Wrapping Up Our Monthly Seasonal Strategy

Over the past year, we have shared trades based on a seasonal strategy. At the beginning of every month, we provided real time buy recommendations and we also tracked the results of the previous month’s recommendations.

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  • Now, after a year, we are able to show you the results for the past twelve months.

    This system was based on one of 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, every month we ran a scan to find the stocks with the best historical performance for that month. That’s it. There were no other criteria.

    Our Simple Strategy That’s Beating the Market

    As an example of the rules for new readers, to find trades for December, 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.

    simple strategy

    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 strategies. For the final month, we used the Russell 2000 for potential buys.

    The reason for this switch is because December is historically the best month for small caps. That small cap index shows a gain 78% of the time in December since 1998. The second best month is November with a gain 74% of the time.

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  • Now, instead of buying stocks, traders could have used call options that expired near the end of the month 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.

    When selecting potential buy candidates each month, our test required a minimum of 15 years’ worth of history. We then sorted the results based on winning percentage. In most months our cutoff was 80% or higher indicating we had a high probability of success.

    Year to Date Results

    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.

    In July, there were six winners and a single loser among the seven recommendations. As a group, the stocks once again beat the S&P 500. The strategy gained 3.4% while the S&P 500 gained only 2.0%.

    In August, the strategy lagged the market, gaining 0.1% as the S&P gaiend 0.4%. Of the eight recommendations for the month, five delivered a gain.

    In September, we experienced a great deal of volatility. Overall, we had 5 winners, two losses and one stock was unchanged. The strategy stocks gained an average of 1.6%, beating the S&P 500 which was up 1.3%.

    In October, the strategy lagged the broad market for the third time. We had five winner and three losses. The strategy gained 1.3% as the S&P 500 gained 2.5%.

    In November, the strategy once again beat the market. Six of the eight trades were winners with an average gain of 3.8% compared to a gain of 1.2% for the S&P 500.

    In December, the strategy underperformed the S&P 500. Just two of the seven trades delivered a gain and the average loss was 0.3% compared to a agin of 1.3% in the S&P 500.

    For the year, our simple seasonal strategy has delivered a total return of 26.7% for the stocks in our seasonal strategy with a win rate of 69% for all 90 trades.

    Even with December’s loss, we beat the broad stock market by a wide margin and did so with a relatively simple strategy in a strong bull market where the S&P 500 gained about 20%.

    seasonal strategy

    These are results you could have obtained in real time.

    Looking Ahead to 2018

    As we noted in the past year, the key to a trading strategies 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.

    With a disciplined process, you can continue benefiting from the strategy in the years ahead. You simply find the stocks with the best winning percentage in any month and buy them. Then, repeat the process the next month. Those are the only rules to this market beating strategy.

    It’s important to remember that in identifying these trades, we applied one of the least sophisticated seasonal strategies. We simply identified 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.