How Our Biggest Breakthrough Ever Doubled the Market’s Return | BY KEITH KAPLAN
CEO, TRADESMITH |
Imagine you’re in the year 1850, driving down a dusty old road on a horse-drawn carriage. The route is clear, and this is not the horses’ first trip. But while the front of the pack are strong, more than pulling their weight to get where you want to go… More than half of them are sick, weary, and barely limping along. Despite this, you’re cruising along at an acceptable pace. All of a sudden, you hear the thunder of hooves upon the ground. You look over your shoulder and spot a cloud of golden dust rising against the sky. Soon, another carriage catches up and quickly passes by. The man at the reins looks to be in just the same station as you, and the carriage itself is in just the same shape. The key difference is the horses in his team are all in the prime of their lives. Prized stallion thoroughbreds, all at a full gallop. Some time later, you catch up to the man who’s parked in front of a barn. He’s switching out his now fatigued stallions for new, well-rested ones. He’s gotten there so fast, he says, he can afford to spend the time changing out his team every few miles. And while you keep the same horses for the whole journey, he’s happy to make pit stops like this… because he gets where he’s going twice as fast as you. Here’s why I’m telling you this story… The first carriage is like buying and holding an index fund in the stock market. Often, you’re being pulled forward by just a few strong stocks – like the Magnificent 7 over the past two years. But when those horses falter, like in 2022, early 2020, and 2008… the ride comes to a grinding stop. The second carriage, on the other hand, is like using a new investment strategy we just built at TradeSmith. With it, you focus on a specific group of stocks with the best historical tendency of moving higher at any given time. Not only that, a special factor makes these stocks continually ready to outperform. Using it has led to returns that have on average doubled the return of the S&P 500 since 2006. Not only that, it’s completely avoided any prolonged stretch of losses over that entire span.
This strategy is our newest investment breakthrough, and it may prove to be the biggest breakthrough in the history of our firm. Let me show you how it works… How Seasonality Helps Us Beat the Market Our latest breakthrough has to do with an incredible innovation we’ve made on a piece of software we debuted in 2023. This software helps you optimize the market’s moves by keeping you in only the stocks with the best chance of rising, faster than the market, at any given time. Dedicated readers know I’m talking about our seasonality software. Seasonality is the practice of averaging out the price data of the past to make effective forecasts about the future. For example, take a look at the chart below of seasonality data for the SPDR S&P 500 ETF (SPY). By averaging out the last 15 years of SPY prices, we were able to forecast at the end of October that the S&P 500 would rally hard through November and into December:
Our data suggested a price rise of 3.64% from Oct. 26 to Dec. 5. Annualized, that’s a return of more than 33%. Stocks wound up doing even better here in 2024, rising about 4.7% over that span – one of the best stretches of performance all year long. And seasonality works on far more than just the broad markets. You can run your stock tickers through this tool at the website we’ve set up for registrants to our upcoming seasonality webinar in January. To try it for yourself, register here to attend the webinar and get free access to seasonality patterns on your stocks. For example, here’s what seasonality showed us about NVDA earlier this year… During the last 15 years, the data shows that NVDA has had a strong tendency to rise from Jan. 20 to Feb. 14. In that time, it’s been positive through this period all but one year… and its average return through this span was 9.04%:
How did NVDA do this year? Even better. It rose over 24%. If you ask me, you’ll want to own NVDA on Jan. 20 again in 2025. It works on the downside, too, as you can see on a seasonality chart of Starbucks (SBUX). From April 29 through May 14, SBUX has been negative 80% of the time for the past 15 years. It’s also posted an average loss of -1.84% during this time:
