In my September 9th, 2015 Seasonal Forecaster newsletter I covered a trade setup that stood out to me. Only two weeks before, the S&P 500 had quickly plunged 10%. It wasn't clear whether more selling would come in, or a rebound of any sort would form.
But in the newsletter I stated “There will always be quality stocks that mostly ignore the overall market environment and show indications of institutional accumulation. While I'm expecting more downside as we get into September, I am looking for a few stocks that appear to be under steady accumulation in spite of the overall market.“
“One example is Hormel Foods (HRL). If you want to add a little upside exposure to your portfolio, consider a small position in HRL and add to it if and when it breaks to new highs [if it] comes out with positive earnings (due around mid-November). It has a pretty good seasonal pattern starting in late October, going into early-summer. The next 7 weeks are pretty flat on HRL's seasonal chart, meaning it has a mixed track record of gains in the near term. But that doesn't mean this can't be a breakout year with strong gains earlier than usual. The more I think about it, the more I like it. So I'll turn it into a trade setup:
“Note that Hormel will likely pay at least a $.25 dividend to holders of record in mid-October. This may also be a good stock for a covered call trade.“
The seasonal pattern of HRL, at the time of the article, showed a mediocre track record over the next several weeks, but good gains starting 9 to 20+ weeks out:
Why would the average results suddenly jump 9 weeks from the third week of September? Hormel Foods typically announces earnings in the last week of November. This seasonal pattern showed Hormel's stock often jumps after the November earnings announcement. In fact, from mid-September into mid-December, HRL has averaged an 8+% gain, with gains in a very high 28 out of 31 years (90%).
While the S&P 500 went on to re-test lows in late September, HRL traded sideways, staying above its 50-day moving average. This stock was ignoring the rest of the market, and the volume pattern was indicating accumulation. Most likely, some institutional traders, who were quite familiar with HRL's track record going through November earnings, were picking up the stock again this year.
In early October, while the S&P 500 was still in a trading range, HRL broke above previous highs on strong volume. It fell back to retest the August high, and then rebounded nicely.
Two days ago the position was up 5.5%, which over the 35 days since the trade entry, worked out to an annualized gain of 57%.
In the September 9th trade setup for HRL, I also suggested an alternative trade using an HRL December 60 call. That call traded around 4.35 on the morning of the 9th, so this trade was up 52% (in my newsletter I said it was time to close the position).
Back in the September 9th newsletter, I also mentioned HRL may be good for a covered call. Today is the expiration of October options, and HRL is trading around the 65 level. If it closes above 65, the stock will be called away and the covered call will return a 5.5% gain. If someone holding the covered call wanted to keep the stock, in hopes the seasonal pattern will again play out, then rolling the October 65 call up and out to a November 65 call could lower the cost basis on the initial stock purchase to around $60.
And finally, Hormel Foods will pay a $0.25 dividend on 11/16, adding to our gains.
Once again, identifying a stock with good fundamentals and a strong seasonal pattern, along with recognizing technical strength compared to the market averages, produced a good trade so far, and it may keep on giving.
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, please click on the following link: www.markettamer.com/seasonal
Copyright (C) 2015 Stock & Options Training LLC
Gregg Harris is the Chief Technical Strategist at MarketTamer.com.
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