This month, we are continuing to apply our seasonal strategy. The strategy is among the simplest seasonal trades possible. We are running a scan to find the stocks with the best historical performance in the month.
To find trades for April, we started by looking at how stocks have performed, on average, during the month. We assumed the stock was bought at the beginning of the month and sold at the end of the month every year. We then calculated how well that strategy would have done for every stock in the S&P 500 index. We limited our test to stocks in the S&P 500 because those are the most liquid stocks in the market and their liquidity provided an options trading strategy.
Of course, it’s important to remember that instead of buying the stocks, a trader could buy a call option that expires at the end of April or later. Call options allow for exposure to a stock with less cash since call options often trade for less than 5% of the cost of the stock. There are risks to trading options and you should familiarize yourself with those risks before placing any options trades.
Our test required a minimum of 15 years’ worth of history but used more than 50 years of data when it was available. We then sorted the results based on winning percentage. We set a cut off of at least 80% winning trades and an average gain on each trade of at least 7%. This month, eight stocks made the list of potential buys. We don’t need to know why these stocks perform better than average in April, we are simply trying to benefit from their tendency to do so.
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It is important to remember that each of these stocks is highlighted based solely on the seasonal trend. We have not considered the fundamentals or technical picture of any of these companies. That fact provides an opportunity for you to refine the trading strategy.
Before turning to this month’s picks, let’s look back at the first three months of the year.
In January, we identified eight stocks, six moved up, a win rate of 75%. Half of the stocks beat the market, delivering an average gain of 5.1%, significantly better than the 2.3% gain of the S&P 500 index.
In February, of the eight stocks highlighted, six moved up, a win rate of 75%. As a group, the stocks in the strategy delivered a gain of 4.2%, a little better than the 4.0% gain of the S&P 500 index.
Last month, of the ten stocks highlighted, seven moved up, a win rate of 70%. As a group, the stocks in the strategy delivered a gain of 2.89%, easily beating the S&P 500 which lost 0.2% in the month. The results are summarized in the table below.
So far, this year, we have a total return of 12.2% for the stocks in our seasonal strategy with a win rate of 73%. We are outperforming the broad stock market by a wide margin and doing so with a relatively simple strategy.
Now, it is important to remember we never know whether a trade will be a winner or loser and we never know which stocks we highlight each month will deliver the biggest gains, or which ones will be losers. That will always be true with system trading and is an example of why system traders must always take all of the system signals.
The key to a successful trading strategy is to follow it with discipline. You could consider the strategy to be the entire list of stocks that pass the screen each month or you could refine it. As we’ve noted in the past, perhaps you only want to trade two stocks on the list. One way to refine the list would be to determine the price-to-sales (P/S) ratio for each stock and sort from lowest to highest so the deepest value lies at the top of the list. Then, you would buy those two. Obviously, the strategy could be expanded to buy three or more stocks. Buying just one stock on the list each month is probably not the best approach since there is no way to know which stocks will provide gains each month.
The same general idea for selecting stocks could be applied to dividend yields, earnings growth rates or even technical factors such as relative strength (RS). With RS you would most likely want to own the strongest stocks. As an alternative, you could look at RSI, the relative strength index, and buy the stocks with the lowest value. These would be the most oversold stocks and the ones that would be expected to rebound over the next month.
The results of our high probability trading screen for April are shown in the table below.
Any of these stocks, or call options on these stocks if available, could be considered as a trading possibility for the month of April.
Snap-on Incorporated (NYSE: SNA) makes and sells tools, equipment, diagnostics, repair information and systems solutions. The company serves a wide range of global customers to include, aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation and technical education industries. The company offers hand and power tools, tool storage, diagnostics software, information and management systems, shop equipment and other solutions for vehicle dealerships and repair centers.
Crown Castle International Corp. (NYSE: CCI) owns, operates, and leases shared wireless infrastructure in the United States and Australia. The company provides towers and other structures, such as rooftops; and distributed antenna systems, a type of small cell network (small cells). It provides access, including space or capacity to its towers, small cells, and third party land interests via long-term contracts in various forms, including license, sublease, and lease agreements. In addition, the company offers network services relating to wireless infrastructure, primarily consisting of antenna installations or subsequent augmentations, as well as site development services relating to wireless infrastructure.
The Williams Companies, Inc. (NYSE: WMB) is an energy infrastructure company that owns and operates natural gas pipeline systems across the United States. The company provides natural gas gathering, treating, processing, and compression; NGL production, fractionation, storage, marketing, and transportation; deepwater production handling and crude oil transportation; and olefin production services, as well as transports and stores natural gas to local natural gas distribution companies, municipal utilities, direct industrial users, electric power generators, and natural gas marketers and producers.
Southwestern Energy Company (NYSE: SWN) is an independent natural gas and oil company that engages in the exploration, development, and production of natural gas and oil in the United States. The company is the third largest producer of natural gas in the US Lower 48, with operations on the Marcellus Shale, an unconventional natural gas reservoir covering approximately 245,805 net acres in Northeast Appalachia; Marcellus, Utica, and Upper Devonian Shales covering approximately 321,563 net acres in Southwest Appalachia; and the Fayetteville Shale, an unconventional gas reservoir covering approximately 918,535 net acres in Arkansas. The company is also involved in gathering, marketing, and transporting natural gas, oil, and natural gas liquids.
American Express Company (NYSE: AXP) provides charge and credit payment card products and travel-related services to consumers and businesses worldwide. It operates through four segments: U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services, and Global Merchant Services. The company’s products and services include charge and credit card products, as well as other payment and financing products; network services; expense management products and services; travel-related services; and stored value/prepaid products.
Principal Financial Group, Inc. (NYSE: PFG) provides retirement, asset management, and insurance products and services to businesses, individuals, and institutional clients worldwide. The company has $591.6 billion in assets under management and offices in 19 countries throughout Asia, Australia, Europe, Latin America and North America. It operates through Retirement and Income Solutions, Principal Global Investors, Principal International, and U.S. Insurance Solutions segments. The Retirement and Income Solutions segment provides a portfolio of asset accumulation products and services, including retirement savings and income. It offers products and services for defined contribution pension plans, including 401(k) and 403(b) plans, defined benefit pension plans, nonqualified executive benefit plans, and employee stock ownership plans; individual retirement accounts and payroll deduction plans; investment-only products; and annuities, mutual funds, and bank products.
SL Green Realty Corp. (NYSE: SLG) is a real estate investment trust (REIT). The firm engages in the property management, acquisitions, financing, development, construction, and leasing in the United States. The company also provides tenant services to its clients.
Newfield Exploration Company (NYSE: NFX) is an independent energy company that engages in the exploration, development, and production of crude oil, natural gas, and natural gas liquids The company is located primarily in the Anadarko and Arkoma basins of Oklahoma, the Williston Basin of North Dakota and the Uinta Basin of Utah. The company has oil developments offshore China. Approximately 98 percent of the Company’s proved reserves are located onshore U.S.
In identifying these trades, we applied one of the least sophisticated seasonal strategies. We simply looked for stocks that performed well in a calendar month. This is a powerful trading strategy but there are more advanced ways to apply seasonal strategies. TradingTips.com’s Extreme Profits Calendar program focuses on seasonal trades using more sophisticated strategies To learn more about this trading program, there is a special report available at http://reports.tradingtips.com/extreme-profits-calendar/