There are a number of ways to initiate the process of generating a trading idea. One of my favorites is to use statistical analysis to determine if a stock or index moves in a predictable manner at some point in the future. When a security experiences regular changes which recur every year, it is said to have seasonable returns. Evaluating the seasonality of a security is often the first step I take in evaluating a potential trade. The next step is deciding on the best instrument to use to create the best risk adjusted returns.
With the calendar now in the latter half of March, I decided to evaluate the performance of certain stocks in April. My objective was to find seasonal movements that showed an increase or decrease in the returns of a security, during a specific period, of more than 70% of the time. The evaluation would cover at least a 15 year period, with an average absolute movement of more than 1%.
Apple is a great candidate to evaluate. During the last 15 year period, Apple has been higher 73% of the time or 11 out of the 15 years for an average gain during the month of April of 4.8%. The seasonal pull has been even more impressive over the course of the past 10-years. The stock price has been higher 80% of the time in April for an average monthly gain of 6.6%.
The move is more of a function of Apples' performance as opposed to technology stocks in general. When comparing AAPL to the Powershares QQQ Trust, Apple has been higher 60% of the relative to the QQQ for an average gain relative to the ETF of nearly 4%.
Profitability is increasing
As of the writing of this article, Apple stocks was trading at $124.50 pushing Apple's market cap over $725 billion. The company is now a Dow Jones Industrial Average component, which will provide for an even broader reach. With all the cash on hand at the company, Apple will likely continue to be its best advocate. The company recently increased its stock buyback program to $90 billion.
Profitability at apple continues to impress as their return on equity (ROE) improved from Q3 2014 to Q4 2014 and from Q4 2014 to Q1 2015. ROE is a profitability ratio calculated as net income divided by shareholders' equity.
Seasonal statistics can help you find regular predictable movements of a stock or ETF, but it is also important to evaluate the best instruments to capture those movements. Investors who are looking for an aggressive trade could purchase the stock, while investors who are more conservative might consider a pair trade.
Pair trading is a market neutral strategy in which an investor looks to produce returns based on the relative change of one stock to another. Pair trading is thought of as a relative value strategy, as it does not depend on the outright direction of the broader markets and instead produces returns based on the ratio between two stocks. In this scenario you could consider purchasing Apple and simultaneously shorting the QQQ.
Disclosure: The author is long AAPL.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.