Like the leaves turning orange in the fall and the warm cover of snow blanketing the countryside, the market has its own seasons. Seasons come and go as predictable as the weather. But for the new trader, the stock market seasons are not very obvious or easy to find. In today’s blog post, I will dive into stock market seasonality, where to find the charts, and, most importantly, how to use them to make money.
Table of Contents
- What Is Seasonality In The Stock Market?
- How To Use Stock Market Seasonality Charts In Your Trading?
What Is Seasonality In The Stock Market?
As far as the stock market is concerned, seasonality refers to the influence certain times of the year have on stocks/sectors/indices. Tendencies can range from:
- weather events
- (temperature in winter vs. summer),
- extreme weather events
- Re-occurring calendar events
- quarterly reports
- earnings announcements
The key takeaway here is that the tendency is recurring and that the tendency impacts the instrument you are trading. Hence, your goal as a trader is to correctly identify the seasonality and base your buy and sell on that.
5 Minute Takeaway
- Seasonal investing is all about taking advantage seasonal tendencies of certain stocks and sectors.
- One of the most well-known stock market adages is “Sell in May.”
- Bullish Bears does NOT recommend using seasonality alone as a tool to make trading and investment decisions.
You’ll see the optimal holding period for each market sector/index in the image below. Each bar will indicate a buy and sell date based upon the optimal holding period for each market sector/index.
What Are Seasonality Charts In The Stock Market?
Just like our year is broken down into monthly segments, so are seasonality charts. When looking at a seasonality chart, you’ll see 12 different individual sections representing the total performance for that specific month.
What does this all mean?
Well, let’s say in the first two weeks of January, the market was up 5%. Great. But then, due to some event (i.e. news/weather), the market dropped 3% from 5%. So, when calculating market seasonality for January, it will show a 2% net.
Ok great. But still, what does this all mean?
Once you break down performance by month, you can then compare the results to other years.
To calculate the annual stock market seasonality chart, you add every January for the last ten years, then every February, etc. Then tada, you’re done.
A seasonality study preferably uses at least ten years of data.
If you remember from your painful statistics class in school, the more data, the better. The main reason is that shorter-term studies have a great chance of having their results skewed by a single data point.
Hence, any study using less than ten years of data won’t be that reliable. In some cases, we don’t have ten years of data, so keep that in mind when looking at the charts. What we use as a benchmark for U.S. equities and sectors is the S&P 500 Index, and in Canada, it’s the TSX Composite Index for Canadian equities and sectors.
How To Use Stock Market Seasonality Charts In Your Trading?
This is where the waters can get murky – because the honest answer is that it depends. It depends on your trading style and your strategy.
Generally speaking, if you like to swing trade and hold your positions for a month or more, use these charts to time your open positions.
Now, here’s the kicker; you need to hold on and weather the storm even if a month is bearish.
Alternatively, if you’re an active trader, I suggest using the charts a little more freely.
General Stock Market Seasonality Chart Observations:
- Between May and August, the market gets quiet
- Despite what I mentioned above, markets get a bit more bullish in May and more bearish in August
- October through to December are the best three consecutive months for U.S. equities.
- Between October to April, stocks are seasonally strong
- April is the single strongest month for stocks
- August and September are the ONLY negative net months (funny how two months scare investors away from the other 10)
There you have it; now you know what these stock market seasonality charts are, how they work and how to read them.
You should already know how to include them in your strategy, and even if you don’t, they are handy to know.
Examples Of Seasonality In The U.S. High Tech Sector
From around the end of September to the time between December and January end, we see a period of seasonal strength in the U.S. high tech sector. Coincidently, the sector peaks between the start of the annual Las Vegas consumer electronics show (second week in January) and the start of fourth-quarter earnings reports (Jan end).
How can you use this to your advantage? Well, statistically, the best time to place a seasonal trade for high-tech securities is during this time.
Periods Of Strength
Take a look at holidays on the calendar and open a chart. What you’ll see are periods of strength around these times. Examples include
- Just before and after U.S. Thanksgiving
- Strength from just before Christmas until just after the New Year.
- We also have longer-term “cyclical” periods lasting several years. Look no further than the four-year “presidential” cycle.
What Is An Example Of A Seasonal Investment Strategy?
“Sell In May”
“Sell in May” is one of the most well-known stock market adages and is based on one of many seasonal tendencies of the markets. However, “Sell in May” is not a new strategy. In fact, the saying’s been around for 350 years with roots based in England’s early stock market.
It’s thought that it dates back to when London stockbrokers took the summers off to launch their daughters into high society. They then returned in the fall, which was reflected in the substantial market rise.
What Not To Do In Regards To Stock Market Seasonality
I’ll be frank, do NOT use seasonality as a “stand-alone” tool to make investing and trading decisions. Even though it seems predictable and reliable, it’s only useful when used with fundamental and technical analysis.
My final thoughts are that Seasonality analysis can be considered the bridge between fundamental and technical analysis. Fundamental analysis tells you what to buy and sell, whereas technical analysis tells us when to buy and sell. And when you tie it together, seasonal analysis tells us what and when to buy and sell.