Only Fools Deny this Blooming Trend
"History repeats itself all the time on Wall Street.” – Edwin Lefevre
You can be a flat earther because retro is cool. And few things are more retro than pre-Socratic views of the universe.
You can even believe we live in a computer simulation. You watched The Matrix and loved it so much it became your entire identity.
You can deny Earth’s very existence.
But what you can’t deny is the changing of seasons.
This is something flat earthers, Nick Bostrom disciples, and even sane individuals can agree on.
Spring becomes summer … summer becomes fall … fall becomes winter … and then it starts all over again.
It’s a cycle.
The most fundamental cycle of whichever reality you reside.
It’s also one of the most powerful forces investors can exploit.
And today, I’m going to share how.
Tapping Consumer Cycle-ology
Most people recognize the cyclical nature of their lives.
Night becomes day … spring becomes summer … there are birthdays, presidential elections, hurricane seasons, etc.
Yet, they’re hesitant to accept that the economy and markets have identifiable cycles of their own. Even though these are a direct reflection of the cycles people are living.
So, when I talk about seasonality in the markets, I tend get my fair share of, “Aw, that’s cute you believe that” looks. I get lumped in with investing’s flat earthers and simulation hypothesis believers.
But let’s break it down this way …
Consumer spending plays into roughly 70% of U.S. economic activity.
By that, I mean, when you purchase an automobile, a coat, a computer (how meta is that for simulation believers) or maybe even a globe, there’s a chain of companies impacted.
You give your money to the company you purchased the product from. Seems fair. It’s their brand label emblazoned on it. But, all the parts needed to create that product came from various vendors.
For example, Apple (AAPL) has 1,180 parts suppliers. When you buy an iPhone, you’re not thinking about Texas Instruments (TXN), Cirrus Logic (CRUS), Micron (MU), Hon Hai Precision (HNHPF), STMicroelectronics (STM) or any of the others … but they’re there.
As seasons change, your purchases and needs change.
You buy a coat for winter. You buy toys for the holidays. In the spring you’re working out to get in shape to wear that speedo in the summer. And in the fall, you buy the new iPhone and Pumpkin Spice Lattes.
And you can see these purchase trends repeated in the sales of companies.
Don’t believe me? Pull up a quarterly revenue chart for Columbia Sportswear (COLM) and Hasbro (HAS). Pull up one for WW International (WW) – Weight Watchers. Do the same for Apple. See which quarters are their busiest year-after-year.
News flash: there’s a pattern to each one!
We know that share price follows sales and earnings. Well, as revenue and earnings fluctuate from quarter to quarter, shares reprice to match.
These cycles at the individual name level then filter up to the performance of the broader indexes, creating cycles of strong months and weak months. These tend to be the same months year-after-year.
And we tap into these trends for profits.
Spring Forward for Gains
February was a real kick in the teeth for bulls.
The S&P 500 slid 2.45% during the month.
The Dow Jones Industrial Average fared even worse, exiting February with a decline of more than 4%.
But there’s a change in the air.
Spring is here.
I know, because I can see the green islands of daffodil sprouts in the forest, and the horses a couple farms over keep breaking out to feast in the hay field behind us.
The days are warmer. And everyone’s mood brightens, even investors.
This is the time of year when the market’s start to bloom.
But things are about to get a whole lot better!
Below is the all-time average monthly gain of the Invesco QQQ Trust (QQQ) – the Nasdaq 100 proxy. This chart shows how the ETF has performed on average each month since 1999…
We can see February tends to be a frigid month for tech stocks. The QQQ averages a loss of 0.67% in the month. And if we dig deeper behind the numbers, we see it’s finished February with a loss for four consecutive years. But the dour mood goes far beyond that. Since 2003, tech stocks have closed February with a monthly decline 13 times. That means 6 out of 10 times, the QQQ will end February in the red.
But February is in the past, like stirrup leggings and skinny jeans. It’s time to focus on the future.
And we’re now entering the best stretch of the year for tech.
March through August is typically the smoothest six-month span for the QQQ.
We historically see gains in March, April, May, July, and August.
July is particularly strong as the QQQ hasn’t suffered a loss in the month since 2007. That’s not a typo … the Nasdaq 100 has ended July with a monthly gain 15 years straight in a row.
Over the last 20 years, the QQQ has averaged a gain of more than 10% during this six-month cycle. And the probability for walking away with a win holding the ETF from March to September 1st is 70%. Plus, over the last decade it’s increased to 80%.
Seasons change.
Regardless of your worldview or belief system, that’s a fact.
And these fundamental cycles impact markets.
By embracing seasonality, we can improve our returns. And that’s key, whether we’re saving for retirement, funding an expedition to the Ice Wall or passing the time earning fat stacks of fake money in a computer simulation.
Exploiting the glitch in the matrix,
Matthew
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© 2023 Matthew Carr
All rights reserved.
This market commentary is opinion and for entertainment purposes only. The views and insights shared by the author are based on his many years of experience covering the markets. But nothing in this email should be considered personalized investment advice. Investments should be made after consulting your financial advisor and after reviewing the financial statements of the company or companies in question.