Seasonality: Are Hedge Funds Set Up Accordingly?

New York (HedgeCo.Net) Wall Street loves a good saying and there are many that get repeated far too often—“buy low, sell high” comes to mind. Another one that gets repeated every spring is “sell in May and go away.” This particular saying started years and years ago as the floor traders and many brokers would take off for the Hamptons or the mountains for the summer months and very little trading would take place. Many times the market would move sideways or perhaps drop a little as the trading volume was so light since the traders couldn’t easily access market data.

Obviously with today’s technology, most of the reasons the “sell in May and go away” mantra started are no longer valid. However, there are a number of seasonal patterns that start in May, June and July that have statistical significance. According to the Stock Trader’s Almanac provided to us by our friends at Probabilities Fund, there are seven seasonal patterns from the sectors that start in May, June and July.

• Short the Banking Sector starting in May, ending in July
• Short the Cyclical Sector starting in May, ending in October
• Short Gold and Silver starting in May, ending in June
• Short the Materials Sector starting in May, ending in October
• Short Natural Gas starting in June, ending in July
• Long Gold and Silver starting in July, ending in December
• Short the Transportation sector starting in July, ending in October

Looking at our own data from the platform and also looking at the Commitment of Traders reports where appropriate, hedge funds are definitely positioning themselves appropriately in some cases. Looking at the HedgeCoVest Index Short-only model, the three sectors that make up the greatest percentages of the portfolio are retail, banking and transportation. Retail is a sub-sector of cyclicals, so you have all three of these sectors represented in the seasonal plays listed above and all three are bearish seasonal patterns. Within the HedgeCoVest Financials Short-only model, banking stocks make up 45% of the portfolio, versus 30% for insurance and 25% for diversified financials.

The Commitment of Traders reports for gold, silver and natural gas show some shifts in sentiment are in the works. For gold, bullish sentiment fell in the first few weeks of May and has rebounded a little in the last two weeks. With the short bearish pattern suggested in the Almanac, this makes sense as they could be building up long positions ahead of the pattern in July. The COT report for silver shows a similar pattern as that of gold in that bullish sentiment fell in April, but in the case of silver the bullish sentiment started to climb in May and as of last week, large speculators are the most bullish they have been since February. Natural gas in an odd commodity and it is almost the exact opposite of gold and silver. Large speculators are hardly ever net short gold and silver, but they haven’t been net long natural gas since February of 2007. The current COT report for natural gas shows that the biggest net short position since 2011 was hit the week of April 28 and now the group is slightly less bearish as a whole.

All in all, it looks like hedge funds are positioned such that if the seasonal patterns play out, they will benefit. At least it looks that way based on the models on our platform and from the COT reports.

Rick Pendergraft
Research Analyst

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