Sunday, January 24, 2010

U.S. Financial 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.

I clipped this from DVTechtalk January 18, 2010 – Thoughts on Seasonality in the U.S. Financial Services Sector. According to a recent seasonality study on the U.S. Financial Services sector completed by Brooke Thackray, the best time to own the U.S. Financial Services sector is from January 19th to April 13th. Average return per period from 1990 to 2008 was 4.1% versus a gain of 1.3% for the S&P 500 Index. The annual recurring reasons for the trade include the reporting of encouraging fourth quarter earnings and favourable outlooks offered in annual reports and annual meetings about first quarter and 2010 results. The seasonal trade is not recommended this year:

Well, I can see why DVTechtalk does not recommend the trade this year – this seasonal trade has never worked! A simple buy-and hold from January 1995 has returned 72% (excluding dividends) and the seasonal trades actually lost money (-16%) over the same period. Note during the 1995-1998 and 2003-2007 advances the tendency to sell high and buy back higher. The only big call was the sell in April 2008 but once again one could also argue that in April - May 2008 you could have sold anything and been correct. Also as of now the seasonal model has missed the great May 2009 to January 2010 35% recovery having sold last April.

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.


Anonymous said...

always been skeptical of seasonality. It's one of those trading ideas that just seems too easy. And your analysis proves that, at least with the financial sector, it is.

BP said...

I see that HAC - the ETF on seasonality hit a 52 week low.

This ETF will make seasonality studies suspect.

These studies seem to always show that if you got in on the lowest tick and out on the highest you make money. I bet this ETF shows the vagaries of seasonality.