An Amazing Energy Services Seasonality Trade

Jan.27.10 | About: VanEck Vectors (OIH)

There are some amazingly consistent seasonality trades that seem to provide convincing evidence that the stock markets are not totally efficient. One example is a simple 6 month trade using the energy service sector:

  • Buy the last day in November.
  • Sell the last day in May.

This trade can be easily executed using an ETF or the Fidelity Energy Services Sector Fund [FSESX]. I use FSESX because I trade a fairly large size, you can buy it without any commission and there is no slippage or bid-asked spread.

It is amazing that this simple seasonality sector trade has been profitable every year since FSESX was started back in late 1985. Here are the annual returns using price data that is adjusted for dividends.

2008 25.35%
2007 19.34%
2006 19.48%
2005 19.48%
2004 9.94%
2003 17.54%
2002 16.26%
2001 36.03%
2000 35.45%
1999 62.96%
1998 45.22%
1997 0.99%
1996 15.30%
1995 35.70%
1994 17.79%
1993 1.77%
1992 30.40%
1991 5.83%
1990 1.87%
1989 33.98%
1988 27.16%
1987 22.62%
1986 38.13%
Click to enlarge

The winning streak is 23 in a row and still going strong!! This could be the “Joe Dimaggio” of seasonality trades (Joe Dimaggio had a 56-game hit streak, so the trade needs to be profitable for another 34 years to beat Joe’s record).

A good way to find seasonal trades like this is to compute monthly returns over a ten year period, and then look for patterns of positive or negative returns. Here are the average monthly returns for FSESX for the last 10 years (2000-2009):

JAN 0.58%
FEB 3.95%
MAR 3.66%
APR 6.02%
MAY 5.01%
JUN -1.93%
JUL -2.86%
AUG 1.21%
SEP -2.18%
OCT -2.38%
NOV -0.66%
DEC 5.36%
Click to enlarge

The December through May returns are all positive. Another good sector trade would be a four month trade from end of January through end of May.

This year, the trade was to buy FSESX on the close of Nov. 30 at 55.85. It remains to be seen whether the win streak will continue to 24, but so far the trade is profitable because FSESX closed yesterday at 59.17.

Full Disclosure: Long FSESX