Last Updated on June 19, 2022 by Quantified Trading
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. Put short, the best month 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 column 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:
The 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. Obviously, 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? Normally, edges come and go for a number of reasons. One of the major reasons for this to NOT work in the future is the composition of the fund (the holdings) and the growth in e-commerce.
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.