Using Seasonal Analysis to Improve Trade Odds

You have probably read that one of the strongest groups right now is the homebuilding sector. And compared to the S&P 500's chart, which is in correction and bordering on a bear market, some of the homebuilder stock charts look like textbook examples of bull markets.

Lennar Corporation (LEN) announced earnings a week ago. Earnings were 21% higher than expectations and revenue was up 24% year-over-year. Lennar added to its already strong track record of growth in recent quarters:

Chartwise, LEN has been cycling within an up-trending trading range. I didn't need to draw the bottom trendline in this snapshot – the 50-day moving average has been functioning as the bottom of the trend:

While the current market environment appears weak, and weak markets are no strangers to September and October, the end of October tends to be the start of strong rebounds through the end of the year. The last two months of the year are when institutional traders fine tune their portfolios for final gains (after all, their bonuses and client retention will depend on how their track record for the year, and the potential gains for next year look).

Lennar's stock is a good example of how the picture improves as we go into October. Looking at the above chart, you might be thinking this may be a good time to buy Lennar stock, as it is sitting near the bottom of that trend. And you may be right. Value-seeking investors with patience and willingness to ride through a bit more weakness may be rewarded nicely as soon as the overall market sentiment improves. After all, if LEN merely rebounds to the top of the channel, gains will be in the 20% to 30% range.

But how can we improve the chances of success of buying the stock? By also taking into consideration the seasonal track record of LEN.

Looking at the track record of buying LEN stock this week, we see that it has a mixed track record for the next several weeks:

The success rate of buying this stock in previous years has only been about 50-50 when held for the next several weeks.

Held for a longer time period, the statistics improve. If LEN was bought this week and held for 17 weeks, over the past 31 years LEN produced a gain in a high 87% of the years:

But notice that there were a few large losses, with 2008 and 2009 producing 27% and 55% losses respectively.

However, what if we wait until the end of October? The track record improves:

If we bought LEN at the start of the 4th week of October, and held it for at least 15 weeks every year, we would have averaged a 23.4% gain, with only 2 losses in 31 years!

And notice that those two losses were only -12.6% and -5.5%. Those 2 large losses in 2008/9 instead produced gains:

A prudent trader or investor may want to hold off on value-hunting Lennar stock right now, and instead keep an eye on it, looking for a good chart setup around the end of October.

Seasonal analysis, like all other analysis, will not offer any guarantees of success. But it can be used to increase the likelihood of success of trades, and as the above example shows, may lower the likelihood of large draw-downs.

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

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2015 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.

The content on any of Market Tamer websites, products, or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options, and other securities involve risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities are not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.

 

Related Posts

 

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.


This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.


The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.


The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.