Before I go any further, I first need to revisit last week’s article titled, “There’s Always a Bull Market Somewhere (Revisited)”.  At the time I hit “Update” to post the article I thought that I had done a pretty good job of describing the theory and rules and results.  As it turns out several alert readers apparently remember what I have written in the past better than I do (which I find disconcerting but which also – sadly - does not surprise me in the least).  Because as it turns out, I left out a couple of important details.  To wit:

-For the purpose of the Pure Momentum system I detailed last week, I include Fidelity Select Gold (ticker FSAGX) in my list however, if it happens to show up in the Top 5 at the end of the month I ignore it as include #6 instead.  To put it more succinctly, I do not use ticker FSAGX with the Pure Momentum system.  The bottom line is that for whatever reason, gold stocks have a much greater tendency to “spike” and “implode” than they do to trend, thus they are a poor choice for inclusion in a method that attempts to “ride the winners” for an extended period of time (if possible). 

-One other thing that I sort of implied but did not quite spell out as clearly as I should have is this: I look for the 5 funds that were UP the most over the look back period (240 trading days).  If less than five funds happened to show an actual gain during the look back period, I would hold only those and put the rest in cash.  In other words, I want the funds that have gone up the most, not the ones that have gone down the least.

OK, I think that just about covers the screw ups from last week, let’s see what can go wrong this week with……

iShares Brazil

If you are unaware of the fact that I utilize seasonal trends in looking for trading ideas then clearly you have never read anything that I have written before.  In which case, “Hi, my name is Jay, I am a seasonalaholic.”  This week we will go off the beaten path in a southerly direction and look at a simple seasonal trend in the Brazilian stock market.  To reiterate something I said last week, when it comes to investing, very often “simple” can be “better.”  For our purposes we will use iShares Brazil ETF (ticker EWZ) as a proxy for “the Brazilian stock market.” 

As you can see in Figure 1, like most stock indexes, ticker EWZ spends a certain amount of time rising, a certain amount of time falling, and a certain amount of time going, well, nowhere. 

Figure 1 – iShares Brazil (ticker EWZ)

Looking at the chart in Figure 1, a person might reasonably make the argument that EWZ price movement is fairly random.  But from what I can tell I think they would be wrong.  For there seems to be something going on “under the surface” with ticker EWZ.  OK, now I know what you’re thinking - “uh oh, here he goes again” – and I hate like heck to risk sounding like one of those guys who mysteriously and mystically prattle on about “the secret hidden order in markets”, but, well, how about I just show you the details and you can decide for yourself. 

We will break all trading days for EWZ into two categories.  We will refer to these two categories as “Good Days” and “Bad Days” (Note to myself: work on developing some creative skills).  The theory is that EWZ performs better on “Good Days” than on “Bad Days”. 

Now I hate to give away a perfectly good surprise ending but I feel it might be necessary in this case, because I fear that some readers may be nearing their “Wow, this sounds like kind of a stupid investment idea” threshold.

So just for the record, over almost a 13 year period the Good Days have gained +7,952% compounded, while the Bad Days have lost a little over -96%. 

Shall I continue? Great.

“Good Days” (i.e., Seasonal Favorable Days of Month) for EWZ

The following trading days of the month are considered to be “Good Days” for ticker EWZ

-The first 2 trading days of the month

-Trading Day number 9

-Trading Day number 12

-The last 4 trading days of the month

“Bad Days” (Non Seasonally Favorable Days of the Month) for EWZ

-All other trading days of the month

 That’s all there is to it.  Now let’s look at the results. 

Ticker EWZ began trading on July 14, 2000.  Since that time, the net result has been a gain of just under +200%.  That’s pretty darn good considering the S&P 500 has gained all of about +3% during the same time period.  Of course, a look at Figure 1 reveals a whole of “swooping” and “soaring” along the way for the EWZ buy and hold investor.  Definitely not for the faint of heart. 

But there is an “interesting” dichotomy in performance between the “Good Days” and the “Bad Days” (would I write an article about it if there wasn’t?).  Figure 2 displays the growth of $1,000 invested in EWZ only on all “Good Days” since July 2000.  The original $1,000 grows to over $80,522.

Figure 2 – Growth of $1,000 invested in Ticker EWZ only during “Good Days” (2000-present)

Now that’s not too bad you might think, but you might also wonder “what do I miss by being out of EWZ during all other trading days?”  As far as I can tell, the answer to that question is “pain and suffering,” for as you can see in Figure 3, $1,000 invested in EWZ during all “Bad Days” declined to a little more than $36, representing a “fairly significant” decline of -96.4%. 

Figure 3 – Growth of $1,000 invested in Ticker EWZ only during “Bad Days” (2000-present)

Summary

As a proud graduate of “The School of Whatever Works” I personally am open to “alternate” trading ideas.  But let’s be brutally candid here – the vast majority of investors will have a really hard time investing in EWZ (or anything else for that matter) solely because it just so happens to be a particular day of the month.  Which I understand perfectly.  The underlying fear is obvious – “what if it stops working as soon as I start trading it?”  This is a legitimate fear (Of course, couldn’t this question be asked of any trading method?).  In all candor, is this type of performance likely to continue to be as dramatic over the next 13 year as it has been over the past 13 years?  My guess is “probably not.” 

Still, if you had to choose, would you choose to invest on those days that generated a gain of almost 8,000%?  Or those days that generated a loss of -96%?

And no, that is not a trick question….

Jay Kaeppel

Staff Writer and Trading Strategist

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