This time, a unique pattern for the beginning of summer on AMZN stocks. Over the past 20 years, it had a success rate of 90% and an annualized return of 55%.
Inspirations
Amazon is an incredible company, one of the locomotives on the American Stock Exchange. Founded by Jeff Bezos in 1994, it is the largest e-commerce platform in the world and a provider of cloud computing, streaming services, and artificial intelligence.
The seasonal strategy we will discuss today has an exceptional 20-year history. Let's get to work!
Key components
Exploration of the pattern occurring from May to July.
The strategy is based on specific dates. We completely ignore trends, news, stock valuation, and the overall market situation.
Entry rules
Purchase is made on May 20th or the next day if it is a holiday.
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Exit Rules
We close the position exactly after 2 months, i.e. on July 20th.
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Backtest 1, Fixed $ Money Management
In this variant, we invest a constant amount of $100k.
We have been testing for the last 20 years period.
Capital chart for this test:
Test results:
The average annual result was over 9%, which, when using capital for only 17% of the year, gives an annualized return of approximately 55%.
Backtest 2, % Money Management
In this backtest, we invest in a strategy that constantly uses 100% of the current capital (with an initial capital of $100k). This causes the value of the position to change proportionally with the increase or decrease in capital. The rest of the parameters remain unchanged.
The capital chart for this test looks as follows:
Basic statistics resulting from the test:
The maximum open drawdown is shown on the chart and was 22% during the 2008 crisis. Holding this position until July resulted in a loss of 15.4% this year.
Additional information about the strategy
SL & TP
The strategy does not use typical stop loss and take profit levels, although they can be implemented. According to our tests, for most ETF and stock strategies, these settings worsen the results. Diversification within the strategy portfolio serves as protection against the strong impact of a potential change in the price of a single stock on the entire portfolio. Click for more about stop loss order.
Market Regime
Despite its simplicity, the strategy has been tested in all major market regimes and has performed well in different periods.
Trading Costs
Trading costs and slippage typical for the strategy have been taken into account in the backtests, based on our real account tests with the Alpaca broker. With a diversified portfolio of stocks and strategies, transaction costs can significantly affect your profit or loss, so take the time to thoroughly test and choose a broker.
Robustness
The main concern with seasonality strategies is the low number of trades. We cannot directly compare it to the number of trades obtained in backtests of stockpicker-type strategies. However, seasonal patterns by their nature will never have a large number of trades.
Recommended Instruments
The primary instrument is AMZN.
Pattern Day Trader
The strategy is suitable for use on smaller accounts as well. The holding period is over 41 business days, which does not meet the Pattern Day Trader rule.
Correlation with Other Strategies
The strategy aligns with trends related to the summer period, so it may be correlated with strategies that trade during this period, go to the correlation page.
Summary & Strengths and weaknesses of the strategy
The Amazon Buy in May! strategy is another good example of seasonality in stocks. Unfortunately, we cannot precisely explain the reasons behind this pattern. Naturally, the reasons can be found in the company's reported results, but these are usually published in April, and the increases occur both when the company exceeds analysts' expectations and when it falls below them.
However, with a 20-year history, 90% effectiveness, and an average profit of around 9%, these are great parameters for a strategy that trades only 2 months a year. Therefore, we focus on exploring this pattern rather than explaining it.
We consciously avoid backtesting the years 2000 on .com stocks due to the very turbulent and inadequate period of the .COM Crash, after which stars like AMZN emerged. However, the strategy receives reduced points for cutting the backtest period and for a maximum open drawdown of 22%.
The strategy is very easy to use, even manually. However, in our opinion, it should be used in a portfolio with other strategies. If you value your time, we suggest entrusting this work to simple and effective algorithms. This way, you won't have to worry about keeping track of deadlines, especially since you can use multiple systems simultaneously by using capital precisely only for part of the year.
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What you get in the package for this strategy:
An SQX file ready to be used on the Algocloud and StrategyQuant platforms.
Pseudocode that describes all the rules in an easy-to-understand way.
Disclaimer
The results obtained from historical data do not guarantee future outcomes. The effectiveness of a strategy can change over time. Backtesting is a tool that allows for the analysis and evaluation of an investment strategy based on historical data. Various factors, such as market changes or economic conditions, can influence the effectiveness of a strategy over time.
Investing always involves risk. This material is not investment advice. We share our experience and algorithms for educational purposes. We make efforts to ensure that our algorithms are error-free, but neither we nor the tools we use guarantee the absence of technical issues. Any decisions to use a particular strategy are made at your own risk and should be preceded by careful understanding and verification. You should always carefully consider your investment goals and risk tolerance before making investment decisions.
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