July 28, 2017

Expect to see a trading range with slight expansion as the market heads into the summer doldrums

On 5/3 I stated “bullish seasonal tendencies (end/beginning of the month) ended today as the market officially moves into the “sell in May and go away” period”.

On 5/4 the S&P (SPY) opened at $150.75. Today the S&P (SPY) closed the day at $151.30, up $.55 or .36% since the old Wall Street adage began.

As you can see from the paltry gains above the S&P has found a comfortable trading range over the past few weeks. I would like to go back to some statistics that I referenced early last week.

I looked at the historical average return of the S&P on a monthly basis over the last 60 years to see if actually backed up typical range-bound summer months also known as the “summer doldrums”.

  • Jan. – 1.4%
  • Feb. – (-0.2%)
  • Mar. – 1.0%
  • Apr. – 1.3%
  • May – .0.3%
  • Jun. – 0.2%
  • Jul. – 0.9%
  • Aug. – 0.0%
  • Sep. – (-0.6%)
  • Oct. – 0.9%
  • Nov. – 1.8%
  • Dec. – 1.7%

I stated at the time that I referenced the stats and in my most recent newsletter issue, the Stock Trader’s Almanac states “A $10,000 investment compounded to $5444,323 during the November-April period over the last 56 years compared to a $272 loss for May-October. I think that sums up the significance of the historical period known as the “Summer Doldrums”.

So, the question is, how can we make money during the historically flat period from May-October. Well, look no further than an Iron Condor Strategy. An iron condor performs best during a range-bound environment. It never hurts to learn an alternative investment strategy to see if it meets your risk profile and more importantly, if it can help you achieve a higher potential return in your overall portfolio. The strategy is not a “get rich quick” strategy and it has some obvious risks like any other leveraged investment strategy. 

However, risks can be reduced in many ways, position sizing, defined stop-loss, etc. But, another way is to limit short iron condor positions to particular expiration cycles. Historically, some are weaker than others and the summer doldrums are typically a period that is attractive for this type of strategy. If you think that history will repeat itself this year then you might want to investigate an Iron Condor Strategy that fits your risk profile.

The next expiration cycle is also only 4 weeks which is typically advantageous for this type of strategy. You should expect to receive less premium then a five week cycle, but the VIX (investor’s fear gauge for the S&P) is up to 13.50. At the onset of the May expration cycle four weeks ago the VIX was hovering around 12.50. The increase in volatility should increase the potential premium, which means the potential return during the June expiration cycle should increase if all things stay the same (i.e., chosen range).

Currently, as the major indices approach options expiration the Dow remains in an overbought state. I mentioned yesterday that if the bulls can sustain the positive momentum through Thursday then we could see a short-term opportunity present itself as early as Friday. The bulls did take a short-term reprieve today, but if they can somehow manage to stay in an “overbought” state or preferably moving back into a “very overbought” state tomorrow then a short-term reprieve in the Dow (DIA) looks likely during the early past of next week. Remember, historically if the market is overbought as the market moves into the week of post options expiration a decent short opportunity  is usually found.

Overbought/Oversold levels for May 17, 2007

  • SPY –  62.2 (neutral)
  • DIA – 77.9 (overbought)
  • IWM – 33.6 (neutral)
  • QQQQ – 46.7 (neutral)
  • GLD –  21.9 (oversold)
  • OIH – 82.9 (overbought)

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