The past two fed calendar meetings (July 25-26 and Sept 19-20) have resulted in little action on the "Fed Drift" trade (if you buy the S&P on the stock market open on the day prior to a Fed meeting, and sell about 15 minutes prior to the announcement at 2:15 the following day). Perhaps this is simply because - as has been noted before - once a strategy is identified it no longer works. I have noticed that the market has tended to sell-off following the last few meetings. Perhaps this is a new trend or just an anomaly. As far as the meeting went, Yellen announced that they will begin running off about $10 Billion a month of holdings to shrink the balance sheet, as expected, and the dot plot for increasing rates was a little more hawkish than expected. The fact is that if the Fed buying up securities caused the stock market to rise, then logically one would think that selling off (or allowing the balance sheet to shrink) would have the opposite reaction. I am reluctantly short the S&P here around 2,500. We shall see. At any rate we are long overdue for a correction of any kind.
(This post originally appeared 9/19/2015)
So if I told you that you could have a market beating return by just being fully invested for 8 days out of the year and in cash the remaining 357 days, would that seem crazy? Well according to research created by the NY Fed, you can do just that:
According to the research, which primarily looks at data from 1994 to near present, if you buy the S&P on the stock market open on the day prior to a Fed meeting, and sell about 15 minutes prior to the announcement at 2:15 the following day, you can have an average daily return of about .5%. Interestingly, if you remove the historical performance of these 8 days from each year going back to 1994, investing in the stock market wouldn't be so hot. I suppose the best strategy here would be to buy call options on the SPY or perhaps use a leveraged 3X fund (like SPXL) as the trading vehicle on those 8 instances.
My biggest concern with this strategy is the simple fact that the cat has been let out of the bag and generally strategies fail as soon as they are identified. The research report was dated 2011. There was not much difference between periods of tightening or easing.
In the chart below, the solid line is the market performance on Fed days and the dotted line is the average return on non-Fed days.
Many investors (especially those just starting out) want to delve into the world of micro-cap stocks, mainly because of the tremendous potential for gain which stocks trading at or below $1 can deliver. Unfortunately many investors get most of their stock training by visiting web sites which specialize in nefarious practices under the guise of "expert opinion". The most important thing to understand about stock investing, and micro-cap investing in particular, is that you should trust no one. Do not trust company officials, investor relations representatives, web site operators, message board bloggers, stock gurus, grandma Miller, uncle John, or cousin Fred. Always find the facts for yourself. Never take anything for granted. Most web sites which profile micro-cap stocks are bought and paid for promoters. And just because they disclose this (which the SEC requires) does not make it better. However, the worst offenders are those not paid in cash but in free trading shares. Some of these operators will be dumping hundreds of thousands of shares (while you are buying). Kind of makes it hard for the price to rise, doesn't it? At bottom, there are several things for an investor in penny stocks to watch out for: high volume, strange financing deals, outrageous claims by the company.
High Volume: This is a primary red-flag for micro-cap stocks. A tiny company that trades more than a $100,000 in (dollar) volume on an average daily basis should be reason for alarm. Most tiny companies with high volume (dollar volume in particular) have a huge amount of shares outstanding and/or are being promoted (usually by dubious individuals).
Wicked Financing: Small companies have a hard time getting big cash injections. One way they get cash is by making complex deals with accredited investors. Some of these deals include warrants, preferred stock, and debentures, set up in ways that could cause a serious amount of dilution. Of course not all deals are bad for the company or for the other shareholders. It really depends on the particulars. Just read through the company filings and you will know when things just don't add up.
A New Breakthrough: When a micro-cap company comes out with a press release which makes a claim (such as a cure for cancer, etc.) be more than a bit skeptical. Outrageous claims are almost always fiction.
The best research is reading the corporate filings. Find them right at the SEC site.
