Capturing The Sales Seasonality Effect

A deep dive into an alpha-generative market phenomena.

Background

To understand this strategy, you first have to understand the base concept of seasonality. Seasonality refers to the tendency for certain investments or markets to perform better or worse at specific times of the year. An example of this can be found in electricity markets. As summer approaches, the demand for electricity increases (e.g. air conditioners, pools), and the price goes up. When the weather cools and shifts to fall/winter, prices go back down as electricity demand decreases(e.g. heating oil / natural gas heating). Take a look:

This concept can also be seen in company fundamentals. Many companies go through cyclical sales cycles depending on their product. For example, Vail Resorts (NYSE: MTN) is a large operator of mountain resorts and ski areas, mainly based in Colorado, United States. Naturally, their peak sales seasons are winter and summer (high vacation times).

This seasonality creates a highly predictable and profitable trading strategy, but not in the way you’d think.