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If You Didn't 'Sell In May and Go Away'...

Date: June 29, 2009 
Company: SPDR - S&P 500 Depository Receipts
Ticker: SPY
Price: $92.70
Opinion: Bearish

Comments: ...You might still have time to sell.

Since bottoming in early March, the S&P 500 catapulted more than 43%, pushing it to within striking distance of where it was prior to the 2008 Election of Barack Obama. While this rally was impressive and might prompt many novice investors to take the plunge and buy stocks during the current price dip, experienced chartists and traders know better.

The attached chart illustrates that after the S&P500 made its most recent peak on June 11th, the index pulled back towards its May lows, resulting in the formation of a very reliable chart pattern called a 'Head and Shoulders Top'. We see this as a significant occurrence which should not be ignored, because Head and Shoulders Tops tout a 93% accuracy rate and average decline of 15%. This development came right on cue, because over the past 59-years, May through October has been a historically bad time to own stocks, as evidenced by a Plexus Asset Management report which determined that since 1950, the S&P 500 Index showed a 7.9% average return from November 1st through April 30th, while the May 1st through October 31st period touts a far inferior average return of 2.5% per annum. We believe this year's price action will also fall victim to this old folklore and that now is the time to position your portfolio for a downward move over the next few months.

Our determination is that over the next three months or so, SPY will likely decline to $81.65, which would translate to approximately 7700 on the Dow Jones Industrial Average and 805 on the S&P 500 Stock Index. The attached chart also shows that the anticipated decline would only be a 50% retracement of the March-June rally, so don't worry about a full retest of the March 2009 lows unless the 50% retracement level is violated.

To profit from the impending decline to our target price of $81.65, we suggest buying the SPY September 105 Put (Ticker: .SWGUA), which is currently offered for $13.25 per option. And if you want more bang for your buck, we also like the September 93 Put (Ticker: .SWGUO), for $4.70 per option. If you are a serious risk-taker, consider either the Short S&P 500 ProShares (Ticker: SH) or UltraShort S&P 500 ProShares (Ticker: SPXU), last traded at $65.16 and $71.63 respectively.