The market has now ripped the face off the shorts with about the same force as the last correction in October. We are now 13% higher than the lows just a little over a month ago. I figured the shorts would get punished again but I was only expecting a run to about the 200 day SMA or about 2025 on the S&P at the most. I entered heavy short just after the FOMC meeting (I had some small option positions from just above 2000 previous). Most traders who were bearish just a few weeks ago are now all out bulls again. From a contrarian sentiment indicator I would say that is good for the short crowd. But the Fed did cave and basically said they will never raise interest rates again, so you could see how the logic could propel those bears (now bulls). The dollar has been crushed - which is good for commodities - which is good for stocks. But the overall picture has not changed as stocks are overvalued and the world economy is in the can (exactly the reason every central banker is pulling every trick out of their hat). I do have the voice in my head that is saying something about not fighting the fed (again) and that voice does need to be respected. So I will tread lightly here.
The market has broke just above 2000 now on the S&P and there is some technical resistance at this level. However, the market probably pops even higher here to burn some more shorts - maybe taking us all the way to the 200 day moving avg. So I am just entering some small option positions here and will add as we most likely break higher.
During the 2008 collapse there were at least 6 bounces of 8% or more on the way to 666 on the S&P, which turned out to be the ultimate bottom and bounce. The sell-off started slowly and thus the bounces tended to the mild side, and when the crashes ultimately occured during the later phase, the bounces and rallies were ultimately stronger. The bounces ranged from 8% at first to 27% before the ultimate bottom. The year 2000 collapse started somewhat more forceful and the bounces tended to be somewhat even all the way to the bottom. The 2015/16 correction has started even more tumultuously than either those two bear markets. The first bounce off the August/October low was nearly 13%, which ripped the faces off many on the short side, creating the most pain. We are now probably on the start of a new bounce. There are two reasons (aside from obvious over-sold conditions on the technicals) that we could see a rally here. First, is that the central bankers of the world are once again active. The FED itself wll be having their meeting this week. We all now know what the normal market reaction is to the FED meeting schedule - See Story Here. The second, is the fact that the corporate buy-backs can once again kick into high gear once earnings season winds down. The wild card? Oil of course. Energy (and basically the fear that there will be massive credit defaults) has been the tail wagging the market dog. I will probably play the big picture by adding into market shorts as the S&P rises from this correction. Starting small and averaging in. The new mantra is to sell the rally - not buy the dip. We shall see.
The first week of 2016 has been the worst in the history of the stock market. My January Effect portfolio has been reduced to smoke and ashes. I did have some shorts on for a hedge, but not nearly enough. I had individual company issues also: SKUL warned of a bad holiday season and the stock tanked 25%. This was the largest holding in the portfolio. So far I have sold some positions but I am holding others, as most technicians believe we should see a bounce here in the general market for the next week or so. Long term though, most are looking for a much larger correction (as do I).
Stocks now on the Tax Loss Portfolio list include SKUL - OBCI - TUES - ENG - BOFI - FHCO - WTT - and a couple funds in the energy sector - FCG and AMLP. I am either buying these, adding to existing positions, or looking to buy.
The downside target of 2000 to 2020 was hit on the S&P at 2019. The rally has now taken us to 2097 before backing off a bit on Friday. I did put on a small short position as the rally started fading from the 2097 level. At this point it seems as if we may trend a little lower, maybe to the 2060 level or so before resuming higher. Either way I feel I need to have at least some shorts on here as a hedge as I build the January Effect portfolio. So far I have targeted SKUL and TUES to be included in the portfolio and will add to those positions over the next few weeks. I am also looking to buy FCG as the energy component of the portfolio. FCG is a natural gas/oil ETF that may get some January Effect buying after the tax loss season. The components of the fund are generally small to mid-cap names. Here is the complete portfolio composition today:
The 2015 and 2011 chart playbook is now underway (see posts below). Unfortunately I did not expect the current market to creep much higher than 2080 and of course (because the market will spread as much pain as possible) I had to trim my short position down somewhat as we broke above 2100. Downside is most likely around 2000 to 2020 before the obligatory Santa Rally, but we shall see. I have added a few names to my watch list for the 2015/16 January Effect portfolio. The names I am watching so far are SKUL - TUES - SCX - FHCO. I will add others soon.
Senior Manager, Paul Saad and Associates, LLC