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KAEPPEL’S CORNER: Sector Seasonality (or, “If It’s November, I Must Like Technology”)

By Jay Kaeppel, Optionetics.com | Wed November 9, 2005 9:00AM PT


Sometimes when I stop and think about all the time I’ve spent and currently spend looking at the financial markets, I can’t help but wonder if I might have made something of myself if I had done something else.  I mean, wouldn’t it be nice if we could simply invest in the stock market without thinking, have all that extra free time, and still make a lot of money anyway (come to think of it, it did work for more than a few people during the Internet Bubble).  Wouldn’t it be great if we just knew where to put our money at any given point in time and could then just sit back and let the market do the rest?  Well, snap out of it, because it simply doesn’t work that way... Or does it?  

If you’ve read my stuff in the past you know that I’ve done a lot of analysis of seasonal trends in the stock market.  I have also done a lot of work with sector funds.  So, of course, it was only a matter of time before a few neurons and synapses collided and those two ideas were melded into one.  Here’s the question: is it possible to make three trades a year among market sectors and not only make money but also handily beat the market?  Not to give things away, but the eventual answer is “Yes, at least up until now.”  There are three pieces to the puzzle and they are technology, energy and gold.  Three very diverse sectors and, as you will see, three distinct timeframes.

PHASE 1: TECHNOLOGY 

Historically, the stock market performs best during the November/December/January time frame.  In recent decades, the pace of advances in technology has greatly accelerated and exerted an amazing influence on our lives.  Thus it should be no surprise that technology stocks generally perform well when the overall market performs well – or is it that the overall market performs well when technology is leading the way?  No matter.  The first leg of our seasonal sector strategy is to buy and hold technology stocks from the end of October through the end of January.  The easiest way to accomplish this is via sector funds:

  • Fidelity Select Technology (FSPTX)
  • Rydex Technology (RYTIX)
  • Profunds (TEPIX)
  • Spyders Technology (XLK)


Chart 1 – Fidelity Select Technology (FSPTX)

PHASE 2: ENERGY

Energy stocks tend to perform best during the months when the profitable effects of people trying to keep from freezing to death have their greatest impact.  Now most people immediately think of the winter months, say November through February or March.  And in fact those are of course the coldest months (if you live someplace warm, trust me on this one).  However, it is not until late in or after that time that people really begin to assess the effects of the winter cold on energy companies and are able to get a handle on the actual profitability that occurs as a result.  Thus, the second leg of our seasonal sector strategy is to buy and hold energy stocks from the end of January through the end of May.  The easiest way to accomplish this is via the following sector funds:

  • Fidelity Select Energy (FSENX)
  • Rydex Energy (RYEIX
  • Profunds Energy (ENPIX)
  • Spyders Energy (XLE)


Chart 2 – Fidelity Select Energy (FSENX)

PHASE 3: GOLD STOCKS      

Gold stocks have had a historical tendency to perform well during the month of September.  Now I’m sure I could concoct some eloquent explanation as to why this has been the case, but the fact is it would be nothing but a lot of BS.  So, we’ll just have to go with the “I have no idea why this is the case” explanation.  Nevertheless, the Barron’s Gold Mining Index has shown a gain for gold stocks during the month of September 22 times over the past 31 years, sporting an average gain of +5.7%.  So the third leg of our seasonal sector strategy is to buy and hold gold stocks during the month of September.  The easiest way to do this is to buy the following sector funds:

  • Fidelity Select Gold (FSAGX)
  • Rydex Precious Metals (RYPMX)
  • Profunds Metals (PMPIX
  • StreetTracks Gold Trust (GLD*)

*GLD actually tracks the price of gold and not gold stocks, so it is not the ideal choice among those listed here. 

 
Chart 3 – Fidelity Select Gold (FSAGX)

THE STRATEGY

The strategy that I have followed and will present here works like this:

  1. Buy Fidelity Select Technology at the close on the last trading day of October.
  2. Sell Fidelity Select Technology at the close on the last trading day of January and buy Fidelity Select Energy.
  3. Sell Fidelity Select Energy at the close of the last trading day of May and hold cash during June, July and August.
  4. Buy Fidelity Select Gold at the close on the last trading day of August.
  5. Sell Fidelity Select Gold at the close on the last trading day of September and hold cash during October.
  6. Repeat.

