End-of-Year Seasonal Trade Ideas

12/13/2012 12:30 pm EST


Rob Hanna

Co-Founder, Investiquant

Rob Hanna gives us a few ideas for end-of-year seasonal trades in a specific type of stock.

A lot more traders and investors these days are looking at seasonal trades and the end of the year has some opportunities.  My guest today is Rob Hanna, to talk about some of those.  So, Rob, what kind of seasonal trading are you looking at the end of the year?  We’ve got a lot of holidays and things coming up.

Well, one nice thing with seasonals is that you see the same thing happen over and over every year, and one of the stronger seasonal plays that I’ve noticed over the year is that small caps tend to outperform large caps over the last three weeks of the year, so if you’re looking to trade I normally get more aggressive in the smaller cap stocks, or I’ll play the Russell 2000 instead of playing the S&P 500 a lot of the time as we approach the end of the year.

And what do you think is behind it?  It is a rebalancing of portfolios and hedge funds and that sort of thing?

Yeah, I think it is.  You know, something like 22 out of the last 24 years, you’ve seen the Russell 2000 outperform the S&P 500 between mid-December and the end of the year, and that’s a pretty steady.

Reliable occurrence.

Yeah, it’s very reliable, and the outperformance has been pretty strong, as well.  We also get some nice seasonality from a volatility standpoint.  You tend to see volatility wane off as we get near the end of the year, so VIX, for instance, has hit its yearly low in December something like 80% of the time.

So, what’s the trade here?  Is it simply as simple as going along the Russell and maybe short the VIX futures?

Yeah, you can play VIX futures.  You could also play the VIX ETFs, so if we get to an oversold condition in the market and the VIX is a little high, you could look to buy XIV, which is the inverse VIX security, hoping to make some many as the VIX deteriorates into year-end.

And then technically, when I’m looking at charts of these things to tell whether or not it’s going to be reliable this year or any other year that I’m looking at this, what kind of things on a chart should I be looking at to determine that? 

Well, that’s tough.  Basically, what I try and do is look at a combination of price action and seasonality, so I don’t want to go head-long into an overbought market just because it’s been a good few days traditionally.  What I’d rather wait for is a time where my price indicators are saying it looks like a good time for a balance, or it looks like a good time for a move up, and that also agrees with seasonality, and when you get the two combined, then you get a nice power pool risk-reward scenario.

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