Like the leaves turning orange in the fall and the warm cover of snow blanketing the countryside, the market has its seasons. Seasons come and go as predictably as the weather. However, for the new trader, the stock market seasons are not 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.
Depending on the month of the year, you will likely hear people talking about stock market seasonality. This is the concept that certain months and quarters throughout the year have a historical market sentiment that dictates the price action of stocks. Is it real? It’s difficult to say for sure. There is some pretty good statistical evidence that there is at least a trend.
The market is complex and dynamic, and is affected by more than just the month we are in. This can include, but is not limited to, market sentiment, earnings reports, macroeconomic pressure, global events, and geopolitical conflicts. Of course, you’ve all seen the stats. There is an undeniable, underlying pattern for the stock market’s behavior at certain times of the year. This article will discuss stock market seasonality and whether traders can rely on it.
What Is Seasonality in the Stock Market?
Regarding the stock market, 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
hurricanes
floods - Re-occurring calendar events
quarterly reports
expectations
earnings announcements
The key takeaway is that this recurring tendency impacts your trading instrument. Hence, your goal as a trader is to correctly identify seasonality and base your buy and sell decisions on that.
Seasonality implies that the market’s performance is predictable and repeats throughout history. Just as the seasons come every year, so too do cycles in the financial markets. These patterns can occur daily, weekly, monthly, and even in annual or multi-year cycles. This is especially true in the economy and the stock market, likely because many factors that impact them are cyclical.
You’ve heard of cyclical sectors like energy, which can see its price rise during the summer as more people drive cars. Periods of high manufacturing and industry, which often have a cycle of several years, impact it. Inflation can also be seen as cyclical. Several factors influence inflation, including unemployment and the cost of goods and services.
Those are examples of long-term cyclical patterns. But what about short-term or annual seasonality in the stock market? For example, several months of the year are known as bullish, while the end of September has historically been a bearish close to the third quarter. While these trends appear throughout history, we must remember that seasonality is not set in stone. External factors can prevent a historically bullish month from being bullish and vice versa.
The image above shows the optimal holding period for each market sector/index. Based on this period, each bar indicates a buy and sell date.
Key Takeaways
- Seasonal investing is all about taking advantage of the 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 to make trading and investment decisions.
Seasonality Charts in the Stock Market
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, 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, calculating market seasonality for January will show a 2% net.
Ok great. But still, what does this all mean?
You can compare the results to other years once you break down performance by month.
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.
10 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. We don’t have ten years of data in some cases, 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.
Trading Stock Market Seasonality Charts
This is where the waters can get murky – 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.
Here’s the kicker: you must hold on and weather the storm even if a month is bearish.
Alternatively, I suggest using the charts more freely if you’re an active trader.
Stock Market Seasonality Observations
- Between May and August, the market gets quiet.
- Despite what I mentioned above, markets get more bullish in May and bearish in August.
- October through December are the best three consecutive months for U.S. equities.
- Between October and 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; even if you don’t, they are handy.
Examples of Seasonality in Sectors
The U.S. high-tech sector shows seasonal strength from around the end of September to December and January. Coincidentally, the sector peaks between the annual Las Vegas consumer electronics show (second week of January) and the start of fourth-quarter earnings reports (end of January).
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.
Some seasonal periods take place throughout the year, which have been well-documented. During these times, stocks have tended to perform in a certain way more often than not. You’ve probably even heard of some famous sayings and nicknames for these examples of stock market seasonality.
The January Effect
As its name suggests, the January Effect takes place in the new year and usually lasts for the first few weeks of the month. During this period, small-cap stocks have largely outperformed large-cap stocks.
Why is this the case? Many believe it has to do with tax-loss harvesting from the previous year. As a result, January has an effect on stock market seasonality.
Investors unload losing positions in December to offset capital gains for the year. Once the calendar turns over, these traders reinvest that cash into small-cap stocks, which may have lagged large-cap stocks during the year-end rally.
Sell in May and Go Away
The Sell in May strategy is another well-known saying on Wall Street, although, as we saw in 2023, it doesn’t always come to fruition. This slogan originated in the Stock Trader’s Almanac and its historic stock market returns by month.
