Sunday, January 17, 2010

Seasonality, fact or Folklore?

I do not follow seasonality because from past experience I find in a bull market seasonality will have you buy - sell higher - and buy back even higher. In a bear market seasonality will have you sell - buy lower - and sell even lower.

Investing in platinum: According to Brooke Thackray and his book entitled, “Thackray’s 2009 Investor’s Guide” he notes that platinum has a period of seasonal strength from the end of December to the end of May. The trade has been profitable in 17 of the past 22 periods. Average gain per period was 8.3%. Question; how could a simple rule work so well for so many? The answer depends on the window of time you select to study the results. I selected the great bull advance from December 2001 to May 2008.

There were 14 trades with a total return of 172% (excluding trading costs) and a buy-and-hold netted 180%.

The problem is that few investors will stick to any model when over time, it stops working and with the big platinum calls such as the May 2001 and May 2008 “sells” being few and far between. One could also argue that in May 2008 you could have sold anything and be correct. Also investor glee with the sell-May 2008 and buy Dec 2008 call would have turned sour with the latest sell-May 2009 and buy December 2009 call.

At the moment the fact-or-folklore question needs more study – so over the next few weeks let us audit a few more seasonal trades before May when we all go away.

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