Seasonal And Sector Rotation. The Distant Cousin of Technical and Fundamental Analysis

Certain patterns of weather and traditions on the calendar and political cycle and economic cycle can produce changes in earnings that result in shifts. Weather and season impacts farming which impacts the price of necessity items (foods) and is also connected with oil and gas along with the "driving season". The economy has many cycles back and forth happening simultaneously that also interfere and connect with and effect each other. But one is primarily a shift between necessity and luxury that has existed from the Renaissance to the dark ages. When food is scarce, people must effectively indirectly choose to trade in and spend less on luxury in order to have their "necessity" items. When it is abundant, they can expand their needs. The solar cycle actually may be connected with weather and crops on a longer term time frame but we all know that winter negatively effects crops as well.

When the economy was primarily based upon an agrigarian society of farmers it was much more sensative to changes in weather. This may change going forward to some degree as we learn to produce more and more with less and less and hold reserves and anticipate changes, but it's not a given. The underlying understanding of how economies work remains the same. There are more complex shifts now, driven by many things, but they still exist. Aside from the longer term concern and seasonal concern there is the back to school shopping season and christmas/holiday shopping season as well as changes in weather causing a need for changes in clothing. There are all kinds of seasonal shifts that effect EARNINGS as well as capital rotations and shifts that may effect technicals.
[See finding your edge for more on the sector rotation.]
I will rehash sector rotations chart for reference purposes.

Then there is the seasonal sector rotation.
The reason seasonal and sector rotation is a distant cousin of technical and fundamental analysis is because fundamentals help identify value, technicals identify timing, and sector and seasonal rotation are a way to forsee historically changing technicals based upon how it has worked in the past. There are many fundamental reasons for the shift such as certain areas of the market doing better. (christmas season and retail, driving season and energy, saving season and banking, summer season and real estate activity and so on.There is also the "fear" that occurs during October.


First you can look at the seasonal charts by sector.

Perhaps more important... The relative out-performance by sector ranked left to right up to down by percentage moves: (Buy when it will outperform, sell or use as a hedge when it underperforms)

Each month come up with a gameplan. You may want to track recent performance as it relates to historical chart and see if there is an area that has lagged relative to history. This could potentially represent value, but it also may warn that the decline phases could be more severe. As mentioned before seasonal only helps establish bias, technical helps identify entry point and setups (although some set-ups you may be more anticipatory).

You can also do this with currencies

And various commodities

 And even indicies

Seasonality has been proven.
http://www.optionetics.com/marketdata/article.aspx?aid=13623

Finally, earnings drives prices. Prices may deviate and for certain reasons people will be willing to pay a premium or offer a discount to fair value in the short term. Sometimes due to uncertainty or overly positive or overly negative outlook.

Sometimes the sector is neglected or unwanted(discount), sometimes there is superior management (premium) and sometimes the company just outgrows or "outshrinks" it's capital inflows or outflows into the company. Growth in earnings results in growth in price, stock being under a PE of around 15 will revert to the mean IF it's earnings stays stable or grows going forward to support that price. A low PE means nothing if a company begins to contract.

 This is called a F.A.S.T Graph and can be found at fastgraphs website.

And now the gameplan
1)Identify seasonal tendencies in certain months and/or times when the seasonal tendency has deviated, providing a significant discount off of it's historical price in a particular asset. For example,

The Australian dollar is currently offering a discount. That same gameplan can be applied to other equities by overlaying the current chart starting from January to the seasonal one.
2)Identify the fundamentals where possible. For example, if the retail sector is strong in the September-April time period, then look through individual retail sales (unless you are considering an ETF, in which you should still look at the average value and expected growth of the industry).
3)You can use FASTgraphs if you like to look at the historical trend of fundamentals and price and be sure you aren't buying an overbought area or worse a "bubble".
4)Now you have your bias. Now you can start to build your watchlist according to funamental and seasonal data
5)Once you have your watchlist, you are waiting for the technicals to give you a signal in the direction of the bias. You could swing trade very short time frames and you still increase your chance of getting a swing, and getting a larger price swing than usual. You can find investment and give yourself a good chance of finding a good long term investment. Or you can position trade and trend trade and catch the early part of the trend. Or you can allocate assets accordingly.

Asset Allocation

The asset allocation model is perfect for uncertainty which the market is in, particularly as a long term market allocator.In other words, you may begin to shift more capital into an area because it is a seasonal bottom, and you anticipate sector rotation into the area and because fundamentals provide a compelling case and technicals set up well. Since sectors are fairly well corelated, you probably don't want to worry about too many areas, but you can rotate into those most likely to outperform and then also rotate out of those that don't, and rotate into commodities and currencies.
For example, you might have 10% allocation to each of 10 areas when market is neutral and every area has an equal chance of moving in any direction. Then you will drastically increase the areas that have an "edge" to the upside, and decrease those that have an "edge" to the downside (or even short).
We have talked about this with a more simple strategy of gold, S&P Bonds, and cash and will continue to mention the strategy. In this particular case, what about a more aggressive rotation to replace the S&P with whatever sector has the best seasonal and technical and fundamental chance of going higher, and then sell out completely when rebalancing and into the next area.



