Last update: July 2021

Each time the opportunity arises to write the newsletter, I look to the discussions I have with each of you and in the classroom for inspiration. This week I’ve had the conversation of sector rotation and seasonality a couple of times and thought it would be the perfect topic for this week’s newsletter.

The first time I tried to wrap my head around sector rotation and seasonal cycles, my head almost exploded. I was relatively new to trading and still very much in that stage of discovering all of the things I didn’t know that I didn’t know. I hit the books; I purchased a printed copy of the stock trader’s almanac (back in the days before the content and data were delivered in an online format.) and dove headlong into my studies and emerged months later with both a white flag and a migraine headache.

It wasn’t that the content and concepts were that difficult, rather at that time in my life, they were painfully boring to me. That was before I understood that a strong grasp on seasonal cycles and sector rotation could be converted into cold hard cash.

These days, I love studying economics and business. My fascination with the puzzle of inter-market correlation and analysis has grown to the point where I think I’ll need to enter a 12 step program to quit this stuff. That being said, I hope your first foray into seasonality and sector rotation will be both exciting and profitable for you. I’ll do my best to simplify the information and, as always, include lots of graphs and pictures to help you through the learning process.

The first topic I’d like to delve into with you is a statistical analysis of available market data. It’s usually not too difficult to find the data, but it can be more difficult to find it in a format that’s both easy to read, interpret, and identify patterns in.

Let’s start with a simple examination of the rich history of S&P data that’s available to us. I’ve taken the liberty to plot it into bar graph form so that I could make a chart available to you all that identified which months were the best and worst based on the availability of data (which happens to be 78 years worth).

As you can see from the graph, the absolute worse month is September; which also happens to be the only month to average out negative over the course of those 78 years. That’s due to the fact that several of the major market crashes have hit critical mass during the month of September.

The best months on average are December and July, followed by January, November, August, April, and June. Those months not mentioned in this paragraph are an embarrassment to average market returns with their only saving grace being they’re not September.

For a more recent look at the S&P index, I turned to Thinkorswim to the seasonal chart mode on the S&P index to show the last 20 years of data by day through all 12 months and a very clear pattern emerged. The market rocks from March to May and again from October to December. I’ve known this for a few years now, and I can tell you that armed with this information, you’ll be able to nail the trending part of the year on average much better if you concentrate your efforts in the early part of the year’s 1st & early 2nd quarters and again in the 4th quarter. This graph also clearly indicates that the old saying, “Come what May it’s time to sell and go away.” that I first learned about in the stock trader’s almanac is not so much because the market goes down, but that it tends to become more choppy and volatile through the summer months.

Next, I dissected the readily available data on the S&P SECTOR ETFs. I broke the average performance down by both sector & month and created several charts to help display the data for both all of the sectors on average combined as well as for each sector’s individualized performance.

The first two charts are graphical representations of all sector performance by calendar month. All sectors were weighted equally, averaged, and then calculated again for +/- one standard deviation. A clear seasonal cycle appears across the board. All sectors perform best in February, March and April, then get a mid-summer bump before a September slump that segues into a sweet 4th quarter rally. Based on this graph, the S&P sectors rock in October… yes, that’s right I’m going to say it: ROCKTOBER is its new name from now on. November and December are also top performers, but they don’t sound quite as cool as ROCKTOBER!

While I was compiling all of this data, I thought it would be nice to create some reference materials for all of you. I put together a Seasonal Sector ETF Performance Table based on the last 15 years of data so you can quickly cross-reference the top performers by month and color-coded for sector performance. You will absolutely love this table.

For the record, over the last 15 years, the single top-performing Sector ETF by month is the XLI industrial sector during the month of April; ringing in with the high watermark of nearly 4% return. Stick that in your risk graphs and smoke it!

I also broke down the 9 different sectors into three separate charts for an easier visual reference that doesn’t require a magnifying glass to read. There wasn’t any rhyme or reason behind how I grouped them; I just broke the 9 Sector ETFs into groups of three and paired them on individual charts (all of which also include the SPY as a baseline broad market reference point).

The first grouping is the Energy Sector XLE, the Financial Sector XLF, and the Utility Sector XLU:

The next grouping is the Basic Material Sector XLB, the Industrial Sector XLI, and the Technology Sector XLK:

The last grouping is the Consumer Staples Sector XLP, the Health Care Sector XLV, and the Consumer Discretionary Spending Sector XLY:

Being able to compare and contrast this data can help you identify the general seasonality of each sector as well as the general business cycles that cause the price action of these powerful ETFs to ebb and flow. with behavioral patterns of the institutional traders that drive the markets in search of their competitive edge.

15 years’ worth of data includes two major bullish and bearish cycles and helps us to see these patterns. The power of the next chart is going to knock your socks off and become one of the secret weapons in your trading arsenal. The Tackle Trading Sector ETF Seasonal Performance Rankings. Below is the key to your ability to quickly reference the very best time of year to anticipate trends. All 9 of the Major Sector ETFs are tradeable, optionable, and best of all, ranked from best month on average to worst month on average. You’ll be able to quickly identify the best bullish and bearish sectors month in and month out. You’re welcome! That’s why we’re here: to help each other make wicked smart trading decisions.

We love graphs, charts, and tables that make our jobs as traders easy. The next table is a quick reference for the Top 2 ETFs each month as well as the Bottom 2 ETFs each month. Coupling this information with solid technical analysis, chart patterns, and confirmation signals will help you know when it’s right to take action.

Keep in mind that there is no holy grail; All these charts and tables are based on statistics & probabilities that can give us an edge. There are many moving parts and inter-market correlations to consider, and the more you learn, the more you will learn. One of my favorite go-to’s that I look to for trading opportunities year after year with a high percentage of success is the seasonal cycles. It’s the most elemental story of western business culture that’s driven by simple supply and demand. We’ve become pretty predictable as a culture, and it’s analogous to planting, cultivating, harvesting, and consuming. The cycle chart below is a rudimentary look at a year’s cycle quarter by quarter, play by play. We buy the basic materials in the 1st quarter to manufacture the goods in the 2nd quarter that we ship to market in the 3rd quarter and consume like crazy in the 4th quarter.

There are some simple trading strategies you can learn and put into your own personal playbook and look to call upon when the time is right for years to come. A quick example for you is one of my two favorite plays that I go to every year with over 80% success. Spring Time Energy Sector Play and my Retail Shippers in the Fall Play (i.e., FDX and UPS): sometime between August and October, watch for bullish buying signals. There are two big mistakes you don’t want to make: 1. Don’t miss out on the opportunity to master these strategies, and 2. Don’t trust blindly in any strategy no matter how awesome it looks on paper. Although these strategies have the potential to help you grow your wealth and we share them with you with confidence, always remember that past performance does not equal future performance. Proper position sizing and risk management will serve you well and virtual trading can help you learn without any risk.

Hopefully, access to powerful information and seasonal tendencies & patterns of the market will help you wrap your head around sector rotation and seasonality far quicker than I did years ago by trying to read that confounded Stock Traders Almanac (that for all intents and purposes, was ether in print).

Join us in the Clubhouse for discussion and watch for some fantastic Training Videos to supplement this information.

Newsletters with video commentary… that’s like cherries on ice-cream!

Trading Basics Video: Seasonal Energy Play Using Thinkorswim Seasonality Chart Mode

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