The Benefits of Seasonal Compounding

Jan 30, 2019

Having a glimpse at our previous articles, you might have noticed that seasonal market trends are not unique to a handful of companies, but are a widespread phenomenon that many markets accommodate, often unknowingly.

 Trading on a stock that exhibits a spike or trend once off during the year is fine for short term gain, but how do you turn seasonal analytics into an effective and prolonged trading strategy?

 To take full advantage of these seasonal patterns in markets, traders must take an active approach by moving accumulated capital from one positive seasonal trend to the next.

Compounding on seasonal trends

Fortunately, a sufficiently large number of shares that are entering strong seasonal trends can be found at any time of the year. That makes it possible to accumulate gains by switching into stocks that are seasonally attractive in a consistent and timely manner.

I am going to illustrate this schematically. Let us assume that stock A has a strong seasonal uptrend between January and February, generating an average return of +11%, stock B follows with a similar gain from March to April, thereafter stock C, and so on.

By switching from one stock to the next and by so to speak stringing the seasonal patterns together, these returns can be combined.

You first purchase seasonally attractive stock A, then stock B, then stock C, etc. The chart below depicts a diagram of the cumulative returns based on the above-mentioned assumption.

Diagram of cumulative seasonal returns

Theoretically, by taking the compounding effect into account, the example yields a return of +87.04% per year.Of course, in reality such regularity won't be encountered on the stock exchange, and other factors also have to be taken into account. To make an educated assumption regarding how a stock is likely to perform, traders must also look outside historical and seasonal data to analyse current events and expected performances. What seasonal data does, is it allows us to easily identifies what stocks to look at more closely and determine likely repeats, positive or negative. 

In order to turn this into a real example, I’ll illustrate what two months of seasonal compounding would look like using two examples from our ‘Monthly Trading Pick’ (available every month on our website). 

In January we identified Netflix as a solid investment and one that demonstrated a fantastic seasonal trend, we hope you took advantage of this because Netflix stock price from Jan 3rd through to Jan 28 went up a staggering 23.87%. If you had invested, let’s say for simplicity $10,000 in this stock on Jan 3, by the time you sold at the end of January you would have made approximately $2387 in profit. (link to article below)

Example: Netflix

Now with this capital of $12,387, you then move on to the next stock that exhibits a seasonal trend, such as Novo Nordisk. This company is projected to perform strongly in February based on previous data and its current path looks to be in alignment with previous seasonal trends. If everything goes smoothly, the investment of $12, 387 into Novo Nordisk from Feb 5 through to Feb 25 will give an estimated return of 5.66%. Meaning you would likely earn $701.1 in profits.

Example: Novo Nordisk

This is what we call Seasonal Compounding, an active strategy that identifies seasonal trends on a monthly basis. Moving capital from one positive trend to the next, in order to maximize high returns on investment and interest.

Many stocks exhibit stable and predictable seasonal trends, find them through our web application and start boosting returns with seasonal compounding.

Netflix article: (