Well congratulations everyone – that was definitely a record! First we survived the end of the Mayan Calendar, and now we have (at least in the short-term) survived the dreaded Fiscal Cliff. Looks like it’s time to “develop” some new trading rules. So here are two “new” proposed trading rules.
New Proposed Trading Rule #1:
World Armageddon Rule: If the world is forecast to end on a particular date, sell short at the close of the trading day prior. Cover your short position at the close of trading the next day (assuming of course that there is one. If not, no further action is necessary - literally).
So far this rule has displayed "uncanny" accuracy (100%) with an "annualized rate of return" of +400%. OK, in reality we are talking about a “fairly limited” sample size (one), which involved selling short SPY at the close on 12/20/12 (at 145.12) and covering at the close on 12/21/12 (at 142.79). These results are somewhat counterintuitive since you would think that if the world is supposed to end on a particular date and does not that the markets might be somewhat cheered by the news. But alas, we are a cranky bunch these days, so what little “rigorous analysis” we can do so far suggests otherwise.
Now all we need are 29 more “potential end of the world” events to form a more representative sample size. Can’t hardly wait.
New Proposed Trading Rule #2:
Fiscal Armageddon Rule: If the U.S. economy is about to plunge off of a fiscal cliff entirely of our esteemed elected representatives making, buy at the close the day before the deadline and sell at the close two trading days later.
OK, once again our sample size is only one, but the results sure are impressive. 100% accuracy and an “annualized rate of return" of over 20,000%! Granted this is based on our one test of buying at the close on 12/28/12 and selling at the close of 1/2/13 for a two-day gain of +4.3%.
FYI: This rule may also be referred to in less polite circles as the “Even Stupid Politicians (but I repeat myself) come to recognize that they better save their own sorry a$% at some point by compromising with those darn [political party you hate most here]’s” Rule.
The Upshot
So until we get more occurences to add to our sample sizes, we must so far conclude that:
A) When politicians pass what they consider to be the “least bad” bill that they can at the eleventh hour in order to avoid screwing virtually every single person who voted for them, that’s “bullish”.
B) However, when the entire planet actually “survives” the end of the world, that apparently is “bearish”.
Wow. We really are a cranky bunch.
Where Not to Invest in Early 2013
Certain markets have displayed a strong tendency to decline early in the calendar year. Investors have typically performed best by avoiding the long side of these markets as detailed below, and traders may wish to consider short positions via either futures contracts, ETFs or put options.
T-Bonds
Figure 1 displays the cumulative loss accrued by holding a long position in t-bond futures from the close of the last trading day of each calendar since 1977 through the 14th trading day of February.
Figure 1 – Long T-bond futures from Dec. 31 through February Trading Day #14 (Dec 1977-Dec 2012)
Traders can consider taking a long position in the ETF ticker TBT (which emulates a short position in long-term t-bonds) or a short position in t-bond futures (ticker US) or ETF ticker TLT. Other possibilities include long call options or a bull put spread on TBT or put options or a bear call spread on TLT or US.
The Euro
Figure 2 displays the cumulative loss accrued by holding a long position in euro futures from the close of the last trading day of each calendar since 1998 through the 11th trading day of February.
Figure 2 – Long Euro futures from Dec. 31 through February Trading Day #11 (Dec 1998-Dec 2012)
Traders can consider taking a long position in the ETF ticker EUO (which is designed to trade daily inversely to the euro times two – in other words if the euro declines today by 1%, EUO should advance roughly 2%). One could also take a short position in euro futures or ETF ticker FXE. Once again a trader could also consider using options on any of these securities.
Natural Gas
Figure 3 displays the cumulative loss accrued by holding a long position in natural gas futures from the close of the last trading day of each calendar since 1990 through the 11th trading day of February.
Figure 3 – Long Natural Gas futures from Dec. 31 through February Trading Day #11 - (Dec 1990-Dec 2012)
Traders can consider taking a long position in the ETF ticker KOLD (which is designed to trade daily inversely to natural times two – in other words if natural gas declines today by 1%, KOLD should advance roughly 2%). One could also take a short position in natural gas futures or ETF ticker UNG. Once again a trader could also consider using options UNG or natural gas futures (KOLD option trading is virtually nonexistent).
Summary
So it is always interesting to come up with new “trading rules” as we did at the outset of this article. Nevertheless, despite all of the “excitement” surrounding these “new" rules, most investors and traders will likely be better off focusing on “old” (and boring) but time tested ideas like the ones I mentioned regarding t-bonds, the euro and natural gas.
Hey what is that bright light in the sky – is that an asteroid? Maybe I should sell short just in case we survive……….
Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
