Don VialouxJ.P. MOCZULSKI/The Globe and Mail
Don Vialoux never buys and holds. For him, every market, sector, equity and commodity has its season, and when that season is over, it's time to sell.
"On average our investment is about three months," says Mr. Vialoux, a research analyst for Horizons ETFs Management (Canada) Inc. and a long-time advocate of seasonal investing who runs the blog timingthemarket.ca.
"The longest we would hold would be from the end of October until the end of April."
That six months is the period of seasonal strength for most world markets – and the thinking behind the old investing adage, "Sell in May and go away."
Mr. Vialoux, it turns out, isn't fond of that adage, even if he agrees that most of the time it is true. That's because seasonality isn't so simple: It takes work and a lot of discipline to choose when to buy and sell.
"You pretty well have to be watching these things on a day-to-day basis," he says. "But individual [retail investors] can do this."
Here's how it works: The first step is recognizing a seasonal trend – through annual recurring events that are important to a company and its sector. For Mr. Vialoux, that means studying the past 20 years of the sector.
Take gas prices, for example. They traditionally move higher from the end of January to the end of April, he says, and that's because of two annual recurring events: Inventories drop when North American refiners temporarily shut down production to switch from producing heating oil for the winter to gasoline for the summer, and while they do they also work on their annual maintenance. Because North American refineries are aging, lots need to get repaired during that maintenance period.
Mr. Vialoux then looks at what has happened in the past. Over the past 18 years during periods of seasonal strength, according to his analysis, a trade in wholesale U.S. gasoline prices from the end of January to the end of April – the "sweet spot" – has been profitable 16 times. The average gain per period during the past 18 "sweet spots" was 16.8 per cent.
Generally speaking, Mr. Vialoux says, seasonality works about 70 to 80 per cent of the time. That means you don't automatically invest just because a season is starting. First you need to do some basic fundamental technical analysis to decide whether it makes sense.
"We look at when seasonality is clicking – you see the sector start not only to trend higher, but it will start to outperform the market."
When it clicks, you buy; then you watch closely to make sure it continues to do well.
In the case of gasoline prices, Mr. Vialoux says in his analysis that he looks for the sweet spot to begin when there is a peak in gasoline inventories, usually between the last week in January and the second week in February. This year, it took place in the last week in January.
There are other technical factors – determining that gas prices are likely to rise this year by looking at crude prices and the cold winter and its effect on refiners. Also, checking the wholesale prices of gasoline so far this year – they're moving higher, and their strength relative to the S&P 500 index "turned positive" in mid-January.
A direct way to invest in gasoline prices, he suggests, is through the United States Gasoline Fund (UGA), an exchange-traded fund based on gasoline futures and short-term notes.
While seasonal investing takes work, Mr. Vialoux says there's enough information out there to help the retail investor. His blog and that of his son Jon (equityclock.com) provide technical analysis. Brooke Thackray, also at Horizons, puts out an annual book that outlines seasonal market trends, by month.
Whether the retail investor should get involved in seasonal investing is a subject of some debate, however. Mr. Vialoux says yes, providing the investor is sophisticated and motivated enough to do the work.
Vijay Jog, a professor at the Sprott School of Business at Carleton University in Ottawa, disagrees. "There is just no way for retail investors to time the market," he says. For retail investors, "nothing works. Retail is buy and hold, dollar averaging, don't-get-complicated strategies."
Prof. Jog remains unconvinced by using seasonality as a guide – even the most common variant, pulling your money out in May and coming back in October. Over the long term, he says, there are trends with respect to certain months – November, December, January and February "seem to do most of the returns."
But, he asks, "Why would an individual investor want to do any of that? It's not like you lose money [in the other months], you just don't gain as much."
Three to watch
Research analyst Brooke Thackray's annual guides give month-by-month breakdowns of seasonal trends. Some examples for February, from Mr. Thackray's 2014 Investor's Guide:
DuPont.
Its season is from Jan. 28 to May 5 – and has been positive 23 times in the past 24 years. In 2013, for the sixth year in a row, the chemical giant outperformed the S&P 500.
Royal Bank.
It has two seasons – from Oct. 10 to Nov. 28, and from Jan. 23 to April 13. In the current season, Royal Bank and the other domestic banks tend to outperform the TSX composite.
Oil.
The energy sector has outperformed the S&P 500 since 1984 by an average of 4.1 per cent, although 2012 was a terrible year – with the sector tallying a 13.4-per-cent loss.