Some things you just can’t explain. Like why would anyone in their right mind be a Cubs fan (“Hi, my name is Jay”)? And what is it about chocolate that causes such overpowering cravings? Come to think of it, please excuse me for a moment…....OK, I’m back. And there is other more “trivial” stuff – like can someone please explain to me again how and why we got $16 trillion into debt, and how this will ultimately have a happy ending (never mind, for now I’ll just go along with the crowd and avert my eyes).
And then of course, let’s not forget the seasonal action in Treasury Notes. Huh? Yes, that’s what I said. The seasonal action in Treasury Notes. Because for whatever reason, t-notes have exhibited some pretty meaningful seasonal trends since they started trading in the futures market way back in 1982 (the scary thing to me is that although I have no idea where I put my car keys 30 minutes ago, I do remember t-note futures being launched for trading in 1982. Just one more thing that I can’t explain I guess).
Seasonal Trends – Definition and Caveats
As always, when talking about seasonal trends in the financial markets it is usually a good idea to:
a) Define what we mean when we say the phrase “seasonal trend”, and
b) Mention a few inherent limitations and caveats.
So for the record when I use the phrase “seasonal trend” I am referring to the tendency for a given tradable “thing” (a highly technical term I use to denote a stock, a market, a commodity, a currency, etc.) to move in a particular direction during a particular time frame on a repetitive and recurring basis (I would point out that “repetitive” and “recurring” are “redundant” but I don’t wish to repeat myself). Now that that’s cleared up let’s note a few “limitations and caveats”.
The most important (and most depressing) thing to know about any seasonal trend is that there is never any guarantee that it will work the next time around (which – let’s face it – is kind of a bummer). Even the most reliable trends don’t work every once in awhile. So to best illustrate the significance of this caveat, simply note that if you always “bet the ranch” on a given seasonal trend, somewhere along the way you will “get whacked” (that’s highly technical jargon for “lose a whole lot of money” – which is best avoided).
The Best Way to Use Seasonal Trends
The best way to use seasonal trends is (in my opinion) with the following three step process:
1) Look to a reliable seasonal trend to tell you what a given market “should” be doing during a given time period.
2) Within that time period look to see if that market is actually doing what is supposed to be doing - i.e., rising if the seasonal trend is bullish, or falling if the seasonal trend is bearish - or as an alternative - if it is very far extended in the other direction – i.e., oversold during a bullish period or overbought during a bearish period.
3) Once the pieces are in place, find a trade that maximizes upside potential without taking on more risk than you can handle.
T-Note Seasonality
For our purposes we will use 10-Yr. T-Notes as our trading vehicle. T-note futures trade under the symbol TY, however, there is also an exchange-traded fund ticker IEF that tracks the 10-yr. t-note for those who don’t trade futures. We are going to make about as broad of a generalization as possible and break the calendar year into two parts – one “bullish, one “bearish.”
Bearish Period – From the close of the first trading day of January through the close of the 19th trading day of April (this year that is April 27th).
Bullish Period – From the close of trading on the 19th trading day of April through the first trading day of January the following year.
Doesn’t get much simpler than that. Is this broad generalization really of any value? Decide for yourself. Figure 1 displays the growth of equity achieved as follows:
Red line – the growth of equity achieved by holding a long position of one t-note futures contract during each “bullish period” since 1982.
Blue line – the growth of equity achieved by holding a long position of one t-note futures contract during each “bearish period” since 1982.
Figure 1 – Bullish seasonal periods for T-Notes (red line) versus bearish seasonal periods (blue line) since 1982
Do t-notes always “decline” during bearish periods and “advance” during bullish periods? If that’s what you’re thinking please re-read the earlier caveats. Nevertheless, for the record:
Excluding slippage and commissions:
-A long position during all “bullish periods” registered a gain of $91,619 since 1982.
-A long position during all “bearish periods” registered a loss of $38,297 since 1982.
To go one more step, consider if a trader held a long position from April Trading Day 19 through January Trading Day 1 and a short position from January Trading Day 1 through April Trading Day 19. This strategy would have resulted in a gain of $129,916 (again exclusive of slippage and commissions, but remember that we are only talking about two trades a year). These results are displayed in Figure 2.
Figure 2 – Long t-note futures during “bullish” seasonal period and short t-note futures during “bearish” seasonal period (1982-present)
Also note that if we look at trailing two year returns, these have been positive 90% of the time.
Summary
So are 10-year t-notes guaranteed to rise from the close on 4/27 through the first trading day of 2013? Obviously not. But as the end of April approaches it might make sense to keep a close eye on the trend of t-notes and to consider ways to exploit any up moves by playing the long side of the market.
Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”
Optionetics.com ~ Your Options Education Site
NOTES:
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