According to historical data, the best six months of the year for the stock markets are November to April. The data also considers slower trading during the summer months and seasonal weakness in September and October.
The Santa Claus Rally
Speaking of year-end rallies, the Santa Claus Rally indicates a bullish close to the year. The fourth quarter of the year has often provided major bull rallies.
There isn’t one reason for this, but several theories exist. First, everyone is in a good mood with festive holiday cheer. Another is that strong retail seasons mean many businesses will report good earnings in a few months.
Another factor is that institutional investors and market makers are on holiday, so there is less hedging and volatility. Finally, many attribute this to workers receiving bonuses and investing them in the stock market.
September Weakness and October Crashes
As we’ve seen over the past few years, September has been notoriously bearish. Why is this the case? September coincides with the end of the third quarter when major institutions and funds rebalance their holdings.
It has also historically been a time when traders harvest tax losses ahead of the end of the year. This seasonal weakness is also known as the September Effect.
The October Crash is more of a historical coincidence. October saw some of the worst market crashes, including Black Monday in 1987. October 2022 was also the low point of the post-COVID bear market. Market crashes also tend to happen at the lows during weakness, coinciding with the last two weeks of September.
Periods of Seasonality 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.
Monthly Seasonal Volatility Patterns
For options traders, the third Friday of every month is often a key date circled on the calendar. This day is the monthly OPEX date, meaning monthly options contracts expire. While this doesn’t necessarily cause volatility or crashes, it can lead to interesting volume and market patterns.
Every three months on the OPEX date, we get what is known as the triple witching date. This is the simultaneous expiration of stock options, index options, and futures contracts. These days, there can certainly be some volatility in the markets, but this will only happen four times each year.
The end of each month also has a higher chance of market volatility due to funds rebalancing their holdings. This is especially apparent during the months at the end of each quarter in March, June, September, and December.
Myths of Seasonality in the Market
We all know by now that nothing on the stock market is predictable. And yet, if you listen to some social media personalities, a market crash is scheduled every year in October.
Don’t be fooled by market seasonality because these examples do not happen yearly. In 2023, Sell in May and Go Away would have cost you a massive rally in tech stocks. A lot of the market’s performance concerns macroeconomic impacts and global events.
Market Seasonality Happens Every Year
With the utilization of social media by traders, it is frightening how fast misinformation and rumors can spread. Seasonality in the stock market has always been a popular topic of conversation for traders.
But then you get fear-mongers willing to twist or stretch historical data to suit their narratives. Here are some well-known myths about market seasonality that are not true!
Seasonality Data Mining
You might notice that many charts are posted every September that reflect previous October stock market crashes. Similarly, in April and May, you will see historical data that indicates it might be time to sell your stocks.
Not every period from November to April is bullish, and not every year does it see a Santa Claus rally or January Effect. Do not trade or try to time the market based on historical data mining.
Final Thoughts on Stock Market Seasonality
I’ll be frank: Do not use seasonality as a “stand-alone” tool for investing and trading decisions. Although predictable and reliable, it’s only useful with fundamental and technical analysis.
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 you when to buy and sell. When you combine these two, seasonal analysis tells you what and when to buy and sell.
Human nature attracts us to patterns and repetitive historical occurrences. We often use phrases like “History doesn’t repeat, but it often rhymes.” We inherently love predictability, especially concerning an unpredictable vehicle like the stock market.
Stock market seasonality has always been a popular topic among traders. Why? It provides some justification for market swings and makes us feel like we can control the direction of the markets. Some seasonality examples are true, and they happen for very logical reasons. For example, quarterly rebalancing, monthly OPEX dates, and end-of-the-year tax preparation will happen whether we want them to.
Just because you hear a catchy slogan for a specific month or period doesn’t mean you should use it to direct your trading decisions. One way to mitigate market seasonality is to buy or sell hedges as that time approaches. We can never predict or time a market crash, but we can be prepared with a defensive portfolio as we approach traditionally volatile times of the year.
Frequently Asked Questions
Seasonality refers to different times of the year that affect the stock market and how stocks trade.
Summer and Winter seasons occur in the stock market from November to April and from May to October.
The worst months to trade are January, February, June, August, and September.
