Do you trade the S&P500? Here is why you should consider postponing your summer vacations
The major US stock market indices have seen a quite incredible rally since the crash of October 2007-March 2009. In this period the Emini S&P fell from 1586 to 666, a loss of 920 points or 58%. Very few investors saw this as one of the biggest buying opportunity in recent decades but that is exactly what it is turning out to be. In fact just for comparison the S&P 500 index quite steady growth after the stock market crash of 1987…the year in which I started trading on the London Stock Exchange Traded options market in fact. Then from 1995 it experienced an unprecedented rally up until the crash of 2000 caused by the internet bubble. These accelerated gains took the cash index from a 1995 low of 457 to a 2000 high of 1552, a gain of 1095 points or 239%.
Chart shows the rally in the S&P 500 from March 2009 to Friday May 30th 2014. Each bar is one month.
The next big crash occurred in 2007-2008 of course, taking the S&P 500 cash index from 1576 to 666. Very few investors and traders saw this as one of the biggest buying opportunities in recent history, myself included. However the fact remains that the index recovered from a low of 666 to 1924, a gain of 1258 or 188%. Although the percentage gain is significantly less at this stage than the 1995-2000 gains, the rally has not ended yet and the point gain is significantly more than the 5 year period from 1995 to 2000. We have experienced therefore the largest & fastest point gain in history, something I for one never expected.
In the last 14 months the Emini S&P (I refer to this now as it is the market I trade regularly) has made a new all time high in every single month bar two, June 2013 and January this year. Since October 2011 prices have only closed lower in 6 of those 32 months. At this stage the stunning performance is showing no signs of a top & I can see no reason to bet against the bull trend.
Chart shows the rally in the E-mini S&P 500 from October 2011 to May 2014.
The old adage of ‘’Sell in May and go away’’ didn’t prove to be a great strategy for 2014 therefore. In fact this would only have worked marginally well in 2013 with a dip in June but from there the rally continued higher after a pause in August. In 2012 May was the biggest losing month and was actually the last chance to buy in to the market on a significant fall. We have not seen anything of that magnitude in a single month since then. Selling in May 2011, May 2008, May 2002, May 2001, May 1996 and May 1990 are the only times that this strategy would have worked during my career at least. Not a great track record, only six successful years for the strategy out of 27.
So as I trawl through my SPX chart what I do notice is that May is just a few months early and it seems that the late summer to autumn months are the ones to exit your long positions for the best chance of catching a top in the markets….in the S&P 500 at least but this does tend to lead many of the world’s market and we in Europe certainly pay close attention to markets across the pond.
The biggest falls, apart from those from the months of May which I have mentioned above, since I started trading are from August 1987 (although the stock market suffered a crash in October 1987 the market topped out in August), from July 1990, from October 1994, from August 1992, from January 1994, from August 1994, July 1996, from February 1997, from July 1998, from July 1999, from August 2000, from October 2007, from August 2008, and from September 2012.
July/ August is the clear winner there then – 9 years out of 27 it would have been worth selling the market and buying back in the following months, or a 33.3% success rate. If you include the three occasions in October mentioned above this would take the count to 12 years out of 27 or a 44.4% success rate.
So if you are concerned the stock markets have gone a little too far over the past 5 years and are looking to cash in or perhaps even take a gamble on buying some S&P 500 puts this year, selling your holdings or shorting the market in the July to October period may be the safest bet.
At the very least buying protection on your stock portfolio is at very cheap levels. The VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It could also be viewed as a ‘fear’ index therefore. When prices of the VIX are low it indicates the market believes volatility will remain low & the market is not buying protection as we continuously hit new all time highs. An unexpected shock therefore could have highly negative consequences in a market where the participants are feeling complacent. The crash of 2007 saw the VIX rocket from 9.39, close to it’s all time low of 9.31 (December 1993) to a high of 89.53. On Friday the VIX closed at 11.40 which is just above the lowest level for the VIX since 2007. This was at 11.05 in March 2013. Protection against a significant move to the downside is getting cheaper as we move towards the ‘riskier’ summer/autumn period.
Chart shows the VIX going back to 1990
Although in the short term I see no reason to bet against the bull trend, we must be cautious as in many ways the current bull market could be described as over extended based on much basic historical data:
The average frequency of Bear Markets since 1929 is every 3.4 years. The average Bull Market period lasted 31 months.This current bull market run has lasted 32 months so is already beating the average.
The average Bull Market gain was +104% (The smallest gain was +21% in 2001, and the largest gain was +582% registered in period 1987-2000)
The current bull market has recorded gains of 188%.
So, for summer 2014 I am personally planning to apply my new trading adage: “Sell in July/August instead and then go away”. It is going to be an interesting summer.
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