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Seasonal Trade: Diageo

03/31/08 10:11:39 AM
by Mike Carr, CMT

Market seasonals point to a promising trade in this beverage company.

Security:   DEO
Position:   Buy

At the end of each month, we run a test to look for the most promising industry in the next month. For April, we discovered that the alcoholic beverages industry did the best with 15 winners and only three very small losses in the past 18 years. Buying on the first of the month and holding for four weeks, the average trade gained about 3.1%. One way for traders to profit from this strategy is to buy the PowerShares Dynamic Food & Beverage (PBJ).

From there, we turn our attention to the individual component companies within the industry. Among those companies Diageo (DEO) showed a very favorable seasonal trading strategy. This company brews, distills, and distributes a variety of alcoholic beverages, including Smirnoff vodka, Johnnie Walker scotch whisky, and Captain Morgan rum, in addition to dozens of other popular brands. With more than $15 billion in sales, a forward P/E ratio of 15 and a dividend yield of 3.2%, the company is backed by solid fundamentals.

The seasonal strategy is to buy at the open on the fifth trading day of the month and sell at the open the day after holding for four weeks. Over the past 17 years, the trade has been profitable in all but two years. With a 2% stop-loss, the average trade gained 3.5%. This year, the buy date would be April 7.

Some question whether this is data mining. When using technical analysis, no trade should ever be taken based upon a single indicator. In the case of DEO, the daily chart (Figure 1) presents an argument for the bullish scenario. The downward gap is late January was immediately reversed and the stock has consolidated just below the resistance levels of the gap from early January. That resistance level was recently broken. In addition, the moving average convergence/divergence (MACD) just gave a buy signal.

FIGURE 1: DEO, DAILY. DEO has bounced off downside targets and is more than 10% away from significant overhead resistance.
Graphic provided by: Trade Navigator.
The chart, coupled with the seasonal tendency of DEO to rise in April, makes this is a trade worth examining.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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