeWGIPhKfnk&refer=europe

The upshot is that Volkswagen has now become the world’s largest company by market cap on the back of a short squeeze. This story will only get bigger (although I don’t think VW’s market cap will!) and we’re bound to hear some fallout in coming days or weeks.

One wry (and somewhat tongue in cheek) observation on this shenanigans: We won’t see a financial stock reacting higher like this in the coming months, because the shorts have been banned…

Finally, In my spare moments right now I am doing something that I force myself to do once a year: I am re-reading “Reminiscences of a Stock Operator” by Edwin Lefevre. THE BEST BOOK EVER ABOUT THE MARKETS. i only got to chapter 1 when I read this quote:

“Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again”.

Say no more…

As always my best advice if you’re trading these markets is “stay safe”.

Cheers,

Clive.

Apologies for not posting any Blogs of late. The current market conditions have made for a busy time at FuturesTechs towers!

I’ve said a few things on today’s reports that don’t usually appear in our comments. Things like this from the Bund report:

Short Selling, eh? This is a highly contentious issue, of course, but mostly because there is a lack of real understanding about the mechanics of the market, particularly by politicians and churchmen.

Data Explorers is a fine company that I came across a few years back thanks to an introduction from a good friend of mine in the Stock Loan industry. In simple terms they track percentage of stock that is “on loan”, which gives an indication of the amount of shorting happening in any particular stock. They do a lovely job of collating all the data from the various firms who are involved in this industry, then redistributing it to give everyone a “bigger picture” view (this info doesn’t come cheap, mind!).

Their figures show that there wasn’t any extraordinary shorting going on in many financial stocks in recent weeks, and therefore the banning of short selling is probably a complete waste of time, and is a knee jerk reaction to uninformed people’s ranting on about city fat cats.

Now let’s look at the share prices of our high street banks. Let’s pluck RBS out of the air as an example. The ban on short selling, designed to stop large downward movement in the share price, was announced last Friday morning, and RBS traded up to a high of 263. Where is it now, without the evil fat cats able to short it? 164 is the answer. So has it helped? You be the judge.

Also now bear (no pun intended) this in mind: Today the market has recovered some of yesterday’s drubbing after a bad start. FTSE Futures are up 233 points from last night’s late close as I write this at 12.30 on September 30th. This sort of recovery sometimes has shorts running for cover, and their buying can exacerbate the up-move, except the shorts have been banned from their trading activities, so they haven’t got anything to cover, and it could be argued that this has created a false market that’s actually stopping or at least stalling the recovery, by taking out an entire potential stream of buyers “on the bounce”…

What a mess we’ve got oursleves into…

And now for something I said in my Dow report today, and I quote:

Have a look at this “mystery” chart and tell me what you think?

Does anyone think this (whatever it is) is going down any time soon?

Hopefully we’re all thinking the same thing: That it looks very much like something that’s got a bright future, something that’s going up in the world. There doesn’t seem to be too much evidence that it is topping out, would you agree? In fact if this was a stock and you owned it you’d probably be more than happy to hold onto it, yes? And if you felt the market was going to head lower and you wanted to find a short trade to put on you probably wouldn’t chose something as strong as this, agreed?

It was Charles Dow almost 100 years ago who suggested we can define an uptrend as a series of higher highs and higher lows. In contrast a downtrend is defined as lower highs and lower lows, which brings me on to the next chart.

As you can see this is a chart for Royal Bank of Scotland between October 2006 and the present (August 2008 in case you’re reading this in retrospect). Now I’d like to point out straight away that I could have chosen any number of bank stocks from any number of countries for the purpose of posting this blog. I used RBOS because I’ve got a couple of mates who work there and I’ve got a sadistic streak. Sorry fellas.

Because I think it’s fair to say this chart is quite a bit different to our first chart, wouldn’t you say?

Well the eagle eyed amongst you may actually have noticed that it is actually THE SAME CHART, but “flipped”. We have effectively put a mirror below the real chart to create our “mystery chart”. So the mystery chart is RBOS with 7 quid at the bottom and £1.50 at the top.

Now think about the paragraph above, and think about your reactions when you read it. I would imagine it was something like this:

“… it looks very much like something that’s got a bright future (I agree!), something that’s going up in the world (yes indeed). There doesn’t seem to be too much evidence that it is topping out (too right, it’s a stonker!) , would you agree? (yes) In fact if this was a stock and you owned it you’d probably be more than happy to hold onto it, yes? (yes please, love it!!). And if you felt the market was going to head lower and you wanted to find a short trade to put on you probably wouldn’t chose something as strong as this, agreed? (agreed, let’s short something else, surely).

Which brings us to the title of this Blog: “The most common question of 2008″. Which is, of course “Should I buy Bank Stocks?”. I reckon you just answered your own question!!

NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO!!!

If you want to gamble go to a casino. If you want to play the stock market or make money spread betting follow some simple rules and don’t just put on stupid high risk trades. I’m sick of being asked this question. It’s a joke. It’s simple: Don’t buy things that are still going down.

Let the pros tell you when to buy, ie let the market tell you when enough professional buying has happened in a Stock that it is now in an uptrend.

If you “flip” the chart and there’s no way in the world you would SELL our mystery chart, then what the heck are you doing even thinking about BUYING it when we put it the right way round?

The point I’m making isn’t that Bank stocks haven’t bottomed out. They might have done, but there isn’t enough weight of evidence yet. It’s a dangerous trade, and there’s no need to rush in. These stocks could go sideways for years now, or even keep heading lower, after all we haven’t broken our series of lower highs and lower lows yet, have we?!

Can I finish by saying that we have the chappies at Updata to thank for making “flip” a standard part of many charting systems these days. I’m pretty certain it wasn’t until they started to expound exactly what I’ve done above.

Cheers,

Clive.

PS. August is turning out to be a bit of a damp squib in Equity markets so far, and the best advice I can give is to suggest you don’t get too carried away if you’re trading Equity Indices like the Dow and the FTSE. The market has a habit of taking money off of you in quiet periods. There could be some really solid trends to trade between now and the end of the year. Don’t take yourself out of the game trading during low volume quiet periods like now.