A lot of people – myself included – spend a lot of time analyzing various stock market sectors looking for the next “big mover.” A great deal of research seems to back up the theory that if you “get the sector right” you can do very well in the stock market. This is because fundamental changes in a given industry tend to take a long time to play out. For example, if the Fed cuts interest rates it is not like bank stocks triple overnight. It takes awhile for the “cause” to “effect” changes in the fundamentals for individual companies. So if you can spot a trend in an industry group or sector you can often ride it for awhile. Still, it appears that some of this effort may not be necessary. More on that thought in a moment.
One key sector that gets a lot of attention is the “financial” sector. Most of us well remember 2008 when the financial sector almost ceased to be the financial sector anymore. Analysts spend a lot of time analyzing the factors that affect these important companies and the likely impact for their stocks. Here’s a tip guys – I think you might be over thinking it a bit. And I have a good objective perspective on this because Lord knows I’ve ever been accused of over thinking anything.
Financials by the Day of Month
OK, here I go again with the “seasonal stuff.” Hey, it’s what I do OK. For our “proxy” we will use Fidelity Select Financials sector fund (ticker FIDSX). Let’s assume that we hold this fund only six trading days per month:
-The last four days of each month
-The first two days of the next month
So we are talking about buying and holding during a contiguous six day period starting at the close on the fifth to last trading day of each month and lasting through the close of the second trading day of the second month and then switching to cash until the next six day period comes around.
Heretofore we will refer to the favorable six days of the month period as “The System” (catchy, huh?) and the rest of the time as “Non System Days.”
So is this a viable strategy? As a writer I would just as soon describe it all in 1,000 eloquent words. However, in order to adhere to the norms of decent society I will simply use a picture instead. Figure 1 displays the growth of $1,000 invested in FIDSX both during the 6 day period each month and excluding the six day period each month, since September 30, 1988. The results are “interesting.”
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Figure 1 – Growth of $1,000 invested in FIDSX using The System (blue line) versus growth of $1,000 invested in FIDSX during all Non System Days (red line); 9/30/88-Present
For the record, since 9/30/1988:
-$1,000 invested in FIDSX only during the six-day seasonally favorable period each month grew to $24,088, or +2,309%.
-$1,000 invested in FIDSX only during all other trading days shrank to $374, or -63%.
Anyone notice a difference?
Looking at Rolling 5-Year Periods
Now let’s compare the five year rolling rate of return for The System versus Non System Days. Figure 2 displays the following calculation:
-Each day the five year return for The System is subtracted from the five year return for Non System Days.
A positive number means the System outperformed over the previous five years and a negative number means The System underperformed over the previous five years.
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Figure 2 – 5-Year % return for The System minus 5-Year % return for Non System Days (1993-Present)
As you can see in Figure 2, except for a period of time during the 1990’s and the Great Bull Market of those years, The System has routinely outperformed non System Days. In fact, The System outperformed Non System Days 85% of the time on a rolling five year basis.
2007 to Present
The growth of equity for Non System Days peaked in May of 2007. Since that time the difference in the performance of System versus Non System days has only grown wider. The growth of $1,000 invested in FIDSX using The System versus Non System Days since May 2007 appears in Figure 3.
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Figure 3 – Growth of $1,000 invested in FIDSX using The System (blue line) versus growth of $1,000 invested in FIDSX during all non System Days (5/22/2007-Present)
For the record, since 5/22/2007:
-$1,000 invested in FIDSX only during the six-day seasonally favorable period each month gained +83%.
-$1,000 invested in FIDSX only during all other trading days lost -73%.
Actually Using this Knowledge
Ironically the one thing you cannot do is use FIDSX to emulate this strategy. This is because Fidelity imposes some fairly strict switching restrictions. However, in its place investors can either use the ETF ticker XLF or Profunds ticker FNPIX or Rydex ticker RYFIX.
So are financial stocks destined to rise every month during our “mystical” seasonally favorable period? If only. Will The System continue to outperform Non System Days ad infinitum into the future? It beats me. Nevertheless, are the differences in performance fairly compelling?
I’ll let you draw your own conclusions.
Jay Kaeppel – Optionetics