The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
09/23/2016 10:00 am EST
Jeffrey Hirsch is the advisory industry's leading expert on market cycles and seasonal trading; here, the editor of Stock Trader’s Almanac discusses a variety of seasonal trading patterns, from "Sell in May" to the Election Cycle.
Steve Halpern: Our special guest today is Jeffery Hirsch, editor of Stock Trader's Almanac. How are you doing today Jeff?
Jeffrey Hirsch: Fantastic. How are you today?
Steve Halpern: Very good. Thanks for taking the time. Now before we discuss your newsletter in more detail, could you first share an overview of what is meant by seasonal trading?
Jeffrey Hirsch: Sure. In general, it's trading or investing with respect to the markets consistent recurring seasonal patterns. A lot of people are familiar with sell in May and go away, that's an old British saw.
It's the sort of flip side of our best six month switching strategy being invested in the best month of the year versus being in cash or cautious during the worst months -- as well as different trading times around the beginnings and ends of months, options expirations, holidays, etc. and so forth.
Steve Halpern: You also look at seasonal trades as well related to specific industries or sectors correct?
Jeffrey Hirsch: Most definitely. That's a big part of our work, and we will go in and out of long/short sectors depending upon the season and the sector.
Materials sectors are a great example of having a clear short bias from May through October, and long from October through May. If you long and short the bearish and bullish versus the buy and hold it outpaces it by many fold.
Steve Halpern: Can you talk to our listeners a little bit more about the Stock Trader's Almanac Newsletter, and how you use seasonal patterns in selecting both investing and trading ideas?
Jeffrey Hirsch: At stocktradersalmanac.com we take all these different seasonal patterns, historical trends, and market cycles and put them to work with specific buy and sell recommendations, stop losses, buy limits, targets that sort of thing on sectors as we were just speaking about with a trade on to the Materials Select Sector SPDR (XLB) for example.
We'll also drill down with our fundamental screens, and pick individual stocks within the sector, and stocks at different times of the year. October being a great time to buy stocks; May, April being a time to sort of lighten up, tighten up, and sell losers, and let winners ride. We also provide this work on institutional research basis to the advisor community as well.
Steve Halpern: Along the wide variety of different market cycles and seasonal patterns that you follow, are there a couple that you might point to that stand out as being the most consistent.
Jeffrey Hirsch: The one that is the most consistent is the best six month switching strategy, something that our illustrious found my father Yale Hirsch discovered in 1986.
It was put into the Almanac, first the ‘87 edition, and basically looking at the simple monthly performance bar chart of the S&P 500. You can see the months May through October tend to be weaker versus November through April much stronger.
Switching in and out of stocks versus cash or bonds or other cash equivalence has beaten the market over the years. Average retirement of about 14% or so compounded versus a loss of a few percent on the worst six months.
A gentleman by the name of David Aronson put out a book called Evidence Based Technical Analysis, and proved the no hypothesis for 6000 plus other black box systems.
When he ran the best six month switching strategy through the same paces it was found that the strategy, this black box system had predictive power, and was not the result of chance -- unlike all the others.
Steve Halpern: Now interestingly there are also patterns that are associated with political cycles which you've been covering this past election year. Could you touch on the election cycle, and what this might forecast for the market?
Jeffrey Hirsch: Sure. We've been covering it since the first edition came out in 68 so we've been covering this cycle for about 50 years.
Basically, the election year pattern, the first two years of the president's term, which will be next year and the year after, the post-election year and the mid-term year are generally weaker, accompanied by bear markets, recessions, and wars beginning.
The latter two years -- the third and the fourth year -- the pre-election year, and the election year are much stronger. Up until 2015 we hadn't had a losing third year since the Germans invaded Poland in 1939, 2015 was down.
With respect to this year, specifically, we are tracking the trend versus other years, all election years, election years where there's the second term, when you have a no sitting president running, and incumbent victories versus incumbent party.
What we're seeing at the market at this juncture, we had been up quite a bit showing Wall Street expecting a democratic win. They're comfortable with where their bets are laid at the moment.
But as we've turned into the back to work, back to school of September the convention bounce is fading, and the polls tightening we're seeing the market pull back a little bit, a little bit unsure. This typical September, October correction period is still pronounced even in election years.
Leading up the election we'll probably look for a little bit more of a pull back, some lower prices before year-end rally. You can handicap the election of the market with the market being up indicating an incumbent party win -- indicating a higher upside expectation for the market overall.
Steve Halpern: Now at the upcoming Dallas MoneyShow, you'll be discussing investment strategies that will do well regardless of the outcome of the election. Could you give us a little bit of a hint at what you'll be talking about there?
Jeffrey Hirsch: Well, actually that's a lunch panel that I'm hosting, and there will be I believe its Mark Skousen and Jack Albin and others. They'll be revealing some stocks, and I will have a few of my own to share, and you're going to have to show up there to see them.
There will be some stocks that should do well. Going forward our sectors we like for the future, and long term regardless of whether we have Trump or Clinton in office.
Steve Halpern: Great I'd encourage any of our listeners to attend if they have the opportunity. Again our guest is Jeffery Hirsch, editor of Stock Trader's Almanac. Thank you so much for your time today.
Jeffrey Hirsch: Thank you.
Editor’s Note: Jeffrey Hirsch will be a featured speaker at the upcoming MoneyShow Dallas, October 19th through 21. Register for free here.
Related Articles on STRATEGIES
Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Profit from a market by capturing a trend. Money management is key. The battle is often from within,...
Has Mr. Market (S&P 500/Equities) priced into too much positivity, while inflation remains at ba...