Why Seasonality is Secondary

Some great trades can come when different sets of data align themselves at the same time. I often look at and write about price, relative strength, Commitment of Traders (COT) report, and seasonality when viewing a sector or asset class. Seasonality can be a great resource for screening and finding the bullish and bearish periods of time based on historical. However, 2014 has been a great example of why we can’t rely solely on seasonality.

A few weeks ago I wrote about the breakout in price for the Internet sector ($FDN) which was happening during a bullish period seasonality. Since then we’ve seen $FDN continue to rise.

However, when we look at the overall U.S. equity market, seasonality hasn’t been as helpful. We came into this year with the 2nd and 3rd quarters being historically the worst quarters in the Presidential Cycle. Over the last three months the S&P 500 ($SPY) is up nearly 6%. Looking at one-year seasonality, May to October hasn’t been the stronger period of trading. But 2014 has seen new all-time highs even during this bearish timeframe.

If all we looked at was the historical seasonality of the market and used that solely as our bearish/bullish bias, then so far this year would leave us scratching our heads in confusion. However, price is what pays and must always be respected. Each week in my Technical Market Outlook post I start with the overall trend of the U.S. equity market and then take a look at breadth and momentum to understand the ‘health’ of the trend. This helps keep us honest and check our emotional bias at the door. While seasonality is currently saying we should have a bearish slant, price is saying something different which makes seasonality a secondary indicator.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Is the Internet Sector About to Breakout?

When I look at different sectors and industries one of first places I turn to is the seasonal strength studies published in the Stock Trader’s Almanac. Jeff Hirsch does a great job crunching the numbers looking for periods of time that certain sectors have seen strength. For the Internet sector, that period of time has historically started in August and lasted through December.  So does price action confirm this bullish seasonal bias?

Below is the daily chart for the First Trust Dow Jones Internet ETF ($FDN). It’s had some big moves this year as it rose 11% from January until March and then dropped 26% before finding a bottom in May and most recently it has gained 16% from that May low – all while the S&P 500 has been up just 5%. This is a great example that just because the major indices may be up a couple of percent or even in the red it doesn’t mean other pieces of the market can’t have big moves.

Heading into the low in May for $FDN we can see that a positive divergence developed in the Relative Strength Index (RSI). As price made lower lows we saw this momentum indicator begin to create higher lows, a sign that price may be getting ready to start heading higher. And that’s exactly what happened.

The Internet ETF is now in a symmetrical triangle pattern as it consolidates. This type of pattern often precedes a continuation of the prior trend, which in this case would be bullish. When we look at the movement in momentum, the RSI has held support just under its midway point, which is a positive sign that $FDN may be coiling to head higher.

Looking at the bottom panel of the chart we have the relative performance of $FDN vs. the S&P 500. Since the May low, the Internet sector has been outperforming the market, with the ratio between $FDN and $SPX in an established up trend. This has remained the case even as $FDN has consolidated over the last month.

Going forward, I’ll be watching to see if price can take out the upper trend line and then break past the prior high around $61. I also want to see if the Relative Strength Index can break above its prior high at 60 as a sign that momentum is confirming the potential bullish move in price.

FDN

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Will the Internet Sector Enjoy Seasonal Strength?

At the start of each month I look at what sectors are starting (or ending) their period of seasonal strength. The Stock Trader’s Almanac does a great job at looking back in history and finding the periods of time that certain sectors have best performed. Starting in Mid-April, historically the Internet sector ($FDN) has done well. Since 2005 the Internet sector has only seen two negative years for its seasonal strong period: 2002 and 2010. I use this set of historical data for equity sectors as a way to help screen and get ideas for potential interesting setups.

When looking at the latest price action for the First Trust Dow Jones Internet Index ($FDN), I noticed the positive divergence that’s been taking place in the Relative Strength Index. With price making lower lows we’ve seen momentum bounce from an ‘oversold’ level to making higher lows.

I also noticed that volume has been just destroyed in this space. Looking at the On Balance Volume indicator, which adds shares on up days and subtracts shares on down days to give an idea of buying and selling volume, it’s been knocked down to levels not since early 2013. This tells us that heavy volume has been coming into $FDN on periods of weakness. This is typically a bearish sign but it can also be viewed through a contrarian lens. Has the selling been overdone for this internet ETF?

What I’m watching for going forward is to see if $FDN can get back above its 200-day and 20-day Moving Averages. The shorter-term MA has done a nice job of highlighting the short down trend that’s been created over the last two months, so a break there would help provide some confirmation that the overall up trend may be back in play. If we don’t see $FDN clear these two Moving Averages and drops back under $53 while taking the RSI indicator with it then the bears may still be in control and heavy selling could continue.

FDN

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.