This weekend I was reading William J. O'Neil's How to Make Money Selling Stocks Short. I've owned his How to Make Money in Stocks for years and still find new gems every time I open it. His company, William O'Neil & Co., has produced some of the most extensive and useful research ever for institutional traders. His books, and Investor's Business Daily, are his way of sharing that research with the rest of us.
After the major indexes failure to set meaningful new highs for a couple of months now, and Friday's attention-getting selloff, I was determined to spend the weekend thinking about whether I should be considering some bearish strategies in my newsletter. So I went through my book collection looking to freshen up on good short-sale identification strategies.
One statement in O'Neil's Selling Short book sent me off investigating. Referring to the timing of short sales on individual stocks, his statement was “…the optimal shorting point will, in the majority of cases, present itself five to seven months or more after the absolute peak in the stock.“
Many top stocks set new highs back in February or March of this year, but since then have been struggling. The theory so far is this is just a short-term pullback as we make it through first quarter earnings reports.
But what if the February/March highs turn out to be longer-term highs? If I add O'Neil's five to seven months to February/March, where does that come out? Let's see, that's around…September.
If you've read any of my research or newsletters of the past five years you know I don't participate in the late-summer barrage of analyst and financial writers warning that September is the worst month for the markets, the only losing month, etc.
From my research, concentrating on the market years since the mid-70's (I consider that the start of the ‘modern' market, with options, Mutual Funds, ETFs, and online brokerages coming into existence. I don't care what happened under a buttonwood tree in New York in the 1800's), the S&P 500 has, on average, a sideways track record. It is usually a pause before sharp gains in October, but certainly nothing to fear. Yes, there are a handful of years with significant losses. But on average, September is a time to consider entering new positions, or at least watching the best candidates for good entry points.
There is an exception – those occasional down years. There is one quirk about them that stands out. In my past five years of publishing research I haven't had need to mention it, since we've been in a bull market. But I will now mention it, to give everyone something to think about over the next few months.
There is an approximately seven year cycle in Septembers with larger losses. Below is the seasonal chart for the start of September of this year (my seasonal charts start on Mondays and cover whole weeks, so this one is for 8/31/2015). I've highlighted the 4-week period, which covers the track record of the first four weeks of September.
We certainly remember September 2008. I've outlined the net Gain/Loss of that September, as well as the one 7 years earlier, 14 years earlier, and 22 years earlier. If I include 1981, which was 5 years before 1986, then we have about 5-8 years between major September declines, with the average being around 7 years:
For a closer analysis, the actual drops, and the preceding highs each year were:
1981: High in March, low in November, -20.4%
1986: High in July, barely new high in August, low in mid-Sept: -10.2%
1994: High in January, lower high in August, low in early October: -5.9%
2001: High in May, low in September: -28.2%
2008: High in May, low in November, -48.5% (lowest low occurred in March 2009, the start of the current bull market)
And let's see…the last one was 2008, so 2008 plus 7 years is…this year!
So it may be just an interesting set of facts, worthy of nothing more than invigorating bar conversation. But if the February/March highs turn out to be longer-term highs, AND the best time to look at shorting stocks is 5 to 7 months after the highs, AND the 7-year major index cycle selloff is destined to return this year, then maybe August would be a good time to consider paring back bullish positions and adding some bearish trade exposure.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
Copyright (C) 2015 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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