I’ve been hitting on a lot of different topics recently (OK, so I have a little trouble focusing from time to time, what’s your point, er, wait, what was I talking about?  Well, no matter). This week let’s bring a few things I have been writing about in the recent past up to date.

#1. Small-Cap Stocks versus Large-Cap Stocks

In “Large Cap vs. Small Cap, Part I,” dated 12/2/09,

http://www.optionetics.com/market/articles/22067

I wrote about the tendency of small-cap stocks to outperform large cap stocks between the middle of December and the end of the following February. While this is of course never a “sure thing,” this time around the theory held true in reality. As you can see in Figure 1, small-cap stocks gained +3.7% during this 2½-month period, while large-cap stocks were essentially unchanged.

Figure 1 – RUT (small-cap index) versus RUI (large-cap index)


Click here for larger view 

#2. Seasonally Favorable Periods for Soybean

In “Bean There, Done That," on 1/14/2010,

http://www.optionetics.com/market/articles/22205

 I wrote about the tendency for soybeans to rally between early February and late March and even more so from early February into the middle of June. So far this has not panned out at all as beans have lost roughly $0.17 (at $50 per every penny that works out to $850). This means one of two things. Either:

a) This will be one of those “off” years for soybean seasonality, OR

b) The “big move” is getting close and the good news is it is not too late to get on board.

 

Figure 2 – Will soybeans ultimately experience their typical early spring rally?

For those who are inclined to play the bean market one possibility now is to buy a bull call spread on July Beans, like the one shown in Figure 3. This trade involves buying the July 94 call and selling the July 104 call.


Figure 3 – Bull Call Spread using options on July soybeans futures

As always, this is not a recommendation, it's only an example of one possible way to speculate in soybeans. If the bean market returns to seasonal form and rallies between now and mid-June, this trade can make good money. If a meaningful up move fails to pan out or if in fact beans decline in price, this trade offers limited risk (versus buying soybean futures).

The alternative for stock traders is to purchase shares of or call options on PowerShares Agricultural Fund (ticker DBA), which has almost a 70% correlation to soybeans. Options on soybean futures are by far, however, the more direct play.

#3. Gold Stocks

In “Don’t Give Up on Gold Stocks Just Yet," dated 2/2/10,

http://www.optionetics.com/market/articles/22294

I highlighted the fact that gold stocks still appear cheap relative to the price of gold bullion, and as such may still offer a lot of upside potential. That situation still exists. Since that article was published, both Fidelity Select Gold (ticker FSAGX) and Market Vector Gold Miners ETF (ticker GDX) are up roughly 6%.

 

Figure 4 – Gold Mining Stocks (GDX) creeping higher

While some of the models I use to track gold stocks are presently neutral, the primary thing to remember is that gold stocks are still cheap relative to gold bullion. So diversified investors should either be holding on or looking to buy gold stocks on the next dip.

#4. Technology as a Leading Indicator

In “When Tech is a Wreck, The Market Goes to Heck," dated 2/9/10,

http://www.optionetics.com/market/articles/22317

I detailed a simple system for trading technology stocks when they are outperforming the overall market. Since that article was published, Fidelity Select Technology (ticker FSPTX) is up +11%. This model remains bullish at the moment. The caveat here is that tech stocks are possibly a bit overbought in the near-term.

 

Figure 5 – Technology stocks (ETF ticker XLK) on the move

#5. Anticipated Volatility in the Euro

In ”You Are What You Think You Are," dated 2/23/10,

http://www.optionetics.com/market/articles/22375

 I wrote about the forecasted upheaval that some are expecting in the Euro based primarily on the threat of sovereign debt default by Greece and/or the hoops that some other countries might be compelled to jump through to avoid this outcome. I suggested that one way to play the various possibilities was by buying straddle using options on FXE (the exchange-traded fund that tracks the Euro). Since that time all the euro has done is consolidate into a trading range. So at this point the straddle I mentioned in the article is underwater. Nevertheless, given the recent consolidation in price and decline in implied option volatility, now might be an even better time to consider this type of trade in the euro.

 

Figure 6 – Euro straddle (looking for a big move in either direction)

#6. The Trend In the Stock Market is Presently Bullish

In “Forecasting the Stock Market in 5 Minutes a Month," dated 3/2/10,

http://www.optionetics.com/market/articles/22401

I detailed a (relatively) simple method for identifying the present major trend of the stock market using month end price data. Based on these measures the major trend of the stock market is presently bullish (albeit a bit overbought in the short-term).

Figure 7 – SPY attempting to re-establish an uptrend



#7. Playing the Bullish Side of the Energy Markets

Historically, the February though May period has been bullish for all things energy related – energy commodities, energy stocks, etc. In “And Up Through the Ground Came a Bubblin’ Crude...," dated 3/9/10,

http://www.optionetics.com/market/articles/22431

 I wrote about a method for identifying the present trend in the crude oil market. At present, by this measure the trend remains bullish. Given the seasonally favorable period and the current bullish trend it makes sense to continue to press the bullish side of energy related stocks, ETFs and commodities.

 

Figure 8 – Energy Stocks (XLE) tend to rise March-May (as does Crude Oil)

If history proves an accurate guide, energy related “things” may well work their way higher over the next several months.

Summary

Things have sure changed a lot since I first started in this business. “Back in the day” we were told time and again that the only way to profit in the markets was to have a thorough understanding of the fundamental factors that affect the company (or commodity) you were thinking about buying. Now to be honest, trying to make sense of all of that potential information seemed a bit daunting to me, but who was I to question “the conventional wisdom”?  And of course the one thing that always sort of gnawed at me was the thought of, “how could anyone possibly understand all of the factors that might affect all of these different businesses, let alone forecast any of this correctly with any reliability?” 

Funny how things work out. Essentially all of the ideas I have mentioned above have little to do with “fundamentals” and are based primarily, on relatively simple – yet consistent – cyclical, technical, and/or trend-following methods.

Hey, maybe you can teach an old dog new tricks.

Jay Kaeppel
Staff Writer and Author of Seasonal Stock Market Trends
Optionetics.com ~ Your Options Education Site

Questions for Jay? Please visit "Ask the Traders" through the discussion board on the Optionetics.com home page.

NOTE: Jay’s latest book, Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Stock Market Investing, was ranked among the Top 10 Investment Books for 2009 by the venerable The Stock Trader’s Almanac 2010. For more info, please click here.