Last week I relayed the good news that the bull market in financial stocks is very much alive and well. Unfortunately, it only happens once in awhile. Fortunately, though, it seems to happen at the same time each month. In fact as I discussed in last week's piece ("Look Honey, I Found the Bull Market"), the financial stock ETF XLF has gained 55% during a particular 6-day period of each month since XLF topped out in 2007, while losing a stunning -80% during all other trading days. While I am admittedly at something of a loss to explain all of this, I nevertheless must reiterate something that I have pointed out at times in the past. As a proud graduate of "The School of Whatever Works," I typically prefer not to look certain useful "gift trends" in the mouth.

And as it turns out, the good news this week is that financial stocks are not alone in their tendency to rally during a certain time of month. So this week let's look at a couple of other "bull markets" that are taking place under the radar, even as we are told day in and day out that capitalism is "evil" and the source of all of our problems and that government needs to "do something" to replace it (apparently there are only another 6700+ Dow points to go until we achieve Utopia!). The stock market is signaling very clearly how we can expect all of this to work out.

Fortunately, it appears that all is not lost if you can still bring yourself to get out of bed for a few days each month.

Hot Sector (Sometimes) #1

This week let's first consider stodgy old utilities. Typically, investors buy utility stocks in order to earn a high dividend yield. Certainly it would be hard to argue that this is a "growth" industry, particularly now that companies that generate energy using current carbon-based technologies are now targeted for punishment. That and the fact that utility stocks are back at their 2000 price levels. Nevertheless, as I discussed last week regarding financial stocks, there has been a stealth bull market going on in utility stocks for some time now.

Chart 1 displays the growth of $1,000 invested in Fidelity Select Utilities only during the last four trading days of each month plus the first day of each new month, since 1988. Chart 2 displays the growth of $1,000 achieved by investing in FSUTX during all other trading days. It is a classic "tortoise and the hare" tale.

Chart 1 - Growth of $1,000 invested in FSUTX during last four days and first day of each month since 1988
click here for larger view

Chart 2 - Growth of $1,000 invested in FSUTX during all other trading days

Since 9/30/1988, $1,000 invested in utilities only during this five day a month period would have grown to $6,713. A thousand dollars invested during all other days would have declined to just $716. Even more stark consider this:

• Since April 3, 2000, $1,000 invested during the bullish five day period each month grew +206%.
• Since April 3, 2000, $1,000 invested during all other trading days declinined by almost -81%.

As they say, timing is everything.

Hot Sector #2 (Sometimes)

The big three for the Dow Averages are the Industrials, the Transports and the Utilities. We just looked at the utilities, so now let's take a look at the transportation sector. Chart 3 displays the growth of $1,000 invested in Fidelity Select Transportion (FSRPX) only during the last three trading days and the first two trading days of each month since 1988. Chart 4 displays the growth of $1,000 invested during all other trading days during the same time period.

Chart 3 - Growth of $1,000 invested in FSRPX during last three trading days and first two trading days of each month since 1988

Chart 4 - Growth of $1,000 invested in FSRPX during all other trading days

In sum:

• $1,000 invested in FSRPX during the bullish 5-day period each month would have grown to $11,656.
• $1,000 invested in FSRPX during all other trading days declined to $336 during the same time.
• Since 4/12/99, the bullish five day period has registered a net gain of +137%.
• Since 4/12/99, all other trading days registered a net loss of -82%.

Summary

They say that in life "timing is everything." It is hard to look at Charts 1 through 4 and not agree. The problem, of course is that seasonality has an inherent drawback - that being that no one can really fully explain why a particular trend has worked up until now and why it should continue to work in the future. Probably the best way to think of seasonality was summed up in a phrase from Michael Santoli who writes the "Streetwise" column in Barron's Financial Weekly. In discussing seasonal market trends he once wrote, "Seasonality is climate, not weather." I think that pretty much captures it. In other words seasonality tells you what "should" be happening or what typically happens during a given time period, but not what is actually happening at this particular moment.

Still, anytime I find decades of consistent performance from any method, I tend to take notice. Especially when everything else seems to be melting down around me.

NOTE: don't actually try this strategy with FSUTX or FSRPX. Fidelity has become a bit militant about active switching. Fortunately there are ProFunds Utilities (UTPIX), Rydex Utilities (RYUIX), Rydex Transports (RYPIX) and ETFs SPDR Utilities (XLU) and iShares Dow Transorts (IYT).

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