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 predictable as the weather. But 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.
Table of Contents
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 the tendency is recurring and impacts your trading instrument. Hence, your goal as a trader is to correctly identify the seasonality and base your buy and sell on that.
The image above shows the optimal holding period for each market sector/index. Each bar will indicate a buy and sell date based on the optimal holding period for each market sector/index.
5 Second Takeaway
- 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.
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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 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; even if you don’t, they are handy.
Examples of Seasonality in Sectors
We see seasonal strength in the U.S. high-tech sector from around the end of September to December and January. Coincidently, the sector peaks between 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.
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. The saying’s been around 350 years, with roots 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, reflected in the substantial market rise.
Final Thoughts: 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.
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.
