With the heart of the holiday shopping season just around the corner, I thought it would be interesting to test a theory that seems to pop up about this time every year. The theory is simple - retail stocks should move higher near the end of the year, since that's when most stores do a large portion of their business. On the surface, the idea makes sense. After all, better revenue means better profits, which in turn means these stocks are worth relatively more than they were before the shopping season started. But being naturally skeptical (and a contrarian), it's hard to believe that a tendency this obvious can actually be true. Today we'll find out.

Yep, it's that time of year again, when shopping malls are stuffed with merchandise as well as shoppers. It's also that time of year when all the pundits come out of the woodwork and voice their opinions about why the retailers will do poorly (or not) this holiday shopping season. Some of the theories are sound, but most of the esoteric and sensationalistic ideas don't actually pan out. There's always the obscure expert who has pinpointed why a lack of income paired with negative sentiment will make for the worst shopping season ever. Then there are the retailers themselves, who say (without fail) that they expect sales to up nicely for the year. And of course, there's everything else in between.

The thing is, I'm always skeptical to even play that retail sales-guessing game. The reality is that nobody really knows. But more than that, I'm always skeptical to say that it matters....at least as far as traders are concerned. The one reality I've consistently observed is that there's a major disconnect between the degree of holiday sales for a retailer, and the performance of the underlying stock of that particular retailer. Oh, dont get me wrong - a bad sales or rough earnings report can hurt the stock for a day or two. But for the most part, it seems like stocks aren't as married to revenues as everyone thinks they are.....at least not within this short-term scope. The point is, worry less about the good-sales/bad-sales chatter, and more about what the charts of retailers are doing.

So with that, I'd just lay to lay out the typical calandar results for retail stocks.

There's nothing particularly exotic about today's research. We just averaged out the per-month gains of the S&P Retail Index, going all the way back to 1990. What did we find? Well, the theory does have a little merit. Over the last thirteen Octobers, the S&P Retail Index has gained an average of 1.7 percent. But that's nothing! Over the last thirteen Novembers, the index has gained an average of 4.05 percent! The typical December gain was 1.09 percent. So all in all, investors do indeed push retail stocks higher during the busy shopping season. However, the real question still remains......is the usual strength late in the year actually because retail stocks gain favor in the last quarter? Or is the rising market tide lifting all boats?

Answering that question was simple, and enlightening. To really determine if the fourth quarter retail rally was significant, we just compared the retail stocks' monthly results to the S&P 500's monthly results. Here's where the theory doesn't hold up quite as well. During the average October and November, retail stocks clearly outpaced the market. However, the retail sector underperformed in December (the single busiest shopping month of the year). Take a look at the side-by-side comparison below, then read on for our final thoughts.

S&P Retail Index Returns vs. S&P 500 Returns - Monthly

Quite frankly, we were surprised to see that the theory had any merit at all. Usually these alleged tendencies end up yielding the exact opposite results of what they "should". The reason for that is simple - it's just too obvious to everyone. When the majority of the market rationalizes the same bullish scenario and takes a position in front of the tendency, that means nobody's left to actually do the stock buying when the time comes. In that light, you'd expect the retail rally to begin in August or September, before the holiday shopping season starts. But the reality is that August and September are usually the worst months for retail stocks.

That said, this is not a call for everyone to go out and buy retail stocks in August, or ever for that matter. There were tons of notable exceptions to this tendency, and when it comes down to it, the charts can tell you just as much as the averages. On the other hand, it is nice to know what your odds are, and when your best entry and exit points might be. On average, if you're a believer in this theory, the best time to buy is when things look the worst in September. The best time to sell might be late November, since there seems to be a lull in December.

There were some other things that we saw as well:

1) July, August, and September were consistently bad for the retail sector. Almost half of those months were losing months. That weakness is almost a safer bet than betting on the fourth quarter rally.

2) December results were volatile. Where October and November were usually good, the December results were all over the map (and for no apparent reason), and didn't seem to be related to the prior two months. That's yet another reason to make exits before the last month of the year.

3) February and March were great months for retail stocks. Most of this is attributable to the timing of the next set of earnings announcements after the Christmas earnings are announced in January. After tapping out most of the profit-chasers in October and November, there's a lull in interest. Then, a few more retail buyers come out of the woodwork starting in February. The reason for the timing is two-fold. First, it's hard to sustain interest in a seasonal trend once that season is over. Second, a lot of stores (depending on their accounting calendar), don't really start booking profits until well into the next calendar year. That's actually a compelling reason to stay in retail stocks for a few more months, if you didn't make your exit in late November.

Again, nothing is ever set in stone, so don't trade these tendencies blindly. However, it does validate the idea that an obvious trend can still be profitable. And remember, the sales and revenues data may actually have very little to do with how the underlying stocks perform.

Price Headley is the founder and chief analyst of BigTrends.com.