A Must Have Trading Book
Daily TrendWatch
July 1, 2009
Scott Downing
Portfolio Manager: SMARToptions
As you already know, we at BigTrends are focused on trying to bring you pertinent information to improve your trading. Now that everything in the trading world is so computerized, it is easy to discount other methods of learning. One of the easiest ways to improve your trading is to read books about trading. You will often see us write reviews of books, mostly concerning trading psychology, because these books can help to give you an edge over your competition.
Another way to gain an advantage in trading is to learn about the seasonal patterns of the market. The best resource for finding market patterns that can be predicted is the "Stock Trader's Almanac". This book is produced every year with an almost endless amount of data points surrounding what the market has historically done during a given day, week, month, quarter, or season. Although this sounds a little too much like black magic, you would be amazed at how accurate this resource can be.
For example, the 2009 market almanac suggests that the most likely scenario for 2009, regardless of whether the Democrats or Republicans win the presidency, is a "flat to down year". As we stand right now, the S&P 500 is up only 2.5% year-to-date, despite the massive rally that we have seen since the March 9th lows.
Another major seasonal trend that we often see in the market is the Sell in May and Go Away theory. Although one might think this theory has had mixed results, there is a tradable trend here. According to the Almanac, the best six months of the year to be long the Dow Jones Industrial Average is from November 1st - April 30th. If you had done this from November 2008 through April 2009, your results would have been down 12.4%. Despite the frustrations of the recent market, let's examine this theory over a longer-term period of time.
Had you been long the DJIA during this six month period each year from 1950 through today, your portfolio would be up over 420%! This is despite the last three years being down 8%, 12.4% and 7.9% respectively (see chart below). And keep in mind that this data is all without the use of any market timing indicators or systems. The article goes on to mention that applying MACD to this system tripled the results (one of 12 indicators in our Indicator Library) .
So this is all well and good, but we are now in July and today officially starts the second half of 2009, so where might we be going from here?
The first item to note is that the almanac states that the DJIA has been higher 16 of the last 19 times during the first trading day of this month. After today's close, we can make that 17 of the last 20. Great odds for a trader.
From here, the Almanac is more cautious, suggesting that huge market movements, both up and down, are historically likely after July 4th. It also suggests that the markets are typically weaker during the summer months, with July, August, September and October being the worst four months for the NASDAQ. Since we know the NASDAQ often leads the broader S&P, chances are good that we could see some downside to the market during the third quarter this year.
Finally, according to the almanac, tomorrow should be flat to slightly higher to close the week, and next week should be one of the last bullish weeks of the summer.
Take a trip to your local bookstore or jump online to get yourself a copy of the almanac. Your profits will more than make up for the cost of your education.
Scott Downing
Director of Research
BigTrends.com
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