May 02, 2009

Sell in May, then go away; come back on St. Leger's Day

Weekly Snapshot
• Chrysler files for Chapter 11 protection
• U.S. consumer confidence up at 65.1 in April (57.3 in March); highest level since September 2008
• U.S. factory orders fell 0.9% in March
• U.S. Personal income decreased 0.3% in March
• U.S. Personal consumption expenditures (PCE) decreased 0.2%
• Money market rates continue to fall; 3-month Libor rates are: Euro area: 1.378%, US: 1.039%, UK:1.378%
• US jobless claims rose 27,000 to 640,000 last week
• U.S. economy shrinks more than expected - GDP dropped at a 6.1% in Q1
• US Home Prices Post 18.6 Percent Annual Drop in Feb

More on ETFs
Last week's "Getting started with ETFs" section seemed timely. This week's Financial Times also featured an article about the growing popularity of these financial instruments.
http://www.ft.com/cms/s/0/6e89a514-34e9-11de-940a-00144feabdc0.html

The increased importance is reflected in an astonishing 40% share of all US trading (valued in $ amounts).

Inverse and Leveraged ETFs
As mentioned last week, here is another Charles Schwab publication dealing with slightly more complex ETFs: http://www.schwabtradinginsights.com/2009_04/etfs.html

The universe of ETFs appears to be expanding at a rapid pace. However, we cannot overemphasize the importance of "knowing what you're buying". If you simply wish to track the general market, a low-cost Vanguard ETF or traditional trackers like the SPY are suitable for the average investor. When it comes to inverse and leveraged ETFs however, you should carefully consider whether an ETF, its holdings and its trading strategy suits your investment needs. Before going into details of how these more complex ETFs are constructed, Scott Rothbort made an important point to remember:

It’s important to note that these instruments are not for the average investor: They involve a great deal of risk and don’t always work as intended. Furthermore, although an ETF may be designed to provide investment returns that correspond inversely to, and/or by multiples of, the performance of an underlying index, due to expenses, potential tracking error, market supply-and-demand conditions and other factors, there can be no guarantee that exact correlation will be achieved.

You should definitely keep in mind that "they don't always work as intended". ETFs are supposed to track an underlying index, or a basket of stocks, bonds, commodities etc. Due to various factors including transaction costs, slippage, funding costs (interest), inefficiencies, tax implications etc. the actual performance of an ETF will never mirror the underlying asset 100%. If you're interested, send us your preferred ETF and we can run a correlation analysis in terms of performance versus underlying: Send questions to info@fxistrategies.com

Sell in May, then go away; come back on St. Leger's Day
Last week, we looked at the three instances of attempting to break the resistance level at the 875-877 area. This week, the S&P500 pierced through that level, but only briefly. On Friday, the Index closed just above 877 after hovering around this level for the past three trading days. To constitute a clear break, we also need to see a low above the resistance area.


Charts aside, you may recall the old saying: "Sell in May, then go away; come back on St. Leger's Day" (early September). May has arrived and the general US market is up over 31% since the low point in early March. In fact, not just the US, but most global stock markets have recovered substantially in recent weeks. During the month of April, major market indices have done remarkably well, despite ongoing gloomy economic news and a prolonged recession.

Index Change
S&P 500 +9.98%
NASDAQ +14.12%
Dow +7.39%
FTSE +8.09%
Dax +17.05%
Cac-40 +13.15%
Nikkei +8.01%
Hang Seng +12.91%
Shanghai Comp. +4.06%

This of course begs the question: Is it time to follow the traditional saying and take some profits? While I cannot answer that question for each investor individually, I have been looking at returns of a buy and hold strategy versus "Sell in May and go away". We have data on the S&P500 going back to 1950 and, although highly hypothetical, the results of these implied trades are refreshingly illuminating. Our data series prior to 2008 show a clear advantage towards the "Sell in May" strategy in each decade of running the tests. 2008 jinxed everything however. In 2008 selling in May would have been perfect but this time around, coming back in September would have been dreadful and would have erased all gains over a traditional buy/hold strategy. Please email info@fxistrategies.com  if you like to get see details on these hypotheticals.

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Good luck & good trading!

Disclaimer
Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this email be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance.

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