The Benefits Of Seasonal Compounding

Having a glimpse at our previous articles, you might have noticed that seasonal market trends are not unique to a handful of companies, but are a widespread phenomenon that many markets accommodate, often unknowingly.

Trading on a stock that exhibits a spike or trend once off during the year is fine for short term gain, but how do you turn seasonal analytics into an effective and prolonged trading strategy?

To take full advantage of these seasonal patterns in markets, traders must take an active approach by moving accumulated capital from one positive seasonal trend to the next.

Compounding on seasonal trends

Fortunately, a sufficiently large number of shares that are entering strong seasonal trends can be found at any time of the year. That makes it possible to accumulate gains by switching into stocks that are seasonally attractive in a consistent and timely manner.

I am going to illustrate this schematically. Let us assume that stock A has a strong seasonal uptrend between January and February, generating an average return of +11%, stock B follows with a similar gain from March to April, thereafter stock C, and so on.

By switching from one stock to the next and by so to speak stringing the seasonal patterns together, these returns can be combined.

You first purchase seasonally attractive stock A, then stock B, then stock C, etc. The chart below depicts a diagram of the cumulative returns based on the above-mentioned assumption.

Diagram of cumulative seasonal returns

Theoretically, by taking the compounding effect into account, the example yields a return of +87.04% per year. Of course, in reality, such regularity won't be encountered on the stock exchange, and other factors also have to be taken into account. To make an educated assumption regarding how a stock is likely to perform, traders must also look outside historical and seasonal data to analyze current events and expected performances. What seasonal data does, is it allows us to easily identifies what stocks to look at more closely and determine likely repeats, positive or negative. 

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Disclaimer: Past results and past seasonal patterns are no indication of future performance, in particular, future market trends. seasonax GmbH neither recommends nor approves of any particular ...

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