The Perfect Trade?

Recently in The Toronto Star I suggested that a perfect trade would have been to overweight the portfolio in the TSX financial sector in March 2009 and hold through midsummer and reduce as the financials lost price momentum. The proceeds would then be diverted into an overweight position in the TSX Utility sector and held through year-end. This would have been a perfect trade with returns at least 50 per cent above the broader TSX composite index. Of course, perfect sector trades are possible with 20/20 hindsight.

I then disclosed my less than perfect trade when last April I bought Bank of Nova Scotia and then switched to Barrick Gold Corp. in August. The trade was questioned by a reader who correctly observed that as of one week ago had the trade was a wash and so why not just retain the bank stock. The reader asked if a seasonal strategy was used.

Ok I still think the trade was prudent because I sold a risky asset and directed the capital to a lower risk asset based on relative performance as measured in our chart. In late March our Relative Average (RA) signalled a buy-bank and sell-gold stock condition and then in late August the RA signalled a buy-gold stock and sell-bank condition. I stayed with the trade because BNS was printing high MOM numbers – a sign of a risky asset.

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