A 90% Consistency Rate For Producing Gains!

I receive a hundred or so emails every day, and most of them are promoting various trading systems and recommendation services. An interesting one came in yesterday.

It started…

“It is an entirely new way to produce profits in 2016 that is more effective than anything we've ever seen. Look at the list below…

A list of 26 stocks were given, and then it said 

“***Of the 9,524 stocks currently trading on the market, this list of 26 stocks has a 90% consistency rate for producing gains in January 2016.

“How do we know this?

“Because according to a proprietary tool – that is in the process of being awarded a patent – each of these stocks has gone up in price in at least nine out of the last ten years during the month of January.”

Well heck, I can do better than that. My proprietary tools have been finding stocks with strong seasonal patterns for years, with greater track records. 

For instance, look at this next stock. Over the next 15 weeks, this stock has a 100% track record of gains, and 14 out of 14 years is a better track record than ‘nine out of the last ten' years.

The ‘stock' is actually OIH, the Oil Services HOLDRs ETF. As long as it has been in existence, it has produced a gain over the next 15 weeks, averaging 10.9%, and that is equivalent to a 38% gain per year, annualized.

But herein lies the problem with the way most analysts present ‘seasonal patterns'. I've researched seasonal patterns for a few decades now, and occasionally I backtest the seasonal track records. In general, I found that the historical track records turned into much lower probabilities going forward, when just the statistics were considered. I found that pretty consistently a high success rate winner would work out to a 10% to 20% lower success rate in the future.

In other words, say a stock's track record over a certain period of time worked out to an 80% success rate (percentage of years with gains divided by the total number of years). When I ‘forward-tested', or monitored the stocks in real time, I found that an 80% track record trade usually worked out only about 60% to 70% of the time.

It seems funny – 100 stocks with a maybe an 80% track record in the past will only average about a 65% success rate going forward. It seems difficult to explain other than the theory many traders come up with: “As soon as I sign up for, and start trading a system that has had 95% winners over the past year, the market hands me 4 losers in a row!” 

We all know how it works. The market gods knew you were monitoring and considering trading this new system for the past eight months. As soon as you actually put money on the line and start trading, they decide to humble you and try to force you out of the game.

I've never come up with solid reasons why it works this way, but systems that test well historically just don't match the same odds going forward. Except for one way, and as soon as I figured that out and started using it in my own trading, seasonal pattern analysis worked well for me. 

The approach is to apply personal judgment of the situation, along with good fundamental and technical analysis. Seasonal patterns work when you view them as footprints of institutional participation in the past, when conditions are normal. So each time I consider a trade based on a seasonal pattern, I do a careful investigation of the fundamentals and the technical chart picture, and also take into account upcoming earnings release dates, the overall market picture, and world events.

No computer algorithm can do all of that. Only the application of experience and personal judgment raises the likelihood of success with a certain trade to the levels that computer scanning identifies. 

Take the OIH seasonal pattern above.

Oil has fallen to its lowest price in recent years. An oil war being waged by Saudi Arabia against the U.S. frackers and Russian oil has driven the price of sweet crude oil down to 7-year lows, bordering on 11-year lows. 

So when I look at the chart of OIH, I ask “are there outside influences that may affect the chances of a gain this year?”, and the answer right now is YES!

Most years have ‘normal' gains/losses, meaning that during the periods being analyzed, there weren't major external influences. The underlying security, sector, and overall market traded fairly normal, most of the time. The statistical track records can be taken more seriously.

But when a market, index, stock, or ETF has a significant external influence, the historical odds mean little. And right now, oil-related stocks are the most unwanted stocks in the market. The 100% track record of OIH over the next 15 weeks has little significance this year. OIH may gain over the next 15 weeks, it may not. Saudi Arabia is in control. If the oil-sector stocks were trading more normally, I'd give the 15-week seasonal track record far more respect.

So when I proposed a seasonality-based service to MarketTamer, it was in the form of a frequent newsletter based on only the best seasonal trade setups, incorporating my extensive analysis and personal judgment. It is very time consuming to do this for a 3-times-a-week newsletter. But it is the only way to increase the chances of success for every trade candidate to the levels that computer scanning produces. And this approach can't be patented.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

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Gregg Harris is the Chief Technical Strategist at MarketTamer.com.

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