Sometimes its not “what” you invest in but “when” you invest in it. Seasonal trends can be very useful, particularly to those who are,a) willing to trade short-term, and b) have the discipline to follow a strategy consistently over time.
To wit, the three day period comprised of the last two trading days of the month and the first trading day of the next month has showed a long-term tendency to be bullish for gold stocks. In Figure 1 you see the growth of $1,000 invested in Fidelity Select Sector Gold (ticker FSAGX) during this three day period every month since October 1988.
Figure 1 – Growth of $1,000 invested in ticker FSAGX last two days and first day of every month since 1988
The good news is that hypothetically $1,000 initial investment would now be worth $8,098. The bad news is that due to Fidelity’s fairly strict switching restrictions you can’t actually make this trade every month using FSAGX without racking up some significant fees (and ultimately having your switching privileges suspended.)
Fortunately there are alternatives. One of the best is ticker ProFunds Gold mutual fund Growth of $1,000 (ticker PMPIX) which tracks the Dow Jones U.S. Precious Metals index times 1.5. While leveraged fund returns can get a little dicey over longer periods of time, they can be ideal for short-term trades such as this. Figure 2 displays the growth of $1,000 invested in PMPIX only during this 3-day bullish month end period every month since its inception of trading in June 2002.
Figure 2 – Growth of $1,000 invested in ticker PMPIX last two days and first day of every month since 2002
Other alternatives include ETF ticker GDX and GDXJ – unleveraged funds that track well established gold mining companies (GDX) and “junior” gold mining companies (GDXJ), respectively.
One last alternative – for the daredevils out there – is Direxion Daily Gold Miners Bull 3X (ticker NUGT). As explained in its prospectus, ticker NUGT “seeks daily investment results, before fees and expenses, of 300% of the price performance of the NYSE Arca Gold Miners Index.” In other words, if that index rises 3% today, ticker NUGT should rise roughly 9%.
Triple leveraged ETFs are very tempting to many individuals thanks to their potential for outsized returns. But no one should hold a triple leveraged fund without being fully aware of the dangers involved. The only real appropriate way to use a 3x fund is in the very short-term if you fell you have an edge. Now for something of a “magic trick”, take a look at Figure 3.
The blue line depicts the growth of $1,000 invested in NUGT only during the 3-day seasonal bullish period each month since NUGT started trading on 12/8/10. As you can see, $1,000 tripled in under 3 years times, before suffering a sharp -15% loss in just three trading days during the “bullish seasonal period” in July-August 2013. All told, a gain of +153% since December 2010, still clearly not for the faint of heart, nor for a significant portion of anyone’s portfolio.
Figure 3 – Growth of $1,000 invested in ticker NUGT during bullish seasonal period (blue line) versus $1,000 invested in ticker NUGT during all other trading days (red line) since December 2010
Still this performance is fairly impressive considering the performance of the red line in Figure 3. What is this you might ask? The red line depicts the performance of $1,000 invested in ticker NUGT during all other trading days (i.e., NOT the last two trading days or the first trading day of each month) since inception in December 2010. So how much of the original $1,000 is left? Not much. $19.21 to be exact.
This represents a loss of -98.1% (which is what we “quantitative types” refer to as “statistically significant”). This clearly illustrates the potential dangers of buying and holding 3x funds for long periods of time. It also illustrates the potential benefits of paying attention to seasonal trends. A gain of +153% versus a loss of -98%. You decide.
The next “bullish seasonal period” for gold stocks starts at the close of trading on Wednesday, August 28th and extends through the close of trading on Tuesday, September 3rd. Are gold stocks “guaranteed” to rise in price during this time. Not at all. Gold stocks should always be viewed as a risky investment. But for the person who is willing to speculate, this simple seasonal trend offers the potential for capital appreciation over the longer term.
But you better fasten your safety belt just in case.