29
Oct

Seasonal Trading in 2014 - The Small Cap Power Period

For a several years I have written about this seasonal phenomenon that is used by several hedge funds to gain an edge. Tomorrow (Thursday) is the first buy day of the first of three 2014 "sub-periods that occur in the fourth quarter; (we call them 'power periods') which are especially potent and consistently positive. They are:

Power Period #1: The last two trading days of October and first two trading days of November

Power Period #2: The last six trading days of November and first three trading days of December

Power Period #3: The last seven trading days of December"

I first read about this some years ago as it is described by AlphaIM for their Alpha Bonds Strategy. They use index funds that give them a beta of 1.5. Quotes/italics in this post is the work of Alpha Investment Management. There are plenty of ETF's out there that track the small cap index fund - The Russel 2000 or the RUT. The directly correlated index fund that can be traded is $IWM. I have previously used $TNA successfully which gives a beta of 3x. This strategy can also be played by finding bullish patterns of small cap stocks that are likely to have a stronger edge during this period. In my experience, it is best played with all three sub-periods.

"These three periods exploit other lesser known "sasonal factors" in addition to small cap dominance at year end. For example, it is well established that the market does better during the month-end and month beginning period than other times. Also, the market tends to produce above-average returns around holiday periods (Thanksgiving and Christmas).

AlphaIM has been tracking these statistics since 1979. Over the past 35 years, "the 1.5 Beta Statistics shows that the two historical losses have been minor while the average trade has generated gains of 3.2%. Overall, the three power periods have produced an average gain of 9.6% per quarter while exposing assets to market risk just 8% of the time each year.

We know of no other market-based factors which come close to delivering this kind of return with such unerring consistency.

Disclosure: Past performance is not a guarantee of future performance. The Russell 2000 is an index and cannot be used in actual investing. Index funds which replicate the index may not produce returns exactly matching the index. The data presented does not take into consideration fees, expenses or trading costs. Hypothetical or model portfolios also cannot reflect management decisions which may deviate from the methodology presented."

One Response for "Seasonal Trading in 2014 - The Small Cap Power Period"

  1. […] The final Sub-Small Cap Power period starts on Monday and ends on December 31. It is the last seven trading days of 2014. I intend to be on board for this final sub period. To read about the Small Cap Power Period click HERE. […]

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