Monthly System Spotlight: Seasonal ST ES
December 12, 2005
After watching the struggles of many mathematically-based swing trading systems in 2004, seasonal analysis has seen a surge in popularity in 2005, as traders recognize the usefulness of these types of indicators.
Some traders will argue that Seasonal Market Analysis is the original form of system trading, as seasonal tendencies have always been part of the markets. However, with the development of personal computer and Tradestation software platform in the mid-90’s, seasonal analysis took a back seat to mathematical models, which focused on moving averages and other technical indicators to determine when to enter and exit trades.
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 re-adjusting 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 timeframe 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 b bullish tendencies and short for b 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 b, typically such b 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, 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 b bullish period.
- Short signal is issued on b 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 is the first seasonally based system to trade at Attain and this statement alone might be enough to scare away some investors. However, it is hard to doubt the systems performance in its first three months of trading at Attain (see chart below).
Beyond the nice returns for active the investors the performance of the last three months 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.
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 Tzar 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 developers insist that stops only de-grade system performance as seasonal trades need to breathe. Regardless, we wouldn’t mind seeing a little extra protection against adverse market movements.
Second, we worry that seasonal trading systems are more susceptible to changing market conditions than the average mathematical formula based system. What happens for example if the seasonal Santa Claus Rally turns into a Santa Claus sell off? Without traditional mathematical models will the system be able to adjust to changes? In short, this style of trading might be slightly more prone to system updates and other minor modifications than traditional trading systems, and this will be a challenge for the developer to manage accurately.
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 great start in this the final quarter of 2005, and we fully expect this momentum to carry over into 2006.
- 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 |
After a great month of November it seemed like every single market including commodities, currencies, treasuries, and stocks got off to an awfully slow start in the first week of December. Perhaps the paralyzing snow storm that swept across the Midwest had something to do with the slow down, but more than likely the markets just needed a little break after a rip roaring November.
For trend followers the Metals markets (Copper, Palladium, Gold, Platinum) continue to be very hot as prices continue to sky rocket. Last week alone Palladium prices gained 5.12%, with Gold prices following close behind at +4.58%. Copper traders weren’t left out of the party either with High Grade prices jumping +2.47%. Platinum traders were quiet however with prices remaining unchanged.
Other markets on the move last week include Sugar which was up over 5.00% with price records being set almost daily. Cotton prices also traded higher gaining +1.84%. In the grain markets Soybeans were on the upswing gaining +1.06%, while Wheat prices fell hard dropping -3.83%. Corn was unchanged for the week.
The rip roaring energy markets had an uncharacteristically slow week with both Crude Oil and Unleaded Gas remaining unchanged for the week. Heating Oil and Natural Gas were more active and surprisingly these two commodities which typically see prices rise and fall together moved in opposite directions last week. Heating Oil followed the lead of Crude and Unleaded moving -2.28% lower, while Natural Gas continues to be it’s own animal gaining +2.66%.
Stocks, Bonds, and currencies were all very slow last week. In stock index trading only the NASDAQ futures had any significant movement falling -1.00%. The remainder of the stock indices remained unchanged for the week. Bond futures were also quiet with both 30 year bonds and 10 year notes remaining unchanged. Finally, in currency trading Eurocurrency and the Swiss Franc made a small comeback against the dollar with the EC gaining +0.87% and the Swiss Franc gaining +1.13%, while the US Dollar Index fell -0.70%.
***Day Trading***
Stocks were on the defensive last week but the selling wasn’t convincing enough for the majority of the systems to try and go against the recent bullish trend. Several systems tried their luck buying into the market and most wound up on the losing side of the coin.
Despite murky conditions last week, a handful of systems were able to escape the week profitable. Daybreaker SP came out firing with trades on both Monday and Tuesday and netted +$475 on the pair of trades. RC Miracles ES finished the week positive as well making +$290 per contract. Electric Daybreaker II ES had three trades over the course of two days for profits of +$110. Rounding out the others was Helix which made +$75 on ten trades.
R-Mesa eRL was profitable on two of three trades last week but the end result was a loss of -$70. RC Success ES continues to struggle in the second half of the year and lost -$177.50. Electric Daybreaker II eRL traded three times as well and lost -$190. Nautilus ES came out of hiding and took its first trade since November 1 -- unfortunately the trade resulted in a loss of -$205.
Clipper eRL traded four times for a loss of -$695. R-Mesa SP traded six times including two reversal trades to start off the week resulting in a total loss of -$1,004.55. Compass SP struggled for direction last week as well and lost -$3,750.
***Swing Trading***
Last week was another slow week for the market; however the lagging weekly range and gradual sell off led to an assortment of trading as swing systems were caught looking for a new trend.
Several systems that had been holding long over the past few months officially locked in gains. The most impressive of the bunch was Tzar eRL which reversed its November 2nd long position to end the week with open and closed trade gains of $4,575. Also locking in a solid gain was Axiom ES; the system ended the week +$2,805 after reversing short on Thursday from its October 28th long position.
Other trading included Seasonal ST ES earned an additional +$825 on the week. The system has simply been on fire since starting at Attain (see System Spotlight below). Axiom NQ also added to the bottom line earning +$115 on 3 trades. Unfortunately there was not all good news as many of the short term swing systems found the narrow range and limited volatility confusing. Eclipse eRL was the hardest hit locking in open and closed trade losses of -$2,605.40. Axiom eMD lost -$1,760, Delphi eRL ended down -$1,295, Delphi eMD lost -$1,266, and Athena eRL finished down -$530.
Many investors may have also recognized last Thursday as “Market Rollover†whereby it is required for accounts to move forward to the next most actively traded contract, in this case December 2005 to March 2006. Those systems that did not change position included Tzar ES, Tzar eMD, Axiom eRL, and Tzar NQ. Each system is currently holding onto sizable gains of +$2,790, $2,590, $2,580, and $754 respectively.
Outside of the indices this week Jaws Narrowneck added +$218.75 in open trade equity, Mesa Bonds and Notes lost -$31.25 in open trade equity, and Axiom CL 90 lost -$2,780 in open and closed trading.
***Long Term***
Coming off of their best month of the year most long term system investors were hoping to see a continuation of excellent trending market conditions in December. Unfortunately, it appears that the markets have cooled off a bit as a round of profit taking hit the markets last week. Metals and Softs continue to be the two hottest sectors with Palladium, Gold, and Sugar all rallying higher. Elsewhere, grains have started to trend again after being choppy of late. While energies continue to the most volatile sector with each big rally being followed by an even larger sell off and vice versa.
Since Metals and Softs are the hottest commodity markets we will profile system positions from those two sectors this week.
Please Note: Most Metal trades have been rolled within the last two weeks of trading and because we are required to use actual customer positions we will only mention open trade profits for the most CURRENT leg of a trade.
Axiom LT is one system that is long in both sectors with a long March Palladium position for open trade profits of +$1805.00 per contract, a long March London Sugar trade for profits of +$2200.00 per contract, and a short March Cotton position for profits of +$240.00 per contract.
Andromeda is long in February gold for profits of +$2950.00 per contract, January Platinum for profits of +$3795.00 per contract, and March Palladium for profits of +$1805.00 per contract. The system is also short March Cotton for a loss of -$80.00 per contract.
SEMA4 Symmetry is long in March Sugar for profits of +$3242.00 per contract and long in February Gold for profits of +$2930.00 per contract.
Finally, Aberration Plus is long in March Sugar for gains of +$2962.80 per contract and in LME Aluminum for profits of +$3774.00 per contract.
Please Login to: http://www.attainaccess.com for the latest updated statistics.
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.