Having Every Tool In Your Toolkit

Jon Haghayeghi | Twitter@LoneStarQuant

Market timing is a challenging proposition, which is why it is important to consider all available information when making an investment decision. Whether a technical trader or a fundamental trader, being aware of news events, earnings reports, fundamental value, macro trends, and historical trends are all important. For the fundamental investor looking to enter a long term position or a technical trader looking for a short term move, historical trends can provide valuable insights that have the potential to increase returns (or reduce losses) on a trade.

Often when searching through the Seasonalysis database, I like to create my own universe of stocks that have strong fundamentals before doing any search. The motivation is that in the event that history does not repeat itself, I like to ensure that the position I hold has fundamental strength so I can wait for the market to reflect a fair valuation of the companies equity. Some of my best trades in recent history have been the result of the combination of great fundamentals, great timing based on historical patterns, as well as near term technical strength.

I am interested in the following large-cap that trades in line with industry, has technical support, that I don't mind holding while it pays a 2.25% dividend.

Here is an example of a trade that I might reject because the stock trades at a 50% premium to industry in terms of its earnings multiple. Additionally, the stock has and mixed technical strength.

Moving with the trend

Jon Haghayeghi | Twitter@LoneStarQuant

It has been a busy month - Greece struck a deal, U.S. companies have reported earnings, and China has banned short-selling to curb the recent 30% drop in equity prices. Many american investors are buying dips, recognizing that there has not been a 10% drawdown in the U.S. markets in the past four years and the trend can continue as rates remain low as the Fed holds 4.5 trillion in securities. With that in mind, let's take a look at a couple potential long trades.

Ace Limited has rallied ten years in a row during the three months following August. Although the stock has a beta of 1.01 (nearly perfectly correlated to the broad market), has rallied the past several weeks despite softness in the equity markets. Based on historical data, we expect the stock to rally about 8.5% over the next three months.

Nike (NKE) is a large-cap that has historically traded well in August and September.  The historical average gain is 8.5% for the 56 days starting August 5th. 

Both of the patterns listed above are great candidates for premium selling and have liquid option chains. I encourage you to get creative - there are ways to limit your downside risk without setting stop-losses. Stay smart and trade safe!

Large cap entries for February

Jon Haghayeghi | Twitter@LoneStarQuant

Everyone needs extra money for Valentines Day, which is why we are here to show you trade setups for companies in the S&P500 that open in February. These stocks are highly liquid and optionable, making them great candidates for a swing position.

YUM

YUM! rallies year-after-year during the Spring. In fact, for the past 17 consecutive years YUM has rallied an average of 13% between February and May. The entry date for this trade is February 10th and exit date is May 11th.

VFC

Seasonalysis members have traded VFC several years in a row. This company has particularly strong performance through the months of February and March. On average, the 63-day rally between February 7th and April 10th yields an attractive 10.3%.

PCLN

Have a shorter trade-horizon? Priceline has a great setup through the month of February until the 10th of March.

Trade Setups for January

By Jon Haghayeghi | Twitter@LoneStarQuant

Time to kick off 2015 on a strong note. Let's take a look at some of the best trade setups for the month of January!

Hungry for a good trade? Jack In The Box has rallied over eighteen of the past nineteen years starting in mid-January. Looking specifically at the past 14 years, JACK rallied an average of 13% over the 77 days following the 14th.

We looked at YUM last year before rallying 16% over the 91 days following the 1/31. This has occurred 15 years in a row, moving an average of 13.3%.

Long time seasonal traders have been watching VFC rally at the end of January for nearly 30 years! Have your eyes peeled for a bullish setup Feb-March.

Long/Short Setup on Optionable Stocks

By Jon Haghayeghi | Twitter@LoneStarQuant

We are running a scan of optionable securities with market capitalizations larger than 10 billion dollars. Two trades stand out - AMGN long and GLW short.

Amgen is currently priced at $118, with a high of $129. The stock has a strong upward trend, having more than doubled in price since 2012. This is also a low beta stock, so its performance is not closely tied to that of the broad market. 

