We’re in one of the best three months to invest: here’s how to capitalize on it


NOTIn November, leaf color change, pumpkin pie… And the killer stock is back! Over the past 20 years, the S&P 500 ETF (SPY) ended November higher than it opened 80% of the time.

Granted, I could just go out and buy the ETF on the SPY index. But I want to show you how to get a little more bang for your buck. First, let’s talk a bit about seasonality.

What is seasonality?

I want to start by demystifying the idea that fundamental analysis and seasonality are mutually exclusive. Seasonality is any repeatable pattern that occurs every year, such as months, quarters, seasons, and even holidays. Fundamental analysis assumes that the function of a market is to price the value of a business, which makes seasonality irrelevant unless it has a direct impact on the business of the business. , like heating oil for energy companies in winter.

However, there are many practical reasons that create statistical anomalies. We can see this demonstrated in what is called the “January effect”.

The January effect was first discovered in 1942 by investment banker Sidney Wachtel, who found that stock returns were five times higher than the January average from 1904 to 1974. Another study by investment bank Salomon Smith Barney reported January average outperformance of small caps over large caps of 0.82% from 1972 to 2002.

The theory is that investors sell underperforming stocks at the end of the year to lock in a capital loss for the year, thereby reducing their tax liability. Right now, we are seeing that this kind of selling pressure on the last trading day of each month causes markets to close more often than usual.

So when we look at the seasonality of the market, how do we know that we are not observing a random pattern? We can’t always know the reason behind something. But we can use a little common sense. What do I mean? Well if I find that buying the 10th of each month and selling the 21st of each month wins 90% of the time, I have to ask why the result is so consistent.

We may not be sure exactly why November is performing so well for stocks, but we can see from historical data that there is a link between some specific months and performance. Now let’s see how to take advantage of it.

Find the best opportunities

First of all, if I want to take what I know about seasonality and invest in November, I want to do it in the healthiest industry there is. The fastest way for me to find is through TradeSmith Finance sector health dashboard.

Graphic

This dashboard gives me three important pieces of information:

  • How long has the sector been healthy
  • The current health distribution (the health of the actions that make up the sector)
  • The volatility quotient (how much the sector is moving)

Using this as a starting point, I can see that energy, finance, and real estate are coming out on top. Take Financials for example here. We know the Federal Reserve is planning to cut back on asset purchases and will likely raise rates next year. This bodes well for banks as banks borrow money using short-term interest rates and lend to consumers at long-term rates. The difference between the two is known as the net interest margin. When the Fed raises rates, longer-term interest rates tend to rise more than short-term rates, which means more profits for banks.

So we know that November is a good month for investing in general and we can also see that financials could be a strong and reasonable opportunity within this trend.

In fact, the Financial Select Sector SPDR Fund ETF (XLF) ended December higher than it opened 73% of the time in the past 20 years. XLF has been in the TradeSmith Finance Green zone and in an uptrend for more than 11 months. It carries medium risk with a 20.19% DV and has a bullish rating within our system.

November is one of many

It’s almost halfway through November already, so don’t worry if you’ve missed out on the majority of this particular opportunity. As the table at the start showed, there are several more months with statistical anomalies that offer delicious opportunities.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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