Market Health

How to Profit From Cyclical Stocks This Holiday Season

One of the advantages of being a trend trader is knowing what to expect in the markets.

In August, we told Profit Trends readers to expect the market to sell off in September. But we also told them not to worry because that’s very typical of the month.

Investors become singularly focused on macro headlines and fret that third quarter earnings are going to be disastrous.

And sure enough, the S&P 500 Index tumbled about 5% in September.

But we knew October and November were ahead.

October – despite an unfair reputation – is actually one of the best months for stocks. Once companies start reporting third quarter earnings, everyone realizes that all of those fears they dwelled on in September were unfounded.

The S&P 500 rocketed 6.67% higher in October.

But like we said at the time, that rally was far from over.

You see, there is a month that’s even better for stocks than October… November. The third quarter earnings rally that begins in October is further buoyed by winter holiday cheer.

And that’s precisely what we’ve seen.

The major U.S. indexes are at record highs. And I expect even more upside on the horizon.

It’s these types of short-term catalysts that investors want to use to supercharge their returns

And they can do so with one of my favorite opportunities.

My Favorite Portfolio Booster

Over the years, I’ve written about how every industry has a season.

Well, at the same time, there are countless articles on the most famous – though widely misunderstood – seasonal trading adage, “Sell in May and go away.”

On the surface, this strategy seems simple enough. (And it rhymes – which means it must have some sort of merit, right?) In fact, the whole adage is “Sell in May and go away. Don’t come back ’til Labor Day.”

I mean, that’s poetry.

But here’s the important question… What do you sell?

Everything?

Are you supposed to just dump your entire portfolio and sit in cash every May?

That seems like an exceptionally stupid idea and awfully damaging to your financial future. And any person who blindly promotes the “sell in May” strategy is unintentionally doing more harm than good.

Now, the reality is that the “sell in May” strategy applies to only a handful of specific sectors… not the entire universe of stocks and mutual funds.

But its catchiness turned it into an earworm that’s been mindlessly parroted for decades.

More importantly, one of the sectors it applies to is a “Buy” right now!

We’re heading into one of the busiest stretches of the year for seasonal trading. And the holiday shopping season is already underway. So this is a particularly important period for retailers.

Let’s look at an index of 25 retail stocks that I follow and its performance from October to May.

Since 2000, holding shares of my Prime System Retail Index from October to May has rewarded investors with an average gain of 17.88% and a success rate of 76.2%.

Inversely, holding shares of these same companies from May to October had a mere 40.9% success rate with a negative return.

This is why these stocks fall into the “sell in May” strategy.

However, you’ll also notice that the down years in the chart were financial collapses, like from October 2019 to May 2020. But the bounce-back years have been extraordinary.

Trading Made Easy

The success of seasonal trading is built on optimizing time and effort.

Investors should hold shares of certain companies only during each company’s best periods of the year.

It’s not random.

And it’s not an anomaly.

They’re the same months year after year.

And more often than not, that relates back to the company’s underlying business, revenue and earnings.

Most businesses are cyclical or seasonal. And in seasonal trading, all you want to do is focus on the booming quarters and forget the rest.

Here’s to high returns,

Matthew

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