For this trade you can sell a vertical put spread expiring in October, purchasing the 115 strike and selling the 120 strike options. A single contract with generate premium of about $250 risking $250.

GLW is a short candidate with a 42 day duration.  You can use weekly options and sell the August 29th vertical call spread. With the spot price at $21.84, you can sell the 21.50 strike and purchase the 22.50 strike call option collecting $50 and risking $50. 

My portfolio is still skewed long because of FED policy, that said, geopolitical/credit risk is increasingly concerning. Stay smart and trade safe.

Useful Questions About The Indicator

Twitter@LoneStarQuant

Today we are going to answer some great questions from Mike.

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Hi Jon,

I captured this screenshot from INTC and highlighted two questions:

In the upper panel would it be correct that the highlighted area is a mix of bull and bear periods but the time beyond is predominantly bullish?

You are 100% correct. The 'Historical Seasonality' indicator is telling you, based on historical data, how many patterns are currently long and how many are short. 'Sell in May' is clearly reflected in the indicator, primarily for 7-30 day patterns. That said, there are still patterns of longer duration that are bullish for 30-90 days, which explains why periods beyond May/June are predominately bullish. 

In the second panel (which appears to show the "reliability of patterns) I have two questions:  1.  would we consider the mid-March to Mid April period to be less reliable than the more green areas such as mid Feb to mid-Mar?  2.  why is there no region shown from now to next few months )highlighted blank area) as this would seem to be the most important period?

Great question. So the top indicator is historical seasonality, but the bottom indicator answers 'how seasonally is the stock behaving this year?' As you see, 'Successful Patterns' are 80% red, which is because 80% of active patterns for INTC are moving against their historical averages. The reason why we do not see any data for May/June is because it is because there are no observations yet for 2014. This indicator is useful in determining whether a stock is currently behaving seasonally.

Looking further down the INTC page, on the weekly summary:

Is this the correct understanding of the headers:

Avg Gain would be for an up weeks only? Correct with out looking at losing years.

Avg Loss would be for a down weeks only? Correct without looking at bullish years.

I am a bit confused on avg G/L compared to the Avg gain and Avg Loss. The average G/L is takes the average of all the data; this is the most useful figure. In the above example it is telling you that during the week of July 01- July 06, the average move is negative 1.5%.

As far as application is concerned, one approach I would like to consider is buying a longer term ITM option - say using your 63 or 91day period and then selling the OTM weeklies against it for weekly premium income (I think most would call this a diagonal spread).  Do you have experience with this approach?

Yes, that is a great approach to trading. I encourage traders to use vertical spreads and/or calendar spreads, but the diagonal captures the best of both worlds by using different strikes (like a vertical) and different months (like the calendar). You have a bit larger margin since the strikes are apart, but you are going to quickly benefit from time decay. Tomorrow we will model a diagonal (or double diagonal) based on an upcoming seasonal pattern.

Thanks Jon,

Mike

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If you ever have any questions about Seasonalysis, feel free to send me an email at jon@seasonalysis.com. As always, stay smart and trade safe!

Costless Ratio Spread on Questar

Twitter@LoneStarQuant

As you would expect, natural gas consumption is highly seasonal. Questar is a natural gas holdings company headquartered in Utah. Every year for the past 15 years, STR has rallied for the 70 days starting 3/25. The average move over the 70 days is 10.1%.

Taking a look at the option chain you can see contracts expiring in 24, 52, 115, or 206 days. I have modeled a costless ratio spread that can give you leveraged exposure.  If the trade moves against you, then you only pay commission. This trade uses July call options at the 23 and 24 strike. Take a look:

By selling 10 contracts that are twice the price of the 20 contracts you purchase, some of the time-decay associated with being long a call option can be absorbed, while still enjoying an exponential payoff and capping the max loss. The main 'caution area' is when STR is $23-$25, where you want to ensure time premium does not erode the position. Stay smart and trade safe!