Fresh on the heels of my seasonal trading win with a Treasury Bond ETF (TLT), I thought I’d poke around with my own seasonal-trend research. Jay Kaeppel is in my mind the King of Seasonal Trends, and he’s even written a book on the subject. I thought I’d sniff around and see if I could come up with something too.
After browsing through the world index data I have, my thoughts settled on my nearest international neighbor: Mexico. Mexico’s economy is closely linked with the United States, but different factors drive it (commodity prices for example). So why not take a look?
I busted out AmiBroker and came up with a quick script that would allow me to enter and exit a trade based on the month of the year. After finding the best calendar month, I was able to fine tune the script so I could focus on particular days of the month for entry and exit.
The equity curve is compounded, starting with an account of $100,000. Since this was actual index data I was looking at, I needed a large position size otherwise it wouldn’t trade. I did include commissions, but they’re negligible for this test.
I first noticed that December was the best month of the year, followed by November. However November didn’t seem to have quite the success story as December. So with a little fine-tuning, I came up with the best seasonal plan:
• Buy on the 15th trading day of November.
• Sell on the first trading day of January.
Compare that to the worst month of the year for the Mexican stock market, which is October:
As you can see, the market had a devastating blow in October 1987 that the equity curve never recovered from. Even excluding that first year of data, it’s a pretty bumpy ride.
Check out these stats comparing “December Plus” vs October:
Pretty sweet, yah?
Funnily enough, this is very much like the S&P 500 seasonal pattern. For the S&P the end of the year is usually best, especially December. Therefore a seasonal trading system based on the Mexican stock market might not give you the diversification you’re looking for (unless oil prices are up).
You can’t trade the index directly of course, but those smart folks over at the ETF factory have cobbled together something you can spend your money on. Several somethings in fact.
There’s EWW for starters, or UMX if you like a little more sizzle in your ETF steak. And if you’re feeling bearish, there’s the inverse and leveraged SMK. The last two seem a little slim in the volume department, so do your own research.
¡La negociación de valores puede ser riesgoso!