When traders think of seasonal trading they usually think of trading commodities rather than stocks. Many stocks have seasonal tendencies that can be traded very profitably if the right strategies are employed. Take for example the S&P, there is the old saying “sell in May then walk away”. This saying comes from the seasonal tendency of the S&P to go up until May then chop around for a few months until the “Santa Claus” rally at the end of the year. If you look at a long term seasonal chart of the S&P you will clearly see this tendency. Let’s take a look at a 20 year seasonal chart of the S&P to illustrate this.
20 Year S&P Seasonal Chart
From this chart you can see that from the beginning of March until the end of May the S&P moves up. It then chops around from June until the end of October and moves up again from the end of October till the end of the year.
Lets say that you traded this seasonal chart for the past 10 years (Jan 3, 2000 till Dec 29, 2009). You buy on Feb 26th of each year and exit on June 4th then you buy again on October 26th and exit on December 29th. You take each trade buying 100 shares of SPY each time. Your winning percentage would have been 65% (out of 20 trades 13 would have been profitable). Your average profit on the winning trades would have been $700 and your average loss on each losing trade would have been $440. This would have produced a 6% return as apposed to a –3.58% return using a buy and hold strategy. A buy and hold strategy would have lost $3500 where this strategy made over $6000 profit with only 100 shares. Not a bad return. Can it be better?
You can improve on your seasonal trades by using seasonal charts calculated with less number of years. I have found that if you use just the last 10 years to calculate your seasonal charts your seasonal trading is more profitable. Here is the S&P seasonal chart using just 10 years of data.
S&P 10 Yr Seasonal Chart
By using just the past 10 years instead of 20 years, you are able to see what the seasonal tendencies have been in the more recent past. Think about it, 20 years ago a buy and hold strategy worked very well in the stock market. That isn’t true today! Using the above chart you would have a different strategy to trade the seasonal signals. You would have sold short January 5th and exited on March 12th. Then you would have bought on March 12th and exited on June 5th. On October 28th you would again buy and exit on December 28th.
This time your winning percentage would have been 67.5% (27 out of 40 trades would have been profitable). Your average profit on winning trades would have been $819 and your average loss would have been $293. This would have produced an 18% return as apposed to –3.58% return using a buy and hold strategy. Again, a buy and hold strategy would have lost $3500 where this strategy made $18,328.00 with only 100 shares! (both examples account for commissions as well!).
As you can see from the above examples, trading using seasonal charts can be a very profitable endeavor. You can also use other timing indicators along with seasonal trades to insure you are trading with the trend to make your trading even more profitable.
Many other stocks have seasonal tendencies and can be traded very profitably as well. I will be posting other seasonal stock trades soon so that you can see how profitable seasonal trading in the stock market can be.
Joe Trader
Tags: S&P, S&P 500, seasonal S&P trading, seasonal stock trading, seasonal stocks, seasonal trading, STOCK MARKET, stocks
