System Spotlight: SeasonalST ERL & SeasonalST ES
December 11, 2006
One year ago, to the day; we highlighted the Seasonal ST system - and those clients who read that report and invested with the program sure are happy we did. The Seasonal ST has done great in 2006, returning +$2,200 per single emini S&P contract, and profits of +$9,940 per single emini Russell contract on investments of $20,000 for each.
Typically, most investors associate seasonal analysis with commodities such as crude oil and corn with weather predictions playing a big role in price patterns. But, as the developer of this week’s featured system would tell you, seasonal analysis can also be applied to the stock markets as chart patterns of previous years seem to repeat themselves in the future.
Take for example the popular "Santa Claus Rally" term that countless CNBC broadcasters have referred to of late. A Santa Claus rally is in fact a seasonal expectation that the stock market will rally from late December into the New Year as investors begin readjusting their stock portfolios. Ironically, this phenomenon seems to be true - as over the last 100 years stocks have advanced higher nearly 65% of the time between Christmas and New Years Day.
Who is the Developer?
The developer of Seasonal ST is Robert Steelman, whose background is in technology and computers. For more than 10 years Robert also worked as a technical consultant for several well known financial institutions. It was during this experience as a consultant that Robert realized the opportunity for mechanical trading systems, especially those that focus on exploiting seasonal tendencies in the markets.
Robert started taking interest in the stock markets in 1994. At that time he used his knowledge in technology to pick tech stocks and build a successful portfolio. Buying dips in tech stocks worked pretty well till March 2000, but the next 18 months took back everything and then some, as like many other investors Robert felt the tech bubble burst right from out underneath his feet. Robert compared this difficult experience to repaying a loan with hefty interest.
In the last few years he became more interested in mechanical systems and as a result created a system for day-trading highly liquid stocks based on seasonal indicators. After testing the system on stocks the developer realized that these seasonal opportunities also exist in other investment vehicles including Stock Index Futures and ETF’s. (see last weeks newsletter for a definition of ETF’s)
In the process of developing trading systems Robert found that in order to be successful the following guidelines must be followed and he uses them as the backbone of his SeasonalST system:
a) Prove the strategy to yourself.
b) Trade only with a proven strategy
c) Calculate proper allocation for your strategy while considering your account capitalization. The market will make sure your limits will be tested as the largest drawdown for a system is always in the future.
d) For every strategy set a time frame for performance evaluation. This could be weekly, monthly, quarterly, yearly, etc. Plot the equity curve. Stop trading with strategies producing losses in two consecutive periods. Remember to be realistic (1 day or 1 month is most likely too short)
e) Be very disciplined and continue to trade a system until proper statistical analysis tells you to stop.
f) Be very persistent. Don’t let calculated losses derail the trading plan as market shall make sure the confidence of every participant will be shaken.
g) Don’t attempt to cherry pick setups. Take all system signals as it is impossible to predict which system signals will be successful.
How Does the System Work?
Robert’s studies of the stock markets led him to ask two questions. First, why would a certain time period have either bullish or bearish tendencies? Second, even if that were the case then why wouldn’t big institutions take advantage of this and pretty much negate the advantage?
After plowing through decades of data the case for seasonal indicators became very convincing. Seasonal tendencies have existed for many decades and will always be part of the markets. Therefore the opportunity to develop a trading system around seasonal indicators also exits, in order to give traders a better idea of where and when to enter the markets.
SeasonalST is the result of a lengthy research encompassing over 30 years of S&P 500 index data and this research identified various seasonal patterns. The length of the patterns varies from one day to maximum of 3 months, with the average trade lasting two to three days. The strategy signals long during periods with strong bullish tendencies and short for strong bearish tendencies. The signal strength is a combination of the strength of the seasonal pattern and how many patterns are in effect for the period. For the long signal the strategy normally expects at least two bullish patterns to coincide and for short signal at least two bearish patterns to coincide. There are several exceptions to this rule as some patterns are very strong, typically such strong patterns last only a day or two and provide the quickest trades the system can issue.
SeasonalST can be traded with any trading vehicle emulating the S&P 500, Russell, Nasdaq or Dow Industrials indices. However, trading the e-mini Futures markets is the choice of most investors due to favorable tax rules and leverage opportunities. The system is also suitable to traders with a modest account size, since it doesn’t require a huge portfolio to start, the recommended account size being $10,000 for one e-mini contract. For larger accounts, money management formulas are outlined on the developer’s website. www.theseustrading.com
To recap - SeasonalST strategy:
- Trades last an average of 2 to 3 days.
- Long signal is issued on strong bullish period.
- Short signal is issued on strong bearish period.
