Alright things are a bit disheartening out there in the stock market at the moment. So let’s take a look ahead to a potential bright spot looming in the not too distant future.
See also JayOnTheMarkets.com: Keep a Close Eye on, Um, the World (?)
Believe it or not I am talking about technology stocks. And why not? I mean who doesn’t like technology (especially when it works!)? Sure the tech sector can be a scary place when the overall market is headed south. Still, as it turns out, there is a time for everything.
Technology Seasonality
So why am I bringing up technology now of all times you may ask? Do I, as a “professional market analyst” foresee “a coming boom” that will propel the majority of tech stocks based on “fundamental improvements” and a “new wave of new age”, well, whatever? Um, not exactly. OK, actually, not at all. For I am a fairly strong adherent of:
Jay’s Trading Maxim #201: It is OK to make all the predictions you’d like regarding the financial markets. Just don’t be stupid enough to risk a lot of money thinking that you’ll be right (more succinctly: Predicting the future is really hard).
So rather than taking up space spelling out all of my really amazing “predictions” for the world of technology and the profound impact that all of this will have on the performance of technology stocks, let me just put this out there:
Since October 1988:
-$1,000 invested in FSPTX between the close of October Trading Day #19 and February Trading Day #11 (or roughly 26% of all trading days) grew to $8,229 (or +723%).
-$1,000 invested in FSPTX during all other trading days (i.e., from mid-February into late October, or roughly 74% of all trading days) grew to $3,266 (or +227%).
So to put it another way:
-Tech stocks gained +723% during 26% of all trading days (late Oct. to mid Feb.)
-Tech stocks gained +227% during the other 74% of all trading days (mid Feb. to late Oct.)
So my trusty calendar reminds me to check back on tech stocks during late October….and not before then.
Jay’s Seasonal Technology Trading Strategy
Here is one way to play the typical seasonal strength in tech stocks between late October and early February:
-Using FSPTX as a proxy and as a trading vehicle (alternatives discussed later)
-Buy at the close on the 19th trading day of October (10/27/12 this year)
-Sell at the close the following day if FSPTX registers a gain of +12% or more
-Sell at the close the following day if FSPTX register a loss of -15% or more
-If neither target nor stop is hit, sell at the close of February Trading Day #11
Figure 1 displays the year-by-year results. The years when the 12% profit target was hit are highlighted in green. The years when the 15% stop-loss was triggered are highlighted in red.
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Figure 1 – Year-by-Year Results of Jay’s Seasonal Technology Strategy
All told:
*24 winners (89%)
*3 losers (11%)
*Average trade = +9.1%
*Median trade = +12.4%
*Worst loss = -17.3%
*# times +12% profit target hit = 17
*# times -15% stop-loss hit = 1
Figure 2 displays the daily equity curve for this system since 1988.
Figure 2 – Growth of $1,000 using Jay’s Seasonal Technology Trading System (1988-Present)
Trading Alternatives
Because it has certain switching restrictions – and because not everyone has a Fidelity account, it may be useful to consider alternative investment vehicles. Figure 3 lists a few potential choices. There are others so you might want to do some homework, and just for the record I am not a fan of using leveraged ETFs for most strategies that last more than a few days. But again, do your own homework before applying a leveraged fund to the strategy I’ve detailed.
Figure 3 – Technology related alternatives to FSPTX
Summary
Remember that the seasonally favorable period for tech stocks does not begin until the close of trading on October 27th, 2105. So this is just a “heads up” and I caution you against “jumping the gun”. Even after October 27th, are technology stocks certain to embark on a meaningful advance? Certainly not. Should anyone “bet the farm” on technology stocks based on a reasonably strong seasonal trend? Same answer. But these are not the real questions.
The real questions are:
-Does it make sense to risk a reasonable amount of capital on a strategy that has generated 88% winning trades (21 of 24)?
-Even if that strategy involves nothing more than a calendar, a profit target and a stop-loss trigger?
I leave you to ponder your own answer.
Jay Kaeppel
Jay Kaeppel
