Why It Pays to Trade Seasonality

Seasonal trading theories are a dime a dozen.

  • The first half of the year tends to bring better returns that the second half.
  • Dow Jones Industrial Average stocks whose price was beaten down in the previous year have a tendency to outperform the rest of the DJIA in the following year.
  • There’s even the theory that markets in the northern and southern hemispheres predictably succumb to the winter blues, or Seasonal Affective Disorder.
  • There’s the January Effect -- that expected time of year when tax conscious investors sell stocks to write off losses against capital gains. The “tax sell-off” would depress stock values lower until buyers came back in early January.
  • There’s the “Sell in May and go away” idea that hasn’t worked so well.

And while some are ridiculous and unworthy of attention, we have two favorites, including what we like to call the “New Years Resolution” and “the Holiday Rally.”

New Years Resolution

This is the time of year when we buy one beaten down diet stock and watch it jump around the time of year when Americans (about 90% of them, according to Johns Hopkins Medicine) make their New Year's resolution to lose weight, diet, and exercise more, which usually ends in passing on the resolution until next year.

We all have weight to lose.  We get motivated and say next year will be different.  We join the gym.  We join a weight loss clinic.  We’re really going to do it this year. I for one would love to get down to my lowest weight ever – 8lbs. 3oz.

In many years, shares of Medifast (MED) have moved higher late in the year.  Even Weight Watchers (WTW) had a history of running a big higher in the latter part of the year. 

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The Holiday Rally

We can even watch for potential rallies higher in retailers and shipping stocks between Black Friday and Christmas.  For example, Black Friday 2017 was very good to related stocks.

More than 174 million Americans went shopping between Black Friday and Cyber Monday 2017, according to the National Retail Federation (NRF), as compared to expectations for 164 million.  In fact, U.S. retailers racked up $2.87 billion on Thanksgiving, and another $5.03 billion on Black Friday, according to Adobe Analytics.  Cyber Monday sales hit $6.59 billion – the largest online total for a shopping day in the U.S. 

It’s part of the reason that shares of Amazon.com (AMZN) soared from $980 in October 2017 to more than $1,200 in November 2017. 

Even brick and mortar retailers that boosted their online efforts have done well, even as store foot traffic fell 2% year over year as Americans ordered online.

  • Macy’s (M) ran from $17.50 to $22
  • Gap (GPS) ran from $25.50 to $31
  • Kohl’s (KSS) ran from $41 to $46
  • J.C. Penney (JCP) ran from $2.50 to $3.50
  • Wal-Mart (WMT) ran from $90 to $97

Even the shipping stocks picked up good momentum.  UPS for example ran from $113 to $121.  FedEx (FDX) ran from $217.50 to $230.  We can even watch for post-holiday season pullbacks. For example, after exploding higher in 2016, UPS fell from $117.50 to $100.  In 2015, the stock fell from $97.50 to $80.

While we wouldn’t waste too much time on the January Effect or even the Sell in May and go away ideas, many seasonal investing trends should be followed, including these two.

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