Seasonal Trends in Play - The Good, the Bad and the Ugly
The application of seasonal trends to a trading regimen is often misunderstood. Some try to assign an almost "mystical" power to seasonality, while others dismiss it completely. The proper approach (in one author's opinion) is to view seasonality simply as one more "tool" - aka, moving averages, RSI, stochastics, etc. - to help determine where best to allocate capital at a given point in time.
A security that shows a fantastically favorably (or unfavorable) seasonal pattern going forward from a given point in time is NEVER guaranteed to rally (or decline) the "next time around." But remember this: when you plunk down your hard-earned money to make a trade, you want to be confident that you have placed the odds as far in your favor as possible.
And THAT is where seasonality can help to tip the scales.
I will highlight some of the more notable seasonal trends among ETFs for the months ahead in the information below.
THE GOOD
There are a handful of domestic U.S. sectors with a currently favorable seasonal outlook - although, as you will see, the clock is ticking on a few of them. Ticker XLP (Consumer Staples Select Sector SPDR Fund) is generally considered a "defensive" sector. The good news, for now, is that it tends to hold up well during the June-Oct period that often trips up a lot of sectors.
Tickers IYR (iShares U.S. Real Estate ETF), XHB (SPDR S&P Homebuilders ETF), and IBB (iShares Biotechnology ETF) all have favorable seasonality at the moment - but traders should keep a close on the exits.
THE BAD
Just as a reminder, for this piece, "Bad" refers strictly and solely to the annual seasonal trend for a given security. All other factors (technical, fundamental, sentiment) are ignored.
The "Bad News" for U.S. sectors is heavily focused on the energy and metals, and mining sectors, which historically tend to struggle during the Jun-Oct period. Note the seasonal outlook in the three charts below for tickers XLE (Energy Select Sector SPDR Fund), XOP (SPDR S&P Oil & Gas Exploration & Production ETF), and XME (SPDR S&P Metals and Mining ETF).
The message is NOT that these sectors are "doomed" to decline or even underperform in the months ahead. The message is that historically it has made sense to look elsewhere during the months of June-Oct and that before investing in these sectors, you should have some compelling catalyst that you believe will overcome this unfavorable seasonal bias.
THE UGLY
On a seasonal basis only, many single-country indexes tend to show extreme weakness during the Jun-Oct period. As always, there is no guarantee that that will be the case in 2021. But it is worth being aware of, as some appear to be "running out of runway." See the charts below for tickers EWJ (iShares MSCI Japan ETF), EWW (iShares MSCI Mexico ETF), and RSX (VanEck Vectors Russia ETF).
VIEWING SEASONALITY CHARTS
On an operational note, you can bring up the charts above in Sentimentrader by either:
- Clicking "Indicators" and then "ETF Seasonality."
- Typing the ticker symbol and the word "Seasonality" into the search box.
SUMMARY
The most important thing to remember about seasonal trends is that no trend is guaranteed to work "this time." The best analogy is the weatherman. While they are (understatement alert) never guaranteed to be right in their forecast, you still want the best information available. If the forecast is for warm temperatures and calm skies, you are far more likely to plan an outdoor activity. Conversely, if the forecast is for strong storms - or even the possibility of strong storms - you are far more likely to stay inside.
The same principle applies to seasonality. If the current seasonal outlook for a given tradable is favorable, you may assign a higher likelihood of success to play the long side. If the current seasonal outlook is particularly unfavorable, the good news is that as traders, we have the benefit of being able to assess other technical, fundamental, and sentiment-based factors to buttress or discount the seasonal outlook. If other factors do not sufficiently outweigh the seasonal "message," one may wisely choose to allocate their capital elsewhere, or even to play the short side.
Are energies and foreign country ETFs certain to decline in the months ahead? Not at all. But for a trader, that is not the real question. The real question is, "do I have sufficient reason to allocate capital in these areas?"