For equity markets, there are certain seasonal periods that have a strong long side edge, and we are about to enter such a period. Traditionally, the Santa Clause rally was the period between Christmas and a few days after New Year’s. But according to the stock market cycles researcher, Bill Sarubbi, “In fact, the strongest period of the year in the DJIA from 1915 has run from December 15th through January 11th. The index has risen 74% of the time for an average gain of 2%. The annualized return has been 27%.” For the DJIA, that would be a significant edge that one should consider in one’s market operations. Nothing is guaranteed in the world of trading, but something as significant as that gleaned from 100+ years’ worth of data stands out.

As of this writing on Monday the 6th, equity markets have been put back on their heels with a recent bout of selling pressure in the previous week, investor sentiment as measured by the CNN Fear & Greed Index has closed in the 20s (Extreme Fear) for 3 days in a row.
As Warren Buffett has said, investors should be “fearful when others are greedy, and greedy when others are fearful.”

After such a selling squall, it is often hard to pick stocks to go long as many a chart pattern looks awful, to say the least. Breakdowns abound, trends are broken, and ugly charts can become uglier. It is hard to go long against a crowd that is selling.

So, what to do?

Given the extreme fear and a strong seasonal tendency, we take a barbell approach.

We keep a list of stocks, that we have a good idea are fundamentally strong with good quantitative measures that are the go-to stocks when markets turn up. Higher beta, lower P/E, within 5% of their 52-week highs. We select from there.
Also, we select from a list of stocks that are down big on the year, being sold by money managers (trying to window-dress the portfolio for yearend) and retail investors taking losses. We are gleaning this list for potential “tax-bounce” candidates, stocks that once the selling has abated will potentially rise.

As the stock markets have seasonally strong periods, certain stocks do as well. We look for stocks in the previous two lists and see which may be entering such a period. (In doing so, one would need at least a 20-year period of data to screen for such candidates).
Once we have selected our year-end long plays, we begin to build our portfolio. We take initial positions, and as we do, we put in stop orders in case we are wrong in our selection. As time moves forward, we add to the positions that are working for us, while moving our initial stop orders higher.

We hold for the length of the positive seasonality, then reassess each position. If it looks like the position has further upside, we hold, if not we jettison the stock.

Happy hunting, and best of luck for the season. Stay safe and trade well.

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