That’s all there is to it.  Table 1 displays the sector held for each calendar month.

Month

Sector

January

Technology

February 

Energy

March

Energy

April

Energy

May

Energy

June

Cash

July

Cash

August

Cash

September

Gold

October

Cash

November

Technology

December

Technology

Table 1 – Sectors Month-by-Month

THE RESULTS

Table 2 displays the gain or loss each year for each of the three segments of our seasonal sector strategy.  For Technology, the value displayed is the amount gained or lost by Fidelity Select Technology for January of the year shown in the left hand column, plus November and December of the previous year.  For Energy, the value displayed is the amount gained or lost by Fidelity Select Energy between January 31st and May 31st of each year.  Finally, the value for Gold Stocks is the amount gained or lost by Fidelity Select Gold during the month of September. 

Year

Technology

Energy

Gold Stocks

1990

(-0.8)

5.8

(-4.9)

1991

42.6

9.7

(-0.1)

1992

14.1

8.8

(-0.6)

1993

12.8

10.6

(-10.6)

1994

10.8

0.1

8.7

1995

(-3.9)

16.0

(-0.1)

1996

(-5.6)

12.5

(-1.8)

1997

22.1

(-0.3)

8.5

1998

(-1.4)

10.4

55.0

1999

58.6

36.7

25.8

2000

41.9

28.6

(-5.8)

2001

(-22.9)

4.5

1.7

2002

11.5

7.8

2.3

2003

0.4

13.8

1.3

2004

5.6

5.3

9.1

2005

3.0

11.2

19.3

 

 

 

 

Average

11.8

11.3

6.7

Table 2 – Annual Gains or Losses for Each Sector segment

So what happens when we put this altogether?  Table 3 displays the annual results achieved using the strategy outlined above.  

Year

System
% +(-)

S&P 500
% +(-)

1990

21.7

(-6.6)

1991

40.8

28.3

1992

22.8

4.5

1993

7.4

7.1

1994

14.3

(-1.5)

1995

4.0

34.1

1996

21.8

20.3

1997

13.1

31.0

1998

143.0

26.7

1999

193.7

19.5

2000

(-15.9)

(-10.1)

2001

31.7

(-13.0)

2002

9.1

(-23.4)

2003

15.1

26.4

2004

32.0

9.0

2005

27.7*

0.7*

Average

37.0

10.0

Table 3 – Annual Results of Seasonal Sector Strategy
* - through 11/4/05

Chart 4 displays the growth of $1,000 starting in November of 1989 through the end of 1998.  Note the steady upward slope prior to the sharp spike upward at the end of 1998 when technology shot 34% higher in the final two months of 1998.


Chart 4 – Growth of $1,000 November 1989 through December 1998

Chart 5 displays the full history from November 1989 through November 4th, 2005.


Chart 5 – Growth of $1,000 from November 1989 to November 2005

The results displayed in Chart 5 are fairly compelling.  Still, one must consider the fact that the system suffered a steep 33% decline in equity in just four months at the end of 2000.  It is fair to ask just how many people would keep trading a system after it suffered a 33% loss in just four months time.  And the answer to that question is fairly critical.  Because anybody who had been trading it and who had stopped trading it after taking that big hit would surely be kicking themselves later as the system has subsequently gained about 180% (the S&P 500 is down -7.6% during the same timeframe).

To highlight the consistency of this method, let’s consider rolling 12-month rates of return.  At the end of each month we will look back 12 months and measure the change in equity over that time.  The 12-month change has been positive 91% of the time, with an average gain of 37% (See Chart 6). 


Chart 6 – 12-Month % Rate-of-Change in System Equity

THE FUTURE


The good news is that this simple method has performed far better than anyone might realistically expect it to.  The real question however, is “what happens from here?”  Will the tech stocks keep rallying during the winter months?  Will the energy stocks keep advancing in late winter and into spring?  And what exactly is the deal with gold stocks and the month of September?  Unfortunately, there are is no way to answer these questions in advance.  We’ll just have to wait and see how things work out.  As always, time will tell.  

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
Visit Jay Kaeppel’s Forum

 



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