- Research goes back over 30 years - to the year 1974
- Can be traded with e-mini SP, e-mini Nasdaq, e-mini Russell, and e-mini DOW.
-Suitable for medium sized accounts with at least $10,000 allocated per contract.
- Money management formulas available for large accounts.
Attain Comments
Seasonal ST was the first seasonally based system to trade at Attain, and that may have scared away some investors at this time last year. But here we are a full year later, and there is no worry about being the guinea pig now, with the system having a full year of actual trading under its belt, both in the ES and eRL.
Beyond the nice returns for active investors, the performance in 2006 has given the Seasonal ST strategy validity. Let’s face it; critics of seasonal trading styles immediately make reference to “curve fitting†or “cherry picking trades†because this type of system lacks the complicated mathematics found elsewhere. And to be honest this was the first thought to cross this author’s mind as well when presented with the strategy in early 2005. But, like trading systems of all styles, seasonal or mathematical, the proof is in the pudding and to this point the performance of SeasonalST has not disappointed investors. Of course, past performance is not necessarily indicative of future results.
Another benefit of seasonal trading strategies is the instant diversification that they provide any traditional system portfolio. Because seasonal trading strategies are not bound by the same technical indicators and moving averages as mathematical systems, they can succeed in market conditions that a traditional trading system would struggle in. Therefore the correlation between Seasonal ST and a traditional swing trading system like Axiom ES (0.25 correlation) or Delphi ES (-0.18 correlation) can be very low.
There are some areas of improvement that the system developers may want to consider investigating. First, unlike other mechanical trading systems, Seasonal ST does not use protective stops, which can scare even the most experienced traders. The system will exit when the seasonal logic tells it to, no sooner, no later; but Attain can overlay a "worst case scenario" stop for clients to help them sleep better at night.
In closing, SeasonalST provides an excellent swing trading investment opportunity for any trader who is looking to expand his or her trading portfolio. Because of its non-mathematical focus, this system should provide excellent diversification opportunities especially for those who trade traditional swing trading strategies. In regards to performance, SeasonalST has gotten off to a good start in its first full year of trading in 2006, and we fully expect this momentum to carry over into 2007.
One additional note is that the developer did release a second system this year, called Polaris. Polaris is also by Theseus and uses seasonally based strategies just like SeasonalST. The main differences is that Polaris’ trades are shorter term (2-3) days while Seasonal typically holds trades for 1-3 weeks. To view the backtested performance of Polaris on the eRL, click the following link: Polaris eRL
Call us at 800.311.1145 or email invest@attaincapital.com to see how the Seasonal ST program would fit in your portfolio.
- John Cummings
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can
carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading
losses are material points which can adversely affect investor returns.
Feature | Week In Review | Chart of the Week |
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Feature | Week In Review | Chart of the Week |
***Overview***
US Stocks continued their climb last week, albeit at a slightly slower pace than we have seen in previous weeks. Trading conditions slowed as the week wore on ahead of tomorrow’s final FOMC meeting of 2006. Most analysts expect the Fed to leave rates unchanged again. However, there is some speculation that the statement that accompanies the Fed announcement will be less transparent than those issued throughout this year. Less transparency = more uncertainty which is typically good for traders who prefer more volatile market conditions. Last week SP futures gained +0.69%, Nasdaq futures were up +0.34%, Russell 2000 futures rallied +1.08% higher, while SP 400 Midcap futures moved +0.56% higher.
US Treasuries and foreign currencies both pulled back slightly last week after Friday’s monthly unemployment report, as the US economy continues to appear b. 30 year bond futures pulled back -1.14% for the week, while Eurocurrency futures dropped -1.04%, Swiss Franc futures were down, -1.05%, and Japanese Yen futures moved -1.05% lower. US Dollar Index futures rose +1.06% for the week.
Likewise the precious metals markets took a hit last week as well. Gold futures fell -3.01%, Silver was down -2.08%, High Grade Copper dropped -1.89%, and Platinum futures dropped -4.05%
Energies were also down for the week however these markets have stabilized and Crude Oil futures seem destined to remain closer to $60 per barrel than $50 per barrel for the foreseeable future. Last week Crude Oil futures fell -2.21%, Heating Oil futures were down -4.89%, RBOB Unleaded Gas futures moved -4.02% lower, while Natural Gas futures remained very volatile dropping -8.31%.
Finally, grains fell hard last week with Wheat futures losing -6.72%, Corn down -4.78%, and Soybeans falling -3.10%. In the tropical markets Sugar fell -7.26%, Cotton was down -1.77%, and Coffee dropped -1.37%.
