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 and we also continue reporting our results.
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.
Our Simple Strategy That’s Beating the Market
To find trades for July, we followed the same process we have been following all year. 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 July 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. We then sorted the results based on winning percentage. We set a cut off of at least 70% winning trades. This month, just seven stocks made the list of potential buys. We don’t need to know why these stocks perform better than average in July, 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 review the first half 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.
In April, of the eight stocks highlighted, five moved up, a win rate of 62.5%. As a group, the stocks in the strategy lost 0.81%, losing a little more than the S&P 500 which was down 0.49% for the month. It was the first time the strategy failed to beat the market in a month.
In May, our strategy returned to its winning ways. Of the five stocks highlighted, four were winners for a win rate of 80%. The strategy gained 2.45%, which was slightly better than the 2.3% gain in the S&P 500.
In June, the strategy again beat the market. We identified five stocks to trade. We recorded two big wins and three losses for a win rate of 40%. Overall, our recommendations delivered an average gain of 3%, more than double the 1.2% of the S&P 500. The results are summarized in the table below.
So far this year, our simple seasonal strategy has delivered a total return of 16.85% for the stocks in our seasonal strategy with a win rate of 68%. We are outperforming the broad stock market by a wide margin and doing so with a relatively simple strategy in a strong bull market where the S&P 500 shows a double digit gain.
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. Among the many possible ways 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. This is just one example of how that process could be implemented.
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. We are simply following all of the stocks on the list without using any other filters.
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 results of our high probability trading screen for July 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 July.
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.