I have great news this week. Contrary to popular belief, the bull market is alive and well! Especially in financial stocks. Now I know what you're thinking: "Uh oh, too many hours in front of the computer screen has fried another brain." Well that's just not the case (actually, in the interest of full disclosure, technically that is the case, but it already happened a long time ago). No, in this case I absolutely stand behind my opening statement. There is an ongoing bull market unfolding across a number of key stock market sectors. Um, but just not all the time.

The Role of Seasonalilty

In my new book, Seasonal Stock Market Trends (about which I have shown great restraint by not plugging it in the past several weeks; I guess that streak is over), I wrote about a great many, well, seasonal stock market trends. Among them is the tendency for the stock market to perform best during the end of month/beginning of month period. This finding was first widely reported upon by Norman Fosback in his 1975 stock market classic Stock Market Logic. Despite becoming a fairly widely known phenomenon, this tendency has held up well (with the inevitable choppy periods along the way) over the ensuing 34 years. My theory is that there is a constant inflow of money into the stock market around this time each month that creates a built-in demand for stocks. Thus, barring other more negative influences, this will serve to lift stock prices. Of course, I also have a theory that banks should not be compelled by government to lend money to people who can't afford to pay them back, thus leading to an ultimate financial meltdown. So what the heck do I know?

This end of month/beginning of month tendency also appears to hold true for a variety of individual stock market sectors. So when I say that there is a raging bull market in financial stocks, among other things, there is good news and bad news. The good news is that there is in fact a bull market in financial stocks. The bad news is that apparently it only happens once a month. I have always been fond of the saying "there is always a bull market somewhere." After the past year, it looks like I might have to modify that to read "there is always a bull market sometimes."

Specifically, let's look at the performance of Fidelity Select Sector Financial Services fund (FIDSX). We will break each month into two categories:

Category 1: The last four trading days of the month plus the first two trading days of the new month.

Category 2: All other trading days

Chart 1 displays the growth of $1,000 invested in FIDSX only during Category 1 days since September of 1988.

Chart 1 - Growth of $1,000 in Fidelity Select Financial Services during 6-day bullish period each month since 1988

Chart 2 displays the growth - or rather, the decline of equity - suffered since 1988 had one invested in FIDSX during all trading days except the bullish Category 1 days.

Chart 2 - Growth of $1,000 in Fidelity Select Financial Services during all other trading days since 1988

To say that these results are a bit stark is an understatement. To put numbers to it:

• $1,000 invested only during the 6-day favorable period each month would have grown to $21,159.
• $1,000 invested only during all other trading days each month would have shrunk to just $236.

Making all of this even more compelling is the relative performance achieved since FIDSX topped out way back on 6/1/2007. Chart 3 displays the performance once again broken into Category 1 and Category 2 days.

Chart 3 - $1,000 invested in FIDSX during bullish 6-day period (blue line) versus all other days (red line) since 6/1/2007

As you can see in Chart 3 there has been a "slight difference" in performance. Specifically:

• $1,000 invested during bullish Category 1 days grew 55.8% in about 20 months.
• $1,000 invested during all other trading days (Category 2) declined a staggering -89.2% during the same time.

In the immortal words of Homer Simpson, "D'oh!"

Summary

No one grows up thinking, "Maybe I'll spend a lot of time analyzing seasonal trends." In fact, if someone did that nowadays someone would likely prescribe some sort of tranquilizing medication.

So what does all of this mean? Well, apparently if someone asks you when you think financial stocks will finally turn around, you can now quickly consult your calendar and reply "next Tuesday," or "two weeks from Thursday," or whatever, depending on the present day's juxtaposition relative to the end of month bullish period. The obvious question is "Will this trend continue?"

As always, time will tell.

(NOTE: don't actually try this strategy with FIDSX. Fidelity has become a bit militant about active switching. Fortunately there is ProFunds Financial Services ticker FNPIX, Rydex Financial Services ticker RYFIX and the Spyders Financial ETF ticker XLF.)

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Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site