At the beginning of the year, we began sharing real time buy recommendations with you for a successful trading strategy. This month, we continue with that process.
The strategy is among the simplest seasonal trades possible. Few traders follow seasonal strategies although these strategies are often profitable. They are also relatively low risk because they limit market exposure to short periods of time. To apply this strategy, we are running a scan to find the stocks with the best historical performance in the month.
To find trades for May, 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 May 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 75% winning trades. This month, just five stocks made the list of potential buys. We don’t need to know why these stocks perform better than average in May, 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.
Before turning to this month’s picks, let’s look back at the first four 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.
In March, 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.
Last month, our strategy failed to beat the market. Of the eight stocks highlighted, three declined and two of those suffered relatively large losses. The results are summarized in the table below.
This is disappointing but so far, this year, we have a total return of 11.4% for the stocks in our seasonal strategy with a win rate of 71%. We are outperforming the broad stock market trading by a wide margin and doing so with a relatively simple strategy. Since the beginning of the year, the S&P 500 is up just 3.1%.
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 May 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 May.
Reynolds American Inc. (NYSE: RAI) manufactures, and sells cigarettes and other tobacco throughout the US. RAI is the parent company of R.J. Reynolds Tobacco Company; American Snuff Company, LLC; Santa Fe Natural Tobacco Company, Inc.; Niconovum USA, Inc.; Niconovum AB; and R.J. Reynolds Vapor Company. The RJR Tobacco segment offers cigarettes under the NEWPORT, CAMEL, PALL MALL, DORAL, MISTY, and CAPRI brands; and CAMEL Snus, a smoke-free tobacco product, as well as manages various licensed brands, including DUNHILL and STATE EXPRESS 555. The American Snuff segment provides smokeless tobacco products, such as moist snuff under GRIZZLY and KODIAK brand names. The company also manufactures and markets digital vapor cigarettes under the VUSE brand name; and markets nicotine replacement therapy products under the ZONNIC brand.
Dollar Tree, Inc. (Nasdaq: DLTR) operates discount retail stores in the US and Canada under the Dollar Tree and Family Dollar brands.
F5 Networks, Inc. (Nasdaq: FFIV) develops and provides software-defined application services to customers, ensuring that applications delivered over Internet Protocol (IP) networks are available to users at any time and on any network. The company’s products are designed to optimize the security, performance and availability of network applications, servers, and storage systems. The company also offers Traffic Management Operating Systems (TMOS) that provide software for local and global traffic management, network and application security, access management, Web acceleration, and numerous other web application options.
Edwards Lifesciences Corp (NYSE:EW) manufactures heart valve systems and repair products that are used to replace or repair a patient’s diseased or defective heart valve. Its products are categorized in three areas: Transcatheter Heart Valve Therapy, Surgical Heart Valve Therapy, and Critical Care. The company also develops hemodynamic monitoring systems that are used by healthcare professionals to measure a patient’s cardiovascular function. Many of the company’s products are available in more than 65 countries.
United Health Group Inc. (NYSE:UNH) provides healthcare benefits to customers under the UnitedHealthcare insurance brand.
It’s important to remember that 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. Even though it’s simple, it 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 https://reports.tradingtips.com/extreme-profits-calendar.