SBUX lost a lot more this year. It fell more than 13% after it got dumped on a poor earnings report. Think about what this tells us. The timing of seasonality suggests that Starbucks’ Q2 earnings reports have been a sell catalyst 80% of the time over the last 15 years. That’s an edge well worth trading. Understand, seasonality is not a crystal ball. It’s simply data. It shows us an ever-evolving composite of what has happened in the past. The more relevant and precise history there is to look through, the more effective the data. We knew seasonality was helpful for this function. But we got to wondering if it could do more… and if it had the makings of a full-fledged investment strategy. So we put it to the test… The Breakthrough We designed a way to invest based almost exclusively on seasonality. With this method, you plan ahead to trade only the 50 stocks with the strongest seasonality patterns during the upcoming year. You buy these stocks during their best seasonal periods, then sell once that period has ended. Rinse and repeat as soon as another of the 50 stocks comes into one of its best trading windows, based on seasonality. Additionally, you look for stocks that haven’t run too far, too fast in the short term. That ensures you’re only running with a team of “well-rested horses”. (I’ll have more to say on this factor in a future essay.) Remember, people who own index funds and “set it and forget it” wind up with predictably average returns. They’re running teams of horses of wildly varying effectiveness. But for people like you and me, who are deeply involved in the markets every day and are putting in a ton of effort to beat the average, you want to find a strategy that optimizes the index approach. That’s what the new seasonality strategy does. You still focus on a specific group of stocks, but you ONLY trade the stocks at times when their historical data provides a ton of evidence that it’s the best time to hold them. And you reject everything that doesn’t have that evidence. All this is to say, this takes a little bit more work – a few trades per month. But the results are more than worth it. We ran a rolling test of this strategy from 2006 to 2024, with each year testing the previous 15 years of price data for over 5,000 stocks. And this trading strategy – involving the best stocks to buy at their very strongest times of year, based on their historical price action – yielded a total return of 857%… With performance that doubled the S&P 500 on average every single year. Even more impressive is the fact that, unlike the S&P 500 which entered a bear market in 2008 and 2022, this strategy never lost money for long. You can see on the chart below how the Seasonality strategy broke away from the benchmark in 2008 and never looked back…
The biggest drawdown we see was during the late 2018 volatility. Now look at 2020 – barely a blip. And even better, look at 2022… nothing but gains. This is why the horse and buggy analogy makes so much sense. This strategy rejects everything except the fastest, strongest horses with the best track record at any given time. It gets you where we all want to go, only faster and more efficiently… with a lot less pain along the way. If that’s not a better way of investing, I’m not sure what is. We’re set to open access to this new seasonality strategy on Jan. 8, 2025. Once we do, everyone who decides to join will get automatic trade alerts of the best stocks to trade at their seasonally strongest times of the year. (And current Trade Cycles subscribers will have this strategy added on to their current subscription for free on Jan. 1.) In the meantime, though, we want to do something special to help you understand just how big this strategy is. If you go here and sign up for our upcoming webinar all about this new strategy, you’ll be able to access the same seasonality tool I’ve been showing you today… with a forecast for 2025. Take a few minutes and plug in your portfolio top holdings. See when, throughout 2025, they’re set to surge or sink… and write down those dates as a trading plan for the year. Once you see how this tool works firsthand, on your own stocks, my hope is you’ll realize how powerful it is to invest this way. More details on the strategy, including limited time access to the seasonality tool, right here. All the best, Keith Kaplan
CEO, TradeSmith P.S. Before I go, I’d be remiss not to wish you and yours a very Merry Christmas and Happy New Year. We’ll continue to bring you our research through TradeSmith Daily all along to keep your holidays merry and bright. In fact, I’ll be back tomorrow with a letter on how we deploy this seasonality strategy to surface the absolute best times of year to buy and sell any asset… all based on measurable, tangible patterns. P.P.S. Earlier I mentioned a second factor that helps us select stocks to use in this strategy. This second factor is just as important as the seasonality, and it’s how the portfolio was able to experience such little volatility compared to the market since 2006. I’ll show you more about that soon. And I’m excited to, because it’s yet another breakthrough our team made which has strong potential to be used in a lot of other tools throughout our platform. Meantime, make sure to check out more about this new strategy here, and take the Seasonality tool for a free test drive. | 