S&P 500 Breakout - Buy at 152.44

The S&P 500 - I will use its depository receipts or SPY from now on - broke out decisively yesterday to the upside. Around midday it was forming a high, tight flag, indicative of a potential explosion to the upside. A stop could have been placed just above 140 or so. It is unclear if it would have been filled near that range however as the market exploded up immediately after the fed announced its interest rate cuts.
Only a few weeks ago I was bearish and net short the market. Then I was flat; I spent the last 45" of trading (an excellent time to enter the market, by the way - the first 30" are the worst) getting long.
I bought SPY at prices from 151 to 152, as well as XLE, XLU, and the Dogs of the Dow, namely AT&T, Verizon, GM, GE, Citigroup (a phenomenal value right now, me thinks), JP Morgan. A full list is available at www.dogsofthedow.com. I also picked up some Target.
Any 3% surge on good volume across major trendlines and the 20 day high must be taken seriously. Historically, most followed through. The dangers remain, of course, but the willingness of the Fed to perpetuate the bubble if need be means investors should adhere to the old adage of not fighting the Fed. They seem serious about doing whatever it takes to restore liquidity and confidence.
I would expect some choppiness but an equal likelihood is a market that never comes down to "reasonable" levels, so starting to move in aggressively any cash on the side is critical to long-term performance.

SPY Sector Fund 36-Month Return Ranking System, 12/03-August, 2007

If you were to sort the SPY sector funds by trailing 36-month total return at the end of each year, then divide your money evenly among the top 3, you would have achieved excellent results over the past several years. Caveat: these ETFs were launched less than a decade ago, so the data is limited, but studies done with sector mutual funds going back to the 1980s have produced similar results. Also, I have a quibble with how Yahoo calculates its "adjusted prices" which are used here for total return calculation. These returns overstate slightly the returns per year when adjusted for dividends paid. For example, if a stock began the year at $100, paid a $3 dividend, then ended the year at $110, your total return would be 13% ($10 capital gain plus $3 dividend). Yahoo calculates it somewhat differently, in effect subtracting $3 from the initial price (making it $97 ($100 minus the $3 dividend paid)). This creates a return of 13.4% rather than $13% ($110/$97 - 1 = 13.4%). This may seem like a trivial difference, but compounded over a long data series, these differences add up. Nevertheless, for simplicity's sake, I used the Yahoo adjusted price for total return calculations, understanding that it overstates the returns of high dividend-yielding stocks.

I only had month-end data to August, 2007, so did not of course have the full year results available as of writing this.

Nevertheless, the results are impressive:

Model: Invest in the top 3 SPY sector funds by trailing 36 month return, December, 2003 - August, 2007*:
		Start Date:	Dec-03	Aug-07	<>
	Model:	SPY:	Diff:	3.67	years
10k:	18,180	14,048	4,132
rr:	17.7%	9.7%	8.0%
worst:	5.3%	4.8%	0.5%
% of years > SPY:	100.0%
10th %ile:	9.0%	4.9%	4.1%
rr + 10th %ile:	26.7%	14.6%	12.1%
$10,000 invested at year-end 2003 grows to $18,180 (17.7% per year) versus $14,048 in the SPY (9.7% per year), a difference of 8.0% percent per year. Every year of the study period led to an outperformance of the model versus the SPY. Here is a year-by-year breakdown with each of the winning funds: Date IYR XLB XLE XLF XLI XLK XLP XLU XLV XLY SPY avg rr: 10k-> SPY: Dec-99 Dec-00 Dec-01 Dec-02 10,000 10,000 Dec-03 30.2% 13.5% 12.9% 10.7% 18.8% 11,883 11,070 Dec-04 9.0% 4.0% 40.2% 4.8% 17.7% 13,992 11,605 Dec-05 33.2% 17.3% 19.8% 15.2% 23.4% 17,268 13,370 Dec-06 -10.4% 19.8% 6.4% 5.1% 5.3% 18,180 14,048 The number shown for each fund is the next 12 months return. If no number is shown, then the fund was not one of the top 3 by trailing 3 year return. Notice that real estate (IYR) and energy (XLE) dominated, appearing 4/4 and 3/4 the years in question. The model did even better, although it is a high risk strategy I would not recommend, if only the single top sector ETF were bought and held for the next 12 months: Model: Invest in the top 1 SPY sector funds by trailing 36 month return, December, 2003 - August, 2007*:
		Start Date:	Dec-03	Aug-07	<>
	Model:	SPY:	Diff:	3.67	years
10k:	19,941	14,048	5,893
rr:	20.7%	9.7%	11.0%
worst:	9.0%	4.8%	4.2%
% of years > SPY:	100.0%
10th %ile:	11.5%	4.9%	6.6%
rr + 10th %ile:	32.2%	14.6%	17.6%

S&P 500 Sector ETF List

For all it's worth, here is a list of the main S&P 500 Sectors (and an iShares real estate ETF as well):

SPDR BasicInd XLB
ConSvc XLV
ConStpl XLP
CycTrn XLY
Ene XLE
Financial XLF
Indus XLI
Tech XLK
Utility XLU
Real Estate IYR

S&P 500 update 9/13/07 spy

The S&P 500 appears to be setting up for a breakout. Although it has not yet breached its 20-day high, the market has been forming higher lows and challenging its recent highs, holding in the upper end of its recent trading range, after breaking a downtrend line from the false breakout high. A trend line, properly drawn, should only connect the highs preceding lower lows.
Volume on up days still appears weak, but support appears to have moved up to the 144 area.
It the market decisively breaks above 150, then another leg, perhaps to the 156 high, could follow. This would surprise everyone which is what the market tends to do most of the time.
Individual sectors that look interesting include energy (XLE) which has broken out again and is perhaps short-term over-extended, technology (XLK), and basic materials (XLB). Financials (XLF) remain in a downtrend, but the 31.5 climax low may hold for awhile at least. A close above the down-sloping 50 day, currently at 34.29 could be good for a nice trading swing.
The macro economic picture remains horrible and we are in a seasonally weak spot, but pre-election Novembers are usually strong. The market may breathe a sigh of relief if the President indicates he is finally changing course in Iraq, which would eliminate a major financial and credibility hemorrhage to the United States. We currently spend about 12 billion dollars a month there, so any sign that this might be the beginning of the end could be greeted positively, particularly by the credit markets.

S&P 500 Update 9/4/07 12:55 pm (SPY 148.78)

S&P 500 update midday: Well, things are starting to get interesting. This is why it is so important as a trader or investor to be agnostic (literally: not knowing) rather than wedded to one position all the time (long or short). The market has now broken its downtrend line after looking like it was going to make another leg down last week. This could represent a change in trend, but for confirmation, I would like to see the 20 day trailing high taken out (currently at 150.59 on the SPY).
Negatives remain. No pronouncements by the Feds or by Bush about bailing out some homeowners at the margin changes the macroeconomic uncertainty or the overall credit crunch. Nevertheless, the idea of not fighting the Fed remains in place.
Volume is low on up days, the market's action has been distorted by light pre- and post-Labor Day trading (when dramatic moves, usually to the upside, are not uncommon), and if you are bullish, this would be an over-extended entry point. A pullback to at least 144-145 if not the 138-139 range would be a normal and orderly development.
More later. Watch closely. September is a horrible month, but maybe we got some of the carnage out of the way in August... I'm still flat to short the S&P 500 (via puts).