Some people look at individual companies seasonality. I have mixed feelings about this. There certain can be individual company promotions and "hot" months for individual companies that may not apply to others. A retail store that targets specifically back to school aged kids like Abercrombie and Fitch (ANF) will receive a boost from back to school shopping, while a retail school marketed to working adults like Men's Warehouse (MW) may be less seasonal, but may still do well on certain timeframes where this target market is more likely to shop. Then perhaps areas located in busy malls like Sears and JCPennys will do well over holiday season and leading up to it in November and beyond, while major retail chains like Target TGT may improve during those time periods as well, but perhaps it won't create as big of a dent. Regardless, watching individual stores can help.

There also will be several companies which coincidentally just happened to have a big boost during certain times of the year and are really just too new to draw any conclusions. I do think seasonal patterns effect business, but you have to be aware, not only of the boost in stock price, but the underlying boost in earnings that more strongly support the rising prices, and may factor in to increased earnings revisions. The particular earnings quarter where companies tend to outperform may be a good money to really speculate, however due to intense volatility during earnings, that may allow some risk, particularly with only individual companies. As a general rule, I don't like holding during earnings unless it's an investment which I plan to hold for a very long time. That may drastically change whether or not you can profit off of individual companies, and may skew data, which make me more willing to play a broad ETF in a sector or industry instead.

Equity Clock again offers the ability to sort through individual specific ticker symbols. You could look for individual names that offer the best next 30 day period, or the best buypoint (low) or you can look for shorter term moves. You also may just use seasonal data to "confirm" that a breakout may occur soon. This way if the chart pattern sets up and is at support in a triangle pattern, you can anticipate breakout early and avoid others that don't expect to run after the breakout. You get a much better entry point with easy place to manage your exit if the trade doesn't bounce, and a higher probability trade with greater upside too if the seasonal data is reliable.

If you check July and August Performers, you can see REAL estate, energy, silver as the main broad based areas that rally.
October offers a big volatility spike historically skewed largely because of 1929,1987 crash and black October of 2008.
On a post election year, the S&P rises until the end of July, rather than "sell in May and go away"
September-April Offers Retail opportunities.
November-January Offers Technology opportunities

fundamental initial screener
http://finviz.com/screener.ashx?v=151&f=fa_div_o1,fa_eps5years_pos,fa_estltgrowth_pos,fa_fpe_low,fa_netmargin_pos,fa_pe_low,fa_peg_u2,fa_roa_pos,fa_roe_pos,fa_sales5years_pos&ft=4&o=pe


Using changes in relative outperformance to S&P I looked for opportunities to buy the lows mostly or capture strong trends after sideways consolidation moves.
Sector Calander:
January:Sell Utilities,Buy Tech, Financials,Consumer Discretionary,

Late January:Buy Energy Sector, Material,Sell Health Care
February: (watch for Energy Breakout) Buy Consumer Discretionary
Late February:Buy Financials, Industrials into early March,
March: Buy HealthCare,Industrials
April:Increase Healthcare, Buy Technology,Consumer Staples,reduce energy, Sell Consumer Discretionary, Sell Materials,Sell Financials,
Late April:Reduce Industrials or sell into May)
May:Reduce Energy, Sell Industrials, sell materials (maybe short),reduce or sell consumer staples (sell trade) Utilities (or July or late November). (consider futures,currencies,bonds)
June:avoid Industrial, Sell Energy,Increase technology and look for support buys with July big spike coming up. Cover shorts in materials end of June, Buy Financials into July, sell or short consumer discretionary, trade health care for pop and reduce or sell in end of june to buy dip in July. Accumulate Staples in June and July.
July:Sell Technology trades, buy Energy back, avoid bounce in Materials, Buy Financials, Buy back/increase health Care again,Buy Consumer Staples, Buy Utilities?
August:Sell Technology,Buy Energy, Sell or reshort Materials,Sell Financial,Buy Health Care and trade breakouts, Trade Utilities?
September:Reduce Energy (sell in October),
Sell Consumer Discretionary, Buy Health Care for Big pop, Buy Consumer Staples and Trade for pop,,Sell Utilities or short end of month. Late September into October Buy up Tech, 
October:Buy Technology Dip Early October, Buy Materials, Sell Energy,Sell Financials, possibly short into November, Buy Consumer Discretionary, Sell Healthcare,Sell Consumer Staples then trade end of october into November, Buy Industrial,Short Utilities?
November:Sell end of November Tech, buy Materials, Buy Financials,Buy Consumer discretionary, Sell Healthcare,Sell Consumer Staples,Buy Industrial sector, Cover Utilities then Buy into December
December:Buy Utilities.Buy Tech into Jan, Trade Industrials.



resources:
signalfinancialgroup.com
equityclock.com
charts.equityclock.com/
fastgraphs.com
erlangerresearch.com/seasonality.asp
time-price-research-astrofin.blogspot.com/p/seasonality.html
seasonalcharts.com
Institutional buying.