In the movie Margin Call, the character played by Jeremy Irons says: “there are 3 ways to make money in this business: (1) be first, (2) be smarter, or (3) cheat.” This blog offers you option #2. Think of the new seasonality tool as a holiday investing treat that you can keep enjoying all year round.
For those of you who’ve taken my Tensile Trading class, you’ll know that the core of my methodology is showing investors how to take advantage of a number of tools, routines and approaches that each contribute to shifting the probabilities of making a successful trade to your benefit. I’ve been using seasonality myself for years, as have most institutional investors, but due to its limited availability for individual investors until now, I haven’t discussed it in detail.
Well, add another arrow to the quiver of your investing probability bow! Don’t be an amateur. Here’s a statistically significant weapon that you should embrace like a pro. The good news is that this seasonality tool is packaged in a familiar charting format that most of you already use. I won’t repeat what Chip already wrote in the November 23, 2013 ChartWatchers newsletter (http://blogs.stockcharts.com/chartwatchers/2013/11/tis-the-season-for-seasonality-charts.html) about the mechanics of using the seasonality tool, but instead I’ll explain how I use it.
- The seasonality tool I’ve been using through my brokerage house is a static model. I use the word “static” because the sampled number of years is fixed. Also, static in the sense that the basket of equities for which seasonality is calculated is very limited.
- Seasonality is a powerful AC/DC type of tool. It’s useful if you are accumulating a position over a number of months, as it gives you the insight and opportunity to buy your equity during historic periods of weakness and therefore at a discounted price. On the flip side, if you are exiting out of a position, you can review the historical monthly trends over the past 5, 10, or 15 years (your choice) and learn perhaps that your equity has moved up in 14 of the last 15 years in the month of November. The seasonality histogram will show a 93% probability and an average historical gain of perhaps 5.2% for that month. You thus become an informed investor selling into strength and buying on pullbacks.
- A big shout-out to the developers at StockCharts.com. Now individual investors can apply seasonality to all stocks – not just the limited basket offered by one’s broker. But here’s the very big deal: in addition, we individual investors can now apply seasonality to all ETFs, mutual funds and any tradable symbol for which data is available. The institutions hated it when we investors were able to access minute-to-minute money flow data and monitor their every move. Now we have seasonality and they hate it even more. The walls continue to crumble surrounding the big institutional fortress, and the multitudes are cheering!
- Once again, those investors who’ve taken my class or downloaded the Tensile Trading ChartPack know that I’m a big proponent of aligning the market, sector, industry and equity trends. The ChartPack is designed to facilitate this methodology where you look for the strongest sector, then the strongest industry within that sector and finally the best-of-breed equity in this strong industry. This relative performance comparison significantly stacks the probabilities in your favor. Now the seasonality tool employs the same “outperformance” approach when you use the “compare” box.
Here’s another quick example. I know many StockCharts.com users follow Apple (AAPL). The seasonality tool will show you that AAPL has outperformed the market 100% of the time in May over the past 7 years by an average of 5.7%. Cool to know, especially if you like to orchestrate probabilities to work for you.
- I could go on and on, but let me just close saying that I have investor friends who are long-time commodity traders. They would consider it financial hari-kari to trade without their seasonality tools.
In summary, I encourage you to experiment with this powerful tool and include it in your arsenal. With the addition of this seasonality arrow in your quiver, you will further transform your investing bow into a mighty probability enhancer.
Trade well; trade with discipline!
-- Gatis Roze
For a more informed understanding of the Tensile Trading Methodology & it's partnering ChartPack please refer to these articles.