Traders have long understood the importance of seasonal tendencies. Hundreds of years ago, grain trading revolved the seasons. Seasonal trends also impacted shipping as some voyages were best made at certain times of the year and would be almost impossible at some times of the year. While this may seem to be limited to physical markets, we often see seasonal tendencies in financial markets. To be fair, some of these tendencies were based on requirements of physical markets like agriculture.
As one example, throughout history, financial markets in the United States have shown a tendency to crash in the fall. Many of us remember the October crashes of 1987 or 1989 but the history of market crashes extends back almost to the country’s founding. The first panic in the new country might have been the one that occurred in September 1791, during George Washington’s first term, when shares of the Bank of the United States sold off sharply. Other examples of fall crashes include the Panics in 1857, 1869 and 1907 and the crash of 1929. Later, economists would tie fall panics to the crop cycle.
Before the Federal Reserve was a national force, money moved West to pay for crops in the fall and decreased the reserves of banks and brokers in the East. This meant small price changes in financial markets could result in crises and they often did. The 1929 crisis did unfold after the founding of the Federal Reserve but the banks had a regional focus at the time that is now understood to have prevented unified policy actions that might have lessened the impact of the Great Depression.
It’s true that harvest season no longer means moving money by rail from New York to Kansas City but financial markets still show seasonal trends. Some of these trends can be due to business cycles with many retailers, for example, enjoying one strong quarter that generally includes the holiday season. This cycle has an impact on the company’s financials and can, at time, be seen in the stock’s performance. For other companies, the seasonal tendencies might be due to product introduction cycles, trade shows that determine when analyst update sessions are held, earnings releases or a number of other factors.
Traders could seek to understand why a particular seasonal tendency exists for each company or they could simply try to trade the tendencies. This week, we chose to look at how to trade the tendencies while ignoring why the seasonal trades exist.
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To find trades for January, 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. Rather than 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 January, we are simply trying to benefit from their tendency to do so. The results are shown in the table below.
Realty Income Corporation (NYSE: O), at the top of the list, is a publicly traded real estate investment trust. O invests in the real estate markets of the United States and makes investments in commercial real estate. We can see that we have 22 years of trading history for this stock and 17 trades were winners. The average gain across all 22 years was 3.2%.
Illumina, Inc. (Nasdaq: ILMN) provides sequencing by synthesis technology that provides researchers with various applications and the ability to sequence mammalian genomes. ILMN also offers arrays for a range of deoxyribonucleic acid and RNA analysis applications, including single nucleotide polymorphism genotyping, copy number variations analysis, gene expression analysis, and methylation analysis, as well as allow for the detection of known genetic markers on a single array. ILMN also provides various library preparation and sequencing kits to simplify workflows and accelerate analysis; and genome sequencing, genotyping, and non-invasive prenatal testing services.
Level 3 Communications, Inc. (NYSE: LVLT) offers Internet protocol (IP) and data services comprising Internet services, virtual private network, Ethernet, content delivery network, media delivery, Vyvx broadcast, managed, cloud and IT, and cloud connect services, as well as Communications as a Service. LVLT also provides transport and fiber services comprising wavelengths, private lines, transoceanic services, and dark fiber, as well as related professional services; local and enterprise voice services, including Voice over Internet Protocol services and traditional circuit-switch based services.
Tractor Supply Company (Nasdaq: TSCO) offers a selection of merchandise, including equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment; hardware, truck, towing, and tool products; seasonal products, such as heating products, lawn and garden items, power equipment, gifts, and toys; work/recreational clothing and footwear; and maintenance products for agricultural and rural use. TSCO operates around 1,488 stores in 49 states.
UnitedHealth Group Incorporated (NYSE: UNH) offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, individuals, and military service members; and health care coverage, and health and well-being services to individuals aged 50 and older. UNH also provides services associated with chronic disease and other specialized issues for older individuals; Medicaid plans, Childrens Health Insurance Program, and health care programs; and health services, including commercial health and dental benefits.
The Walt Disney Company (NYSE: DIS) is a diversified international family entertainment and media enterprise with the following business segments: media networks, parks and resorts, studio entertainment, consumer products and interactive media. DIS also operates Walt Disney Parks and Resorts and is one of the world’s leading providers of family travel and leisure experiences, serving millions of guests each year.
Blackrock, Inc. (NYSE: BLK) is a publicly owned investment manager. BLK provides services in every region around the world, with 135 investment teams in 30 countries. The primary focus of the company is on its services to institutional, intermediary, and individual investors including corporate, public, union, and industry pension plans, insurance companies, third-party mutual funds, endowments, public institutions, governments, foundations, charities, sovereign wealth funds, corporations, official institutions, and banks.
Linear Technology Corporation (Nasdaq: LLTC) designs, manufactures, and markets a broad line of high performance analog integrated circuits for major companies worldwide. The Company’s products provide an essential bridge between our analog world and the digital electronics in communications, networking, industrial, automotive, computer, medical, instrumentation, consumer, and military and aerospace systems. LLTC also produces power management, data conversion, signal conditioning, RF and interface ICs, µModule subsystems, and wireless sensor network products.
Any of these stocks, or call options on these stocks could be considered as a trading possibility for the month of January.
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/