This has been a successful seasonal trade in many years, and last year was the second best year in our history. We have used this in 22 of the past 23 years – skipping only 1995, for reasons which I no longer recall.
In this trade, we buy RBOB Gasoline futures and sell Heating Oil futures. This is the simplest way to establish the spread, eschewing futures options and ETF options – the options are just too illiquid in the February contracts, which is what we use for this spread.
Buy signals have abounded in the past week. In Figure 1, I have included Tuesday's night's action (vertical red line), as the market first plunged when it became a distinct possibility that Donald Trump would win the election. This was a very "Brexit-like" response to a surprise vote.
I used to think "weatherman" was the main occupation where you could be wrong constantly and still keep your job. Now I'm going to add "pollster" to that list.
Trump has won, but the world is not coming to an end. Futures plunged overnight – at one point touching limit down = 107 points! But prices have completely recovered, and futures were trading on the plus side just moments ago. Prices are still swinging around rather rapidly, but in general volatility is deceasing, and more buy signals are coming to fruition.
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The $VIX “spike peak” buy signal that is in place took four trading days to confirm. That is, $VIX spiked up to an intraday high of 17.95 on October 13th, but it did not complete the signal (by closing below 14.95) until October 19th – four trading days later. We are used to seeing $VIX spike up and right back down again, giving these buy signals on the same day that the intraday high was reached, or perhaps the next day.
Both the Crash of ‘29 and the Crash of ‘87 – two of the worst days in market history – occurred exactly 55 calendar days after the market had made an new all-time high. In other words, 55 days after the top, people are getting anxious. For those who believe in this theory, rather than coincidences, it supposedly has something to do with Fibonacci and/or biorhythms – who knows?
The chart of $SPX (Standard & Poors 500) continues to have a slightly negative bias to it. There is a clear series of lower highs on the chart. Moreover, the trend line from the January lows has been broken.
Equity-only put-call ratios are both technically on sell signals at this time, according to the computer programs that we use to analyze these charts. However, to the naked eye, they are more or less moving sideways.
The time of the year for the October seasonal trade is at hand. This is one of our best seasonal trades – to buy “the market” at the close of trading on October 27th, and to sell the position at the close of trading on November 2nd. However, we do not take the trade in years when there was not a pullback in October.
Time Warner (TWX) agreed to be bought by AT&T (T). The deal is worth $107.50 – consisting of $53.75 in cash and $53.75 in AT&T stock. The stock portion has collars: TWX shareholders will receive a maximum of 1.437 shares of AT&T, but will not receive less than 1.30 shares of AT&T. Those two limits on the shares are equivalent to AT&T stock prices of $37.411 and $41.349, respectively (Just divide the share limits into the $53.75 stock value to get those prices).
