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If you know anything about me, then you know that I have come to be quite the follower of seasonal trends in the financial markets over the years. It wasn't like I planned it this way. Honest, as a kid I never once said "Gosh, when I grow up I want to spend countless hours analyzing and researching seemingly arcane seasonal patterns in the stock and commodities market." And even if I had, rest assured that my parents would have smacked me upside the head and told me to "get back outside," thus ending that silly notion anyway. Funny how things work out"

In January, Wiley published my latest book, Seasonal Stock Market Trends. But as it turns out, the stock market is not the only financial market to exhibit strong seasonal trends. So let's take a look at a couple of other noteworthy "things."

T-BONDS

In my new book and in a lot of research on the topic it has been pretty well documented that the stock market has exhibited a tendency to rally at the end of the month (and at the start of the new month). As it turns out, the stock market is not alone. Over the past 25 years the bond market has also showed a strong tendency to advance during the last week of the month. Chart 1 displays the growth of equity one might have achieved by buying and holding a t-bond futures contract during trading days 17 through 22 of each month between the end of 1983 and the end of 2008.

Chart 1 - Growth of equity trading T-Bonds at month-end (1983-2008)
click here for larger view

Clearly the growth of equity is no "straight line" advance. Along the way there have been three drawdowns in excess of $9,000, including one that started in September of 2008. Some will look at this most recent decline in equity as a sign that this particular seasonal trend is no longer "working." And in hindsight they may ultimately prove to be correct. But the value of any seasonal trend must be considered over the longer term. As such, another trader may consider now to be the optimum time to start paying attention to and utilizing this particular trend in t-bond price behavior.

Investors who do not wish to trade futures contracts can consider trading the ETF ticker symbol TLT, which emulates the long bond.

CRUDE OIL

Crude Oil is probably the most important commodity in the world. Like many other markets, it too has shown a marked tendency to advance or decline during particular times of the year. While there are a number of short-term trends associated with crude oil, one of the most reliable "macro seasonal trends" occurs during the late winter and early spring.

To wit, Part 1 of this trend involves buying crude oil on trading day 7 during the month of February and selling on the 15th trading day of April. Part 2 involves selling short on trading day 11 of October and covering the short position on the 8th trading day of December. Sounds a little nutty I'll grant you. Also, please note that I am not necessarily advocating that everyone rush out and start trading crude oil futures - especially without using any stops. Still, the point here is not so much to formulate a specific trading strategy but rather to highlight a seasonal trend that investors may be able to use to their advantage.

Chart 2 displays the growth of equity achieved by following the aforementioned strategy using crude oil futures since their inception in 1983. For this example, no stops are used.

Chart 2 - Growth of equity trading crude oil using seasonal strategy 1983-2009

Individuals without the financial or emotional wherewithal to trade crude oil futures can consider the exchange-traded fund US Oil Fund (ticker USO) which tracks the price of crude oil.

UTILITY STOCKS

Ever consider investing in stodgy old utility stocks? Many investors buy utility stocks in order to generate dividend income. But like any sector, utilities have their ups and downs. Most active traders typically eschew utility stocks altogether simply because they have a reputation of being, well, stodgy. Still, what if all you did was hold a utility stock fund during March, April, May and December as well as the first trading day and the last five trading days of all other months? What would that look like?

Consider Chart 3. The chart displays the growth of $1,000 invested only during these times versus a buy and hold approach (using Fidelity Select Utilities, ticker FSUTX as a proxy for utility stocks) since 1988.

Chart 3 - Growth of $1,000 using Utility Seasonal trends (blue line) versus buy and hold (since 1988)

Notice two things. First, while utility stocks are often touted as a "defensive" sector, the red line in Chart 3 illustrates in no uncertain terms that there is a time to own utility stocks and a time not to. Second, note the relatively smooth advance of equity displayed by the blue line (which represents the growth achieved investing only during the time periods listed earlier). Making money is the name of the game, but, ironically, it is "not losing money" that keeps investors and traders in the game long enough to actually achieve their long-term objectives.

Note: Fidelity has some strict restrictions on active trading. As a trading alternative, Profunds offers a leveraged utility fund, ticker symbol UTPIX.

SUMMARY

So are these the only seasonal trends of note, or even the "best"? In the immortal words of Jimmy Durante, "I got a million of 'em." In future weeks I will highlight a few other significant trends. For now, simply note that there are more than two ways - technical and fundamental analysis - to "skin a cat."

To search for previous articles written by Jay Kaeppel, please click here.

Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site

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