An 80% Success Rate With An Average 47% Return

Matthew Carr By Matthew Carr, Emerging Trends Strategist

Market Trends


That’s ultimately what we all want as investors.

We want to know – before we get into a trade – that we’re not going to get burned. That it’s going to work. That we’re not going to leap into a stock only to watch it die… And with it, our financial dreams.

Predictability – or the lack thereof – is why so many smaller, retail investors are sitting on the sidelines. Their idea being, “Why invest if I’m only going to lose?”

Well, maybe the harsh reality is: They’re investing wrong… But they don’t have to.

Seasonal Shots in the Arm for Your Retirement

Seasonality is one of the best tools we have in our investing toolbox.

Seasonality gives us predictability. Seasonality lets us know what we can expect to make. It lets us know when it’s the right time to get into the market. And even better, when it’s the best time to exit a position.

Right now, we’re in a beautiful time for seasonal investing. The markets tend to get a little more sluggish – all those high expectations at the beginning of the year start to dwindle… Companies start making revisions on their full-year guidance.

That makes it a great time to open new positions. Particularly in small caps.

Small caps tend to get hit harder when markets head lower… But they rise exponentially faster than their large-cap counterparts on the rebound.

And ahead of us is one of the best times of the year for small caps: January. Since 1926, small caps have outperformed their larger counterparts 70% of the time in that month alone.

Plus, small caps move even higher than large caps during the stretch from October to May.

So, during this part of the year, one of the things I look for as October nears is opportunities in energy small caps. Because this plays into the seasonality of oil and natural gas.

Prices for oil and natural gas generally peak during the winter, but pull back during those dog months of the summer. So, any sell-off in small-cap energy stocks has great upside potential from the lows of fall.

An Average 47% Boost to Your Portfolio

Let’s take a look at Kodiak Oil & Gas (NYSE: KOG).

This is a great little company. Revenue has increased by at least 175% each year during the last four years. And in the last two, revenue has grown by 287% or more.

This is what makes Kodiak so popular as a pick in the small-cap energy sector. It has booming returns and is experiencing tremendous growth.

But the stock has a tendency to die. It builds up a great deal of momentum, investors jump in, and then it fades.

Now, here’s the real exciting part…

There are only seven months of the year you want to hold Kodiak. It’s the seven most profitable months for investors. Because at the end of that span, there’s nothing but losses ahead.

And we don’t want losses.

So, if we look at how the company’s share price has performed on just a seasonal basis – from the start of October to the end of April – we can see a really interesting (and profitable) trend:

Kodiak Seasonal Trade Entry Price Exit Price Return
Oct 2, 2006 – April 30, 2007 $3.50 $6.17 76.29%
Oct 1, 2007 – April 30, 2008 $3.31 $3.32 0.30%
Oct 1, 2008 – April 30, 2009 $1.49 $0.85 -42.95
Oct 1, 2009 – April 30, 2010 $2.34 $3.90 66.67%
Oct 1, 2010 – April 30, 2011 $3.51 $7.01 99.72%
Oct 3, 2011 – April 30, 2012 $4.82 $8.87 84.03%

That’s predictability. That’s what everyone wants. You can look at the history of this seasonal trade and see that 83% of the time it’s been profitable. And your average gain is over 47%.

Let’s compare those seven months to the five months from May to October.

Well, now we know the months to not hold shares of Kodiak.

Seasonality – like volatility – is our ally. They help us squeeze the most we can from each penny we spend, but without additional effort. All we need is some patience.

All you’re doing with this sort of approach is looking for strong, profitable companies (particularly small caps), and applying a seasonal twist. In this case, oil prices peak in winter, then begin to fall back down through the spring.

Even a company with growth rates as strong as Kodiak can’t avoid it. Because seasonality is bigger than any company.

In the current market mood, a lot of participants are taking the longer-term “investor” mentality and buying quality… And that’s great. But adding in a little touch of the “trader’s” approach with seasonal buying can give you an edge.