Stock Market Seasonality Trading Strategies in Retail

Just like we can develop seasonal trading strategies in the overall stock market, we can find potentially profitable seasonal trading strategies in the retail sector. This article presents one such opportunity.

Are there any seasonalities in retail stocks?

Some years ago, Jay Kaeppel published an article about retail seasonalities. The best months for retailers are November, March, and February. Is this a possible seasonal trading strategy?

We did the same test as Kaeppel by using the Fidelity Select Sector Retailing fund (ticker FSRPX). The results from 1985 to December 2020 reveal this performance month by month:

For example, the gains for November are calculated from the closing price of October until the close of November. The first column indicates the month, and the fourth is the profit factor. Clearly, the months of November, March, and February are the best. We can’t offer much insight as to why except perhaps for Black Friday in November?

Performance by investing in the three best months

Let’s test being invested only during the three best months in the retail sector:

Covid-19 made a real dent in the performance in 2020, but apart from March 2020, it has been a steady climb. The average gain per month is 2.63%, CAGR is 7.7%, and the profit factor is 3.04. The graph shows 100 000 compounded with no leverage. The strategy is invested 25% of the time and has captured almost all the gains from “buy and hold”, which was 9.6%.

If we split November in two, the test reveals the second half of November performs slightly better than the first half. Is that due to the growth of Black Friday?

Is this seasonality likely to keep working? Typically, edges come and go for several reasons. One of the primary reasons for this not to work in the future is the composition of the fund (the holdings) and the growth in e-commerce.

Retail ETFs:

If you want to dig further and perhaps trade some retail seasonalities, you might want to use ETFs. There are some retail ETFs, for example, XRT and RTH. However, the tests perform worse on these two than on the Fidelity sector fund. The reason is the compositions and holdings. We believe backtesting works, but be vigilant for the small details like compositions etc.

FAQ:

– What are seasonal trading strategies, and how do they apply to the retail sector?

Seasonal trading strategies involve identifying patterns or trends that occur at specific times of the year. In the retail sector, seasonalities refer to potential profitable trading opportunities based on certain months showing historically better performance.

– Which months show the best performance for retail stocks, according to historical data?

Historically, November, March, and February have been identified as the best months for retailers. This insight is based on the performance of the Fidelity Select Sector Retailing fund (ticker FSRPX) from 1985 to December 2020.

– How does investing only during the three best months in the retail sector perform?

Investing only during the three best months in the retail sector, namely November, March, and February, has shown promising results. The strategy captured almost all gains from a “buy and hold” approach, with an average gain per month of 2.63%, a CAGR of 7.7%, and a profit factor of 3.04.