Last month, for the second month in a row, 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%. As a group, the stocks in the strategy delivered a gain larger than the gain of the S&P 500 index, also for the second month in a row. The results are summarized in the table below.
So far this year, we have a total return of 9.3% for the stocks in our seasonal strategy compared to a gain of 6.3% in the broad stock market.
Once again, in February, this strategy outperformed because of the large gain in a single stock. 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.
After two winning months, we will follow the same process for March that we applied last month. To find trades for March, 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.
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No, not at all.
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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 March 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 70% winning trades and an average gain on each trade of at least 7%. This month, ten stocks made the list of potential buys. We don’t need to know why these stocks perform better than average in March, 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 March are shown in the table below. Priceline (Nasdaq: PCLN) is on the list for the second month in a row.
Signet Jewelers Limited (NYSE: SIG) is the largest specialty jewelry retailer in the US, UK and Canada. Signet operates approximately 3,600 stores primarily under the name brands of Kay Jewelers, Zales, Jared The Galleria Of Jewelry, H. Samuel, Ernest Jones, Peoples and Piercing Pagoda.
QUALCOMM Incorporated Nasdaq: QCOM) develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. QCOM has approximately 175 facilities globally.
The Priceline Group Inc. (Nasdaq: PCLN) is the world’s leading provider of online travel and related services. PCLN provides its services 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.
Pioneer Natural Resources Company (NYSE: PXD) is an independent oil and gas exploration and production company in the United States. The company explores for, develops, and produces oil, liquefied natural gas (NGL), and gas. The company’s primary operations are in Texas and Colorado.
Adobe Systems Incorporated (Nasdaq: ADBE) is one of the largest software companies in the world. The company offers a variety of products such as, Adobe® Creative Cloud®, which offers the most innovative tools and cloud-based services for creating digital media; Adobe Document Cloud, which provides a modern way to manage documents at home, in the office and across devices; and Adobe Marketing Cloud, which delivers groundbreaking solutions for data-driven marketing.
Bed Bath & Beyond Inc. (Nasdaq: BBBY) operates a chain of retail stores under the names, Bed Bath & Beyond; Christmas Tree Shops; and That!; Harmon or Harmon Face Values; buybuy BABY; and World Market, and Cost Plus. The company sells bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and juvenile products. It also provides various textile products, amenities, and other goods to institutional customers in the hospitality, cruise line, healthcare, and other industries.
Foot Locker, Inc. (NYSE: FL) is an athletic shoes and apparel retailer. FL operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and SIX:02, as well as Runners Point, and The Direct-to-Customers segment sell athletic footwear, apparel, equipment, team licensed products, and private-label merchandise through Internet Websites, mobile sites, and catalogs.
Capital One Financial Corporation (NYSE: COF) operates as the bank holding company for the Capital One Bank (USA), National Association (COBNA); and Capital One, National Association (CONA), which provide various financial products and services in the United States, the United Kingdom, and Canada. It operates through three segments: Credit Card, Consumer Banking, and Commercial Banking. Capital One is one of the 10 largest banks in the US based on deposits. Ranked #145 on the Fortune 500 and serving approximately 45 million customer accounts.
Alliance Data Systems Corporation (NYSE: ADS) provides marketing and loyalty solutions in the United States and internationally. It facilitates and manages interactions between its clients and their customers through consumer marketing channels, including in-store, online, email, social media, mobile, direct mail, and telephone. The company operates in three segments: LoyaltyOne, Epsilon, and Card Services.
Darden Restaurants, Inc. (NYSE: DRI) owns and operates 1,536 restaurants, featuring a portfolio of category-leading brands that include Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s and Yard House.
Any of these stocks, or call options on these stocks if available, could be considered as a trading possibility for the month of March.
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/