Stock Portfolio Updates: Too Soon to Declare All-Clear By: Christopher Mistal | September 14, 2017 | Email | Print

Let’s step out on another limb today and just go ahead and declare the Los Angeles Dodgers this year’s World Series Champs. Never mind completing the balance of regular season games or playoffs, they have the best record in all of MLB today. Congratulations LA Dodgers, 2017 World Champs!!! This is exactly what is happening today with the market. New all-time highs in September (and August) apparently automatically mean that Selling in May failed this year and the market can only go one direction from here. Let’s not forget its September 14, 2017 and the Worst Four/Six Months don’t actually end until November 1. That’s over six weeks from now and those six weeks are riddled with some nasty sell offs throughout history.

 

 

In the above chart, we can see DJIA, S&P 500, NASDAQ and Russell 2000 rallying off their respective mid-August lows in the top pane and solid support by Advance/Decline lines in the lower panes. But, note how quickly things have changed in the past. A late-July peak in A/D lines and subsequent pullback was accompanied by a similar move in the major indexes. And from their respective May 2017 closes through yesterday’s close DJIA is up 5.5%, S&P 500 3.6%, NASDAQ 4.2% and Russell 2000 is up 4.1%. It would only take a few 1 percent daily losses to wipe out those gains. The next six plus weeks have a history of that and often much more.

 

 

First off, next week is the week after September options expiration week and it has a dreadful history of declines particularly since 1990. This week has been a nearly constant source of pain with only a few meaningful exceptions over the past 27 years (shaded in grey). Substantial and across the board gains have occurred just four times: 1998, 2002, 2010 and 2016 while many more weeks were hit with sizable losses.

 

 

 

Since 1990, average weekly losses are even worse; DJIA –1.07%, S&P 500 –1.00%, NASDAQ –0.98% and a stout –1.50% for Russell 2000. End-of-Q3 portfolio restructuring is the most likely explanation for this trend as managers trim summer losers and reposition portfolios for the upcoming fourth quarter.

 

 

Then some of you may remember the old saying on the Street, “Buy Rosh Hashanah, Sell Yom Kippur.” Though it had a good record at one time, it stopped working in the middle of the last century. It still gets tossed around every autumn when the “high holidays” are on the minds of traders as many of their Jewish colleagues take off to observe the Jewish New Year and Day of Atonement. 

 

The basis for the new pattern is that with many traders and investors busy with religious observance and family, positions are closed out and volume fades creating a buying vacuum. Holiday seasonality around official market holidays is something we pay close attention to (page 88 Stock Trader’s Almanac). Actual stats on the most observed Hebrew holidays have been compiled in the table here.

 

 

We present the data back to 1971 and when the holiday falls on a weekend the prior market close is used. It’s no coincidence that Rosh Hashanah and Yom Kippur fall in September and/or October, two dangerous and sometimes opportune months. We then took it a step further and calculated the return from Yom Kippur to Passover, which conveniently occurs in March or April, right near the end of our “Best Six Months” Tactical Switching strategy.

 

Perhaps it’s Talmudic wisdom but, selling stocks before the eight-day span of the high holidays has avoided many declines, especially during uncertain times. While being long Yom Kippur to Passover has produced more than twice as many advances, averaging gains of 7.2%. It often pays to be a contrarian when old bromides are tossed around, buying instead of selling Yom Kippur – and selling Passover. This year the high holidays commence on September 21, in the middle of the week after September options expiration.

 

 

October has a frightful history of market crashes such as in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, Friday the 13th in 1989 and the 733-point drop on October 15, 2008. During the week ending October 10, 2008, Dow lost 1,874.19 points (18.2%), the worst weekly decline in our database going back to 1901, in point and percentage terms. Absent a bear market in progress, October’s historical tendency for bear market bottoms is a moot point. October’s record in years ending in seven is of concern. October 2007 was a bull market high, in October 1997 DJIA plunged 12.4% from October 7 to October 27 and during the crash of October 1987 DJIA tanked 23% in two days.

 

Keeping all of this mind and recognizing that more than six weeks remain before the “Best Six/Eight Months” of the year actually begin on November 1 it is far too early to sound “all clear.” We will continue to maintain a defensive posture in the Almanac Investor Portfolios. We will also look forward to enjoying the remainder of the baseball season and playoffs.

 

 

Over the past month since last update, S&P 500 climbed 1.2% higher while Russell 2000 jumped 3.1% higher as of yesterday’s close. The Almanac Investor Stock Portfolio’s blend of cash, long and short positions slipped 0.8% over the same time period excluding dividends and any trading costs. Our Large-Cap portfolio performed best, up 1.8%. Small-Caps edged 0.4% lower while Mid-Caps shed the most, off 3.6%.

 

Of the seven positions held in the Small-Cap portfolio just two made any meaningful progress, Global Brass and Copper Holdings (BRSS) and the short position in PDF Solutions (PDFS). Modest gains here were in sufficient to offset the losses by the rest of the Small-Caps. Century Communities (CCS) was the worst performer and was stopped out on August 30. All positions in the Small-Cap portfolio are on Hold.

 

Worst overall Mid-Cap performance was spread fairly evenly across the portfolio as all long positions slipped lower and short positions struggled. Bluepoint Med (BPMC) was covered when it closed above its stop loss on August 23. Halozyme Therapeutics (HALO) was also covered on September 8 when it closed at its stop loss. A modest 7.8% gain was recorded on the BPMC position while HALO was covered for a 3.5% loss. All mid-cap positions are on Hold.

 

Large-caps continue to dominate. UnitedHealth (UNH) and Arista Networks (ANET) both continued to move higher over the past month. The Hershey Company (HSY) also climbed higher and is once again trading back above its original purchase price. UNH, ANET and HSY are all on Hold. Due to recent gains, stop losses for UNH and ANET have also been raised further.

 

Of the four large-cap short trade ideas three are profitable. Mattel Inc (MAT) and Mosaic (MOS) are working well, both showing double digit gains. Sealed Air Corp (SEE) has reversed course and is headed lower undoing last month’s 3.1% loss for a 1.6% gain at yesterday’s close. Tesla Inc (TSLA) is the only blemish in the Large-Cap portfolio, but we are willing to stick with it. Broader weakness in the auto sector seen in monthly sales figures could hit TSLA even harder as they serve a narrow segment of the entire market. News of additional chargers and more spending on a semi-truck may lift shares today, but will only burn more cash. TSLA short trade is on Hold. 

 

All other positions, not mentioned above, are currently on Hold. Please refer to the updated portfolio table below for Current Advice about each specific position. Please note that many stop losses have been updated.