***Day & Swing Trading***
It was a slow week for day and swing trading programs, with the majority sitting out most of the week waiting for some sort of break in either direction. December has treated systems well in the past few years and hopefully the next two weeks leading up to the holidays will make up for the lull in the first part of the month.
Swing trading systems that were long didn’t have to do much more than maintain their positions to profit last week. Adaptive Euro saw the biggest gains with +$2,098 in profits after holding two long positions in the FTSE and one long position in the CAC 40. All three trades were going against the system, but rallied last week to tack on open trade equity and eventually hitting the profit objectives for both FTSE trades. SeasonalST eRL couldn’t have played it better last week and was rewarded with +$1,190 in profits (+$870 on the closed out trade). The system exited a long position on Wed only to re-enter late Thursday after missing the sharp sell-off earlier that day. SeasonalST ES (see this month's system spotlight on the SeasonalST system above) had similar trades for profits of +$657.50 (+$520 in closed out profits). Tzar eRL tacked on +$1,180 in open trade equity on its long position.
Elsewhere, Adaptive US had one long trade in the eMD that profited +$930. Delphi eMD and Axiom eMD entered the week with long positions and both added +$910 in open trade equity for the week. Delphi eMD went on to lock in its winning long trade for profits of +$500 while Axiom continued to hold long heading into the weekend. Spartan ES reversed short for closed trade profits of +$1,142.50 and ended the week losing a few points on the new short trade for net gains of +$680 for the week. Tzar ES reversed short while Tzar NQ held long for weekly gains of +$390 and +$355 respectively.
Day trading profits were a little harder to come by, but a few systems were able to take care of business despite the slow conditions. An old favorite, Compass SP, got back on track last week, though; with profits of +$2,225 on a pair of trades from Monday and Thursday. Elsewhere, Impetus eRL had one trade that made +$160 on Monday, while BWT Zones Classic was penalized for over-trading in the choppy conditions and lost -$4,450 on five trades for the week.
***Long Term***
The interest rate sector had a moderate correction during the past week as ber than expected job growth in November sparked some profit taking after the markets made new 1-year highs the week before. The trend bias continues to favor the upside, however, as many pundits still see a cooling economy in the coming months supporting prices. The upcoming slate of economic reports and FOMC meeting this week should be good indicators of whether or not the current trend will continue. Long term systems continue to have an upside bias with long positions held by Andromeda +$3,600.00 (open trade), Vivaldi +$1,946.50 (open trade), Pegasus +$353.25 (open trade) and Trend Simplicity with -$240.63 (open trade) in USZ. Axiom LT is Long TYZ with open trade equity of +$564.50 as is Pegasus with +$290.63 (open trade). Aberration is long TUZ with open trade equity of -$328.12.
Major foreign currencies posted modest losses during the past week, sparked by the ber than expected jobs data in the U.S. and general profit taking after the Euro rallied to highs not seen since June. The market still seems keen on the idea that interest rates in Europe will rise faster than those in the U.S. and Japan. Strength should also come from worries that the U.S. economy is nearing a slowdown phase, which might be further magnified by a slew of reports during the coming week. Systems with short positions in DX include Axiom LT +$1700.00 per contract (open trade) and Trend Simplicity +$1,803.00 per contract (open trade). Systems long EC are Trend Simplicity with an open trade profit +$4,612.50, Andromeda +$1337.00 (open trade), Pegasus +$1337.50 (open trade) and Vivaldi +$1375.00 (open trade).
The energy sector remained fixed in the sideways range it has maintained since October, although the market did rally to the top side of the channels due to anticipation of more OPEC production cuts and turmoil in Nigeria. News that U.S. weather could be warmer this winter due to an El Nino formation in the Pacific kept a cap at the attempted upside breakout. Most long term systems banked their current short positions in crude during the past few weeks with Pegasus making $+14,160.00 per contract, Trend Simplicity making +$14,100.00. Vivaldi continues to hold a short mini crude position making $+675.00 (open trade).
Grains and Oilseeds were a little under the weather last week as pressure entered the sector on ideas that the export markets will lose some luster heading into the holiday. The markets also succumbed to ideas that recent gains were a little overdone given that current world stocks remain quite plentiful heading into the South American growing season, which as of now has been good. Systems with long corn positions include Aberration making +$3,150.00 (open trade), Andromeda +$2,462.50 (open trade), Axiom LT +$4,087.50 (open trade) and Trend Simplicity +$2,350.00 (open trade). Vivaldi currently is Short Soybeans making +$787.50 (open trade). Systems with short cotton positions are Andromeda +$1,390.00 (open trade), Axiom LT +$6,425.00 (open trade) and Vivaldi +$3,530.00 (open trade).
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IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can
carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading
losses are material points which can adversely affect investor returns.