Bye Bye Santa – 9 Tips To Stay Profitable In 2015

Bye Bye Santa – 9 Tips To Stay Profitable In 2015

There is a very old saying on wall street, “If Santa Claus should fail to call, bears may come to broad and wall”. Studying the Santa Claus rallies since 1969 stats show that in almost every case where there was not a “Santa Claus Rally”, the market in less than a year was entering a bear market.

The Santa Claus rally run for the last 5 days of December and the first 2 trading days of the new year are not at all encouraging.

In this article I review the 2014 Santa Claus Rally and then look at what “Santa” could be telling investors. We will then review some past failed Santa Claus rallies to see what can be learned from those failed rallies and the months that followed. Finally I review 9 tips I use to stay profitable in the face of what could be the start of the next bear market.

2014 Santa Claus Rally

The Santa Claus Rally in 2014 lost over 60 points on the S&P for a fall of 2.9%. This marks the first Santa Claus Rally that failed since 2007.

Santa Claus-rally-2014

2014 Santa Claus Rally

2007 Santa Claus Rally

The 2007 Santa Claus Rally lost 3.2%. During the year, on October 11 the S&P had made a new all-time high of 1576.09. 2007 ended at $1468.36 just 107.73 points lower or a loss of just 6.8%. This drew in a lot of investors both professional and amateur who saw the pullback at the start of the year as an opportunity to get back in for the next leg higher in the bull market. Indeed analysts were trumpeting that the pullback in early 2008 was “the chance” to get in before the next move higher and indeed on May 19 with the S&P back up to 1426.63 analysts boasted everywhere that they had been right. What they did not see was that the pullback from the May high set up yet another lower high and failed to set a new trend up. The Bull Market had actually died in the fall of 2007 after setting its high on October 11. Everyone knows what happened next as stocks plunged into a ferocious bear market.

2007 Santa Claus Rally

2007 Santa Claus Rally

1999 Santa Claus Rally

The 1999 Santa Claus Rally lost 3.9%. Analysts indicated that the signals had been wrong in that rally, as the S&P recovered from that loss and pushed to a new high in March of 1553.11. Again in July the market pushed again reaching 1517.24 and pulled back. Finally in August momentum returned and stocks once more pushed higher and on September 1 they reached 1530.01. Investors piled into stocks during that period from March to September as once more analysts loved stocks. But hardly anyone realized that the bear market had started back in March when stocks failed to push to new highs. The July and September highs were both lower than the March high and basically set up a triple top, one of the worst signals for bull markets.

2000 had started the year at 1399.42 and ended the year at 1320.28. It was not much of a loss but it was a signal that the bear market was already underway. While the 2007 to 2009 bear market was ferocious, it was certainly equaled by the bear of 2000 to 2003 which saw the S&P fall 49% and the NASDAQ a stunning 4023 points, losing 78% of its value wiping out trillions of dollars of valuations and literally hundreds of thousands of investors, brokers and financial investment firms.

1999 Santa Claus Rally

1999 Santa Claus Rally

Should Investors Be Concerned?

So should investors be concerned heading into 2015? In my opinion, absolutely. This is a pre-election year and in 14 of the last 16 pre-election years followed January’s trend and right now that trend looks poor. While it is true that pre-election years have a good track record for gains, it is not always the case and as well, it does not have the track record the Santa Claus Rally has.

What I Expect

While I am not expecting a bear market or a full-fledged bear to emerge this year, I will not be surprised to see the markets attempt to rally further and perhaps even break the 2014 all-time highs, but I am expecting they will pullback this year. If the pre-election year traditions were to continue, we could see a year where we really don’t move much higher but also perhaps not all that much lower until 2016. That is the year I am expecting the bear market to fully emerge. By 2017 we could look back and realize that the bull market ended in 2015 but most investors just didn’t know it.

Past Market Tops

Past Market Tops

9 Tips To Stay Profitable In 2015

Here are 9 tips that I will be using to stay profitable in what I believe will be a difficult and volatile year.

1) The first thing we can do is every time the market dips to the 200 day moving average we can buy some protection through either purchasing the Ultra Bear or Short ETFs or SPY Put Options and take profits on existing positions to raise cash levels.

2) Increase the amount of cash on hand by 10% for the entire year. In other words, keep more cash out of the market.

3) Each time the S&P dips to the 200 day moving average we can buy puts on the biggest gainers of the market. Google, Netflix, Amazon, Priceline, Apple and many others have had exceptional runs. We can look at what stocks have the highest price to earnings ratio and buy puts on those stocks.

4) Take on smaller positions in the meantime and close positions more often without worrying about whether they expire or not.

5) Set up a schedule to force the closure of trades and never trade without a stop-loss. Tighten up on those stop-losses as the trade works in our favor so as to be stopped out on any small dip or pullback in the stock or ETF being traded.

6) For long-term core stock holdings, each time the S&P hits the 200 day moving average, wait a day or two to see if the market can rebound and if not, sell covered calls on half of a position in a long-term core stock out 3 months to allow time for the market to fall and use a stop-loss to protect against a rebound rally. Keeping half of a position free of covered calls can assist in protecting a position from being exercised since they can be used to buy back in the money covered calls in the event a stock runs back up, and then sell covered calls at a higher strike using some of the stocks that prior to the trade did not have covered calls. I will be writing more on this in coming weeks at a time when I suspect markets may pullback further.

7) For those of us selling naked puts, go further out in strike selection and be content with smaller gains but better protection.

8) When the S&P reached the 200 day moving average consider selling call options on high-flying stocks. Either naked calls or credit call spreads worked well in both of the last bear markets but the best money was made by using a stop-loss to protect gains as they are being made to avoid sharp rallies back up and spikes higher on huge volume which can be unsettling to investors hold naked calls or credit call spreads.

9) Don’t listen to the media or the hype from analysts either up or down. Instead stay the course and do not add extra capital. Instead, enjoy the profits being made but always remain aware that stocks may already be preparing for the next bear market. In other words, trade with the focus on protection of capital being used first and enjoy profits second. Even if profits are smaller than they could be, they are still profits rather than losses and that is what counts.

Bye Bye Santa

With Santa long gone and no rally this year, I prefer to err on the side of believing in the statistics and if this year is not the focal point of a new bear market, it will be surprising. Remember, the lack of the Santa Claus Rally does not mean we will see a decline this year. It means we should be cautious, keep watch and take profits as a bear market has always followed when Santa fails to show. This could be the final year before the next bear awakes from its long hibernation.

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