Friday, March 11, 2011

Investing Seasonality

Nasdaq Composite
I am not one to make my investment decisions purely on the basis of seasonality.  I do watch for seasonal trends.  One of the best ways of monitoring what's in season, and what isn't is to check  From the main page click on the Seasonality tab at the top.
We can see from the list of Primary Sectors that the Information Technology sector is normally strong from October 9 to January 17.  If we look at the chart for the Nasdaq Composite we can see the momentum has carried right into the end of February.  Missed it, right?

No, since I believe the markets are due for a correction anyway, what better way to play the decline than to choose the sector which has just recently peaked?  More bang for the buck, so to speak.  The easiest way to do so is with the Horizons' Nasdaq 100 Bear ETF.  The ticker symbol on the TSX is HQD.  Although I like to use these ETF's, I have to warn others who might want to that they use leverage.  In this case, for every single percent the Nasdaq 100 falls, this particular ETF will gain around 2 percent.  I say around 2 percent, because this type of ETF does not always track the underlying index perfectly.

In a very exaggerated example, think what would happen if the market rose by 25 percent in one day.  This would mean the ETF should drop 50 percent (2 times).  The next day, if the market dropped by 25 percent, the market would be around 94 percent of where it started.  The ETF, on the other hand, would lose 50 percent, then gain 25 percent (50 percent of 50 percent) and only be at the 75 percent level of where it started.

This is one trade where timing is everything.  Success will depend entirely on getting in and getting out at the right time.  With the help of seasonality, and technical analysis, it can be a very lucrative trade.  Still, if it goes wrong, the key is to recognize that fact, and just unwind the trade.  Any time a trade is costing me capital, I have to be doing it wrong!

Paying attention to market seasonality is one way we can identify setups for profitable trades.

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