Washington worked it all out, and yesterday’s 323 point climb in the Dow, along with strong rebounds off short-term cycle lows in most stocks, means its ‘Off we go into the wild blue yonder’, right?
You’ve been listening to the mainstream financial media again, haven’t you?
Listen closely to the actual wording used in several of the quotes from the major players in Washington yesterday. And the debt limit still is not solved. It is only a delay being proposed, and even that hasn’t been accepted by the President and Congress.
Peter Worden, whose www.Worden.com offers the charting package I’ve used faithfully going on 20 years now, summed up the situation last night:
“I hate to sound cynical, but is it just me or did today’s rally feel somewhat contrived? Yes, I know the market had reached deeply oversold levels following a steep, three-week decline. Yes, the boys in Washington D.C. are taking a step in the right direction in an effort to get their #%@& together. And yes, I understand that investors are suddenly more hopeful about the federal budget and the debt ceiling than they were just twenty-four hours ago. Today’s positive news stream from Capitol Hill was certainly worthy of a rally in stocks, but a rally of this magnitude? It was quite the celebration, but where was the volume you would normally associate with a move like this? We saw it in the major market ETFs, but not in the individual stocks themselves. I want to feel better about all of today’s plus signs, but in the end I thought it was a strange day for the market. And one that has me skeptical of its staying power.”
I am going to be hesitant before recommitting any of my funds to new trades. Entering new positions will be higher risk right now, not only because the budget stalemate still isn’t solved, but also because the next earnings release cycle is just starting.
I am not going to sit around watching Duck Dynasty. I am going to be looking for good trade possibilities, and I may consider small trades. I will be looking for stocks that have been strong recently, and haven’t given back much since the beginning of October. I want to narrow that list down to the ones that have strong seasonal patterns. These are track records of strong gains over the same time in previous years, most likely from recurring institutional participation.
Why incorporate seasonal analysis? Institutions, and there are almost 20,000 mutual funds and hedge funds, invest vast amounts of time and resources getting to know the companies of the stocks they invest in. They will figure out that a certain company has a seasonal cycle to their sales or earnings. They are smart. They will come back year after year and build a position in a stock with a regular revenue/earnings cycle leading into that strong period, and take profits afterwards. Year after year they will ‘rinse and repeat’. Seasonal analysis identifies the stocks most likely the target of this yearly institutional accumulation.
Seasonal analysis can also give an idea of the average gain one might expect. Of course there can be a lot of variability from year to year. But the average gain a stock has experienced in the past can be a guide to the profit potential. I am amazed at how often it works out that not only does a certain seasonal work out yet again, but also with a gain in the vicinity of the average of previous years.
Time for an example.
Avnet, Inc manufactures electronic components and devices used in thousands of products. Avnet is one of those companies that has one strong quarter a year. Their first quarter earnings, reported in late October, are usually much higher than the other quarters.
Let’s say it is mid-October, 2012. Avnet is due to report earnings before the market opens on the 25th. It would be higher risk to enter a trade just before earnings are announced. But, knowing the October earnings are usually the highest of the bunch, we wonder how AVT stock has done each year right after earnings. Have there been any signs of institutional participation in previous years?
Not all of us can afford access to a Bloomberg terminal or William J. O’Neil & Co’s database, but we can get a feel for institutional participation in a couple of ways.
First, we can go back through the data for a stock and figure out the gains and losses over a particular time period. This can be done manually, but I’ll save some time here using a chart.
Looking at the 28 years prior to October 2012, and focusing on the 16 week period which would be the fourth week of October through the first week of February, we see the average again in AVT stock during that period was 16.1%.
Now the obvious thing to look for is how much variability accompanied that average gain. Looking at the individual years, we see that many were double-digit gains and the losing years were relatively minor. This is a pretty regular pattern, not just random results.
So we decide to see how Avnet’s earnings release goes on the 25th and work out a plan to buy the stock if the earnings are positive and AVT opens positively.
The earnings report wasn’t spectacular, but the market responded positively. AVT gapped-up at the open. We decide to jump in and Buy AVT at 26.80.
The seasonal track record is no guarantee things will work out to historical averages. We will still protect our trade with a stop-loss, and look to exit the trade when AVT gets near the previous 2012 highs around 37.
AVT climbed nicely, along with the overall market, in early 2013. By early February it had stalled around the 36 level. This was right at the early 2012 highs and it was now 17 weeks into the trade. This was a good time to take the profit, walk away from the trade and go look for the next opportunity, and write a note on our October 2013 calendar to come back and look at the possibility for a similar trade at that time.
AVT gained 34.5% in that 17-week trade, just by buying the stock.
Avnet is scheduled to announce Q1 2014 earnings on October 24th, before the market opens. The seasonal track record this year, updated with last year’s results, will be an average gain of 16.6%, with gains in 25 out of 29 years. Avnet doesn’t have the strongest fundamentals. But the stock has been one of the steady ‘stair-stepper’ stocks that tend to keep going.
I mentioned above that there are two ways to get a feel for institutional participation. The other is to look at the volume pattern on the stock charts. If the charting program you are using displays volume on up-close days in one color, and in a different color on down-close days, you can often spot accumulation (or distribution) from across the room.
For the past 2 months, AVT’s volume pattern has been mixed – almost equal volume on up-close vs. down-close days. If AVT announces good earnings on the 24th, the market responds positively, AND the external political situation is no longer a threat, then AVT may stage a repeat performance.
In today’s newsletter, I cover a stock I’ve already focused on a few times this year, has already produced a 32% gain, and is showing a setup for a strong breakout, once again earnings related.
Of course, there’s much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, type in www.markettamer.com/seasonal-forecaster
Copyright (C) 2013 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg’s passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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