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Global Glance: Sell in May….Buy in September? (Fixed)

August 28, 2008
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****Sorry Folks.  I just realized that the charts weren’t fully showing before.  I’ve fixed it now.*******

****All charts and text, however, are unchanged and still reflect the original date of publishing, 8/23/08.****

Most of us are familiar with the saying, “Sell in May and go away.” Apparently it is also referred to as the “Halloween indicator“. The idea, according to the Wikipedia writeup in the link is to start buying again after October. We spoke some meetings back about the Stock Trader’s Almanac and the various patterns seen over the years that can be helpful to be aware of. Even though there is no certainty to such cycles, there is clearly reason enough to pay attention to seasonal or yearly patterns just as we look for price patterns on charts. Check out this story on the Almanac from BusinessWeek TV.

As always, whatever the conventional wisdom, theory or superstition, the charts tell the story and give the signals. It’s interesting to look at the last five years with this particular pattern in mind. In particular, I began thinking about this when I put together a comparison chart of the SPY versus the ETFs representing the other major markets around the world. Using the old “eyeballing it” method, it actually looks like the world markets did have pullbacks of varying degrees in the past five years beginning around May. More importantly, I looked to see when these may end and turn to rallies. With hopes of September being a time for rallying, I’ve highlighted the beginning of each September with the vertical orange oval. It’s kind of remarkable to see that in most of the markets, rallies have taken place with pretty good consistency each year around this time.

Not surprisingly, there is strong performance from the countries known as BRIC, Brazil, Russia, India, China.

Unfortunately, the only ETF I know for Russia, RSX, only goes back to sometime in ’07, so it is not included here. Also, the China ETF, FXI, begins in late ’04.

So here’s a look from the beginning of ’05 to better include China.

What is most interesting to me is that we hear the talking heads on TV most often focused on China and India as if a mantra of some sort, though Brazil has been the clear leader. I’m sure their ethanol fuel program has had a profound affect on their economy and I imagine its progression and effects are still to unfolding. According to this Wikipedia article on the subject:

  • The Brazilian ethanol program provided nearly one million jobs in 2007, and cut 1975–2002 oil imports by a cumulative undiscounted total of US$50 billion.
  • In 2006 Brazil produced 16.3 billion litres (4.3 billion U.S. liquid gallons), which represents 33.3% of the world’s total ethanol production and 42% of the world’s ethanol used as fuel. Total production is predicted to reach at least 26.4 billion litres (6.97 billion U.S. liquid gallons) for 2008
  • There are no longer light vehicles in Brazil running on pure gasoline. Since 1977 the government made it mandatory to blend 20% of ethanol (E20) with gasoline (gasohol), requiring just a minor adjustment on regular gasoline motors.
  • Today the mandatory blend is allowed to vary nationwide between 20% to 25% ethanol (E25) and it is used by all regular gasoline vehicles, plus 3 million cars running on 100% hydrous ethanol, and 6 million dual or flexible-fuel vehicles
  • The comparison between Brazil’s sugar cane based and the U.S.A.’s corn based ethanol industries show that their corn based industry blows ours away in most metrics.

Here’s a look at the long term chart for Brazil. A multi year, beautiful uptrending channel was broken this year, but there seems to be support around the 68-70 area. After three months of quite orderly but consistent downward movement, we see an “inside” week or maybe we could call it a bullish harami candlestick pattern. Either way, this indicates the potential for a trend reversal. For long term investors, this area could be a very nice entry for a return to the former high. It could also make for a good vehicle for consistent covered calls as it noodles its way around from here.

On a closer look, we can see a bullish divergence with the MACD histogram showing higher lows while price shows lower lows. A break of the downtrending resistance line could be a nice entry with a stop just below the recent intraday low of 67.66. As an intermediate to long term trade and an initial target of the former high around 100 or better, this could be a 1 to 2.5 risk/reward ratio or better.

One might also use the much discussed C pattern entry, buying on a move above the 30 MA or the 50 MA and setting a stop somewhere below the 30.

India has a much longer and well defined downtrend in place making it less appealing for a bullish entry. Nevertheless, the break of the downtrending resistance line would be the first signal to look for. Until then, playing to the downside would make the most sense.

Mexico looks more stable than most and in a pretty well defined sideways range. How about a play from support to resistance? Could be nice to leg into covered calls, selling the 60 or 65 strike price if it gets up there.

Looking at China, it has come down significantly from the high back in late ’07. My uptrend line here may not be very clean with the fudge back in late ’05, but otherwise it has 4 points of contact for support including the last two weeks. Besides, as they say, “Beauty is in the eye of the beholder.” In any case, the horizontal line here just above 40 makes for a very clean entry and defined stop for a bullish entry here. Likewise, a break of that line, would be a nice and clean entry to the downside with, again, a clearly defined line to set a stop with.

The US market, notable at the bottom of global performers in the comparison above, doesn’t look too pretty. Downward moment seems to be waning, but still the rally of late looks more like a bear flag than anything, and more likely to break to the downside. One promising detail, however, is that the recent lows around 120-125 looks to be a potential capitulation with extreme volatility and high volume reacting to the level. A return to that level and successful bounce off support would set a much more stable footing for the market to move up from.

The U.K. doesn’t look very pretty. Here’s an article on their perilous dependance on oil.

Finally, Germany, the world’s third largest economy in US Dollar Exchange rate terms and the largest in Europe, could be in trouble. Though the exact placement of the neckline could be debatable, it looks to have broken below a 16 month head and shoulders pattern. A retest and bounce down from the 28 area would make for a clean bearish entry. The height of the pattern makes for a downside target prediction of about 21.5.

So after all that, I’m not all that convinced that it’s quite time to buy with respect to the “Halloween Indicator,” but there do seem to be some good setups to watch for in the global markets, both to the up and the downside. For those less inclined to be in and out of stocks and uninterested in short term trading, this would be a great batch of ETFs to look to for long term plays.

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