Sunday, February 7, 2010

U.S. Materials 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 Monday February 1, 2010 – Thackray’s 2010 Investor’s Guide notes that the U.S. Materials sector has a period of seasonal strength from January 29th to May 6th. The trade has been profitable in 16 of the past 20 periods. Average return per period was 8.0%. The sector outperformed the S&P 500 Index by 4.5% per period.

This is my fourth seasonal trade audit having looked at platinum, TSX Energy, U.S. Financials and now the U.S. Materials sector and one theme emerges. Seasonal trades do not work in bull markets. During the great January 1999 to April 2008 bull in the U.S. Materials Sector, a buy-and-hold returned +91% and 20 seasonal trades returned +60%. The only big call during the entire period was the sell at month-end 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 May 2009 to January 2010 17% recovery having sold last April month-end.

At the moment the fact-or-folklore question suggests a seasonal trading strategy fails in bull markets but I need to study the results of seasonal trading in protracted bear markets. At this time I have to conclude that seasonal strategies such as those served up by Thackray and the classic Stock Trader’s Almanac may invite curiosity from retail investors but are not suitable in the real world of money management


Investor said...

Are you suggesting Buy and Hold is the preferred investment strategy during a bull market? said...

Hello Investor

There is an old and wise saying - in a bull market be an investor - in a bear market be a trader so yes you do buy-and-hold in a bull

Bill Carrigan