Seasonality is the tendency for securities to perform better during some time periods and worse during others. These periods can be days of the week, months of the year, six-month stretches or even multi-year timeframes. For example, Yale Hirsh of the Stock Traders Almanac discovered the six-month seasonal pattern or cycle. Since 1950, the best six-month period for the S&P 500 extends from November to April.
Market conditions will deliver intermittent, short-term cyclical bulls and bears, requiring a more nimble, hedged and actively managed approach to investing and trading. Starting off or with bad news, September is the worst month for the stock market. Even after removing this event from the analysis, the S&P 500 and other major stock market indices posted a negative performance in September.
Another myth is that the month of October is a weak and dangerous month for North American equity markets. The myth is based on the fact that substantial downdrafts in North American prices have occurred in the month of October. October 1929 and October 1987 are seared into the minds of traders.
A few fundamental analysts on the Street are well aware of long term seasonal trends and base the timing of their recommendations at least partially on seasonality. They usually are analysts who have been in the financial service industry for 10 years or more. Using seasonality as a stand alone tool to make investment decisions is NOT recommended. Seasonality is a useful analytical tool, but only when used in conjunction with fundamental and technical analysis.
Futures
One of the best examples of the market cycle phenomenon is the effect of the four-year presidential cycle on the stock market, real estate, bonds, and commodities. The theory about this cycle states that economic sacrifices are generally made during the first two years of a president’s mandate. As the election draws nearer, administrations have a habit of doing everything they can to stimulate the economy so voters go to the polls with jobs and a feeling of economic well-being. In September, the S&P 500 index gained only 45% of the time, the lowest gain frequency of the year. Other major US stock market indices, such as the Dow Jones and the Nasdaq 100 , fell by -0.9% and -0.5%, respectively, in September.
Risk management must always be used to control losses, yet that may also mean getting out of some trades which would have otherwise been profitable if the favorable seasonal statistics play out. Buying on the close the day after the holiday and then selling on the next close has also shown a steadily rising equity curve . At least according to history, these are better holidays than others for deploying the pre-holiday rally strategy. For a full swing trading method, including scanning, stock selection, placing trades, and taking profitable exits, see theComplete Method Stock Swing Trading Course. The NYSE Composite is all the stocks listed on the New York Stock Exchange so it’s a very diverse stock index. The S&P 500 includes only the largest companies in the US, and the Nasdaq 100 includes large companies that are primarily technology-based.
Seasonal patterns typically see shares do well from around November to May and not so well from May to November. This partly reflects a combination of tax loss selling in the US, new year cheer and the pattern of capital raising through the year. Market cycles include four phases of market growth and decline, which is driven by business and economic conditions.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely. This is how the stock market has performed in each of the months over the last 10 and 20 years.
Chartists can confirm this by looking at the individual seasonal charts for $RUT and $SPX. As of January 2014, the average gain for the S&P 500 was 1.6% in December and the average gain for the Russell 2000 was 3.6%. It’s been noted that there’s a positive expectancy for buying stocks one to two days before a long weekend/holidays and then selling one to two days after. Trading volume tends to lower heading into long weekends which may help explain prices drifting up (there is a long-term upward bias to the stock market). Or possibly people are feeling good about a long weekend and buy some stock.
The market is not a random pattern of results or a simple game of chance, such as flipping a coin or spinning the roulette wheel. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs.
However, it is true that companies often try to “hide” their bad news by releasing it on Friday afternoon or evening, after the markets have closed. Chartists can use relative seasonality to find stocks, sectors or groups that outperform the market during certain months. As the chart above shows, the Russell 2000 shows a strong tendency to outperform the S&P 500 in December (74%). In addition, the Russell 2000 outperforms the S&P 500 by an average of two percentage points.
Whether you invest or trade, an understanding of the cycles and their implications can be invaluable toward financial success. A short squeeze occurs when a stock moves sharply higher, prompting traders who bet its price would fall to buy it to avoid greater losses. The stock market has also benefited from increased spending and decreased interest rates leading up to an election, as was certainly the case in the 1996 and 2000 elections. Classic patterns like double and triple tops, as well as head and shoulders patterns, are examples of movements that occur during the distribution phase.
Economic Data
In between trading stocks and forex he consults for a number of prominent financial websites and enjoys an active lifestyle. Even during months that have a high probability of rising, stop losses and risk control should be used, because if the price drops, we don’t know how far it will drop. The number at the top of the column is the percentage of time the stock index has risen. If it says 70, that means the stock index went up in that month 14 years out of 20 (70%). For the remainder of this secular bear—which can be expected to last many more years—we can expect a couple or several years of surges punctuated by a year or two of decline. An understanding of the patterns and drivers can greatly enhance success in the market.
If annual recurring events are less likely to occur, the seasonality analyst will avoid recommending a seasonal trade. The underlying conditions of the market were as relevant a century ago as they are today. But today, unlike the secular bull market of the 1920s, we are in the middle of a secular bear market that started in 2000.
Reliable technical patterns such as head-and-shoulders patterns are accurate approximately 75% of the time. A seasonal investment by definition is profitable more than 50% of the time. If frequency of profitable trades is 50% and frequency of unprofitable trades is 50%, results are random.
What You Need To Know About Seasonal Stock Trends
A long term study of the market confirms that a rally lasting three weeks or more inevitably happens during the three month summer period. However, traders fail to mention that the three week rally period has no consistency. Timing of the appearance of the three week rally is random and can appear at any time during the three month period.
Equity markets tend to reach a seasonal peak around April when last of the snow melts away. Equity markets in developed nations have a similar seasonal pattern. Figure 3 reflects the dramatic short-term cyclical bull and bear cycles that occur throughout the longer secular bear market period. The magnitude of the swings, presented as percentages between peaks and troughs, is much more significant than most people expect. For long-term investors, a multi-year and multi-decade perspective is often sufficient, especially when the environment is a green-bar, secular bull market. But for traders and curious investors, a look inside a typical secular bear market can be revealing.
A declining trend in P/E, however, can offset some or all of the benefit from earnings growth. Only in conditions when inflation is low and stable do investors pay higher P/Es for stocks. Therefore, trends in inflation or deflation drive P/Es through a cycle of higher and lower levels. Yet conventional wisdom too often includes shortcuts that create blinders to insight.
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Maybe investors are feeling optimistic about the new year’s prospects , prompting them to buy stocks. Or perhaps investors are trying to get a jump on an expected January effect. Still, there’s no guarantee that Santa won’t turn back his sleigh if an economic fog renders Rudolph’s nose ineffective. The Halloween effect is based on the seasonal assumption that the stock market performs poorly from May to October 30 and better from October 31 to the end of April.
The Best Season Is November Through April
Averages are a guide, a tool, but don’t forecast with accuracy what will happen this year. That said, some investors and traders may use seasonal tendencies to build strategies or enhance existing ones. Comments on seasonality made by fundamental analysts can be confirmed by completing a seasonality report based on data for 10 years or more. Fundamental analysts are notorious for commenting on seasonal trends based on 2-5 year data.