Last month, we applied a simple seasonal strategy to find potential buys for January. Now, we can review the results of this strategy. Of the 8 stocks, six moved up, a win rate of 75%. Half of the stocks beat the market, delivering a gain larger than the gain of the S&P 500 index. Results are summarized in the table below.
This strategy outperformed because of the large gain in Illumina, Inc. (Nasdaq: ILMN). This demonstrates the value of trading a strategy. We never know whether a trade will be a winner or loser and we never know which stocks will deliver the biggest gains. That will always be true with system trading and is an example of why system traders must always take all of the system signals.
We will follow the same process for February that we applied last month. To find trades for February, 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.
Once again, it’s important to remember that instead of buying the stocks, a trader could buy a call option that expires at the end of January or in February. 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 70% winning trades and just eight stocks made the cut. We don’t need to know why these stocks perform better than average in February, we are simply trying to benefit from their tendency to do so.
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.
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. 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.
If you were to apply a screen, it would be best to then buy the same number of stocks each month. Alternatively, you could use call options to obtain exposure to the stocks and, again, it would be best to own the same number of securities each month.
The results of our high probability trading screen for February are shown in the table below.
The Priceline Group Inc. (Nasdaq: PCLN) is the world’s leading provider of online travel & related services, provided to consumers and local partners in 224 countries and territories through six primary brands: Booking.com, priceline.com, agoda.com, KAYAK , rentalcars.com and OpenTable. Collectively, The Priceline Group operates in 224 countries and territories in Europe, North America, South America, the Asia-Pacific region, the Middle East and Africa in over 42 languages.
Autodesk, Inc. (Nasdaq: ADSK) is a leader in 3D design, engineering, and entertainment software. The company’s Architecture, Engineering and Construction segment offers Autodesk Building Design Suites to manage various phases of design and construction; Autodesk Revit products that offer model-based design and documentation systems; Autodesk Infrastructure Design Suites; AutoCAD Civil 3D, a surveying, design, analysis, and documentation solution; and AutoCAD Map 3D software for infrastructure planning, design, and management.
People’s United Financial (Nasdaq: PBCT) is a subsidiary of People’s United Financial, Inc., a financial services company with over $40 billion in assets. The company is a community-based, regional bank in the Northeast offering commercial and retail banking, as well as wealth management services through a network of nearly 400 retail locations and over 5,000 employees.
Hasbro, Inc. (Nasdaq: HAS) is a global play and entertainment company. From toys and games to television, movies, digital gaming and consumer products, Hasbro offers a variety of ways for audiences to experience its iconic brands, including NERF, MY LITTLE PONY, TRANSFORMERS, PLAY-DOH, MONOPOLY, LITTLEST PET SHOP and MAGIC: THE GATHERING, as well as premier partner brands.
V.F. Corporation (NYSE: VFC) is a global leader in branded lifestyle apparel, footwear and accessories, global iconic brands, 62,000 associates and $12.4 billion in revenue. VF’s businesses and brands are organized into four categories called coalitions, consisting of: Outdoor & Action Sports, Jeanswear, Imagewear and Sportswear.
Electronic Arts Inc. (Nasdaq: EA) is a leading global interactive entertainment software company. EA delivers games, content and online services for Internet-connected consoles, personal computers, mobile phones and tablets. EA is recognized for a portfolio of critically acclaimed, high-quality blockbuster brands such as The Sims™, Madden NFL, EA SPORTS™ FIFA, Battlefield™, Dragon Age™ and Plants vs. Zombies™.
Tractor Supply Company (Nasdaq:TSCO) is the largest operator of rural lifestyle retail stores in the United States. The company operates over 1,600 retail stores in 49 states and employs more than 24,000 team members. This is the second month in a row the company has made the list although the January trade was not a successful one.
Flowserve Corporation (NYSE: FLS) is one of the world’s leading providers of fluid motion and control products and services. Operating in 56 countries, the company produces engineered and industrial pumps, seals and valves as well as a range of related flow management services.
Any of these stocks, or call options on these stocks could be considered as a trading possibility for the month of February.
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/