This could be the year where this strategy really pays off.
Back in 1986 the Stock Trader's Almanac discovered the position switching strategy that corresponds with the "Sell in May and go away" strategy that has been around for decades. They found that investing only in the best six months of the year and sitting out the worst six months of the year produced astonishing returns.
Since 1950, if you had invested $10,000 in the Dow over the worst six months of the year you would have a cumulative loss of $6,710 over the 66-year period. If you invested $10,000 in the Dow in 1950 and never touched it you would have a gain of $860,000 today. However, if you used the best six months switching strategy with a MACD entry point, you would have generated $2,496,586 in profits. Obviously, that is a significant difference and the strategy is very easy.
Basically, the best six month period is November-April and the worst six months are May-October. Since millions of events impact the market the Almanac publishers figured out that using a MACD buy/sell signal could significantly improve results rather than just using a strict calendar formula.
A lot of investors follow this strategy so it is sort of a self-fulfilling strategy.
Read the full details HERE
Currently the MACD is about to trigger a sell signal. When the MACD triggers the crossover, it would be a sell signal for long positions. They recommend moving to cash or bonds or some neutral position. The advantage is that you are out of the market over the summer months and free to vacation without worrying about the market gyrations. When we get close to November, you begin looking for a positive signal on the MACD to time the entry back into the market for the next six months.
On the Dow, the sell signal was triggered on Friday but we do not use the Dow for the signals because it is more volatile with only 30 stocks. The Dow has been the weakest index with 26 of the 30 components having already reported earnings. The Dow is suffering from post earnings depression.
The moving average percentages are also declining. The percentage of S&P stocks over their 50-day average has declined to only 54.8%. The percentage over their longer 200-day average is 72.2% and a three-month low. This percentage is dropping like a rock.
On the Dow, there are only 14 stocks currently trading over their 50-day average and the direction is bearish.
The VIX closed at a 24-year low on Monday at 9.77. The VIX is telling us to be cautious because complacency is at a two decade high. However, some analysts claim the shift to passive investing with ETFs has negated the signal quality in the VIX. Individual investors are no longer buying S&P puts to protect their portfolio. The VIX is calculated off the option premiums on the S&P.
While I believe that is true to some extent, the major hedge funds and large portfolio managers still use S&P puts to hedge their portfolios. If the market actually rolls over, we will see those put prices rise regardless of how many people are actually buying them.
Lastly, the Russell 3000 has triggered a sell signal by 0.01 point on the MACD and any further decline would confirm it. The R3K came to a dead stop at resistance from March. The index made a new high by 0.14 of a point on Wednesday. The prior high of 1,422.32 was March first and it closed at 1,422.46 on Wednesday. If it declines from here that could easily be seen as a double top.
The market is weak but it has not yet broken down. The Dow is the weakest index but it is clinging to support at 20,900 by the slimmest of margins. If investors are going to use the best six months switching strategy this year then this will be a pivotal week. If the Dow loses its grip on that support and the Russell continues lower, the Nasdaq big caps could take a well deserved profit break.
There is considerable political risk that has not yet been priced into the market and that kind of risk tends to impact the market slowly. The Watergate disaster took a year for the market to feel the real impact because political events tend to unwind slowly. The average investor does not pay any attention to Washington. When the problems finally develop to the point where investors pay attention, the market is normally in full decline.
I would recommend caution in adding long positions this week until we see how the market reacts.
Enter passively and exit aggressively!
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