Stock Market Seasonality
Do you want to know a quick way to hack the stock market?
What if you could invest right before a stock or whole sector was about to make a bullish move upwards?
You’d back up the Brinks truck right?
The easiest stock market hack for beginners is what’s known as stock market seasonality.
Here’s what it is and how you can use it to your advantage.
Stock Market Seasonality
Just like seasonal weather (spring, summer, fall, winter) the stock market seasonal trends change as we go through a calendar year.
Broadly, stock market seasonality is the tendency for securities to perform better during specific time periods and worse during others.
These time periods can span a few days, a few weeks or even a few months.
Conversely, there are also times where individual stocks perform worse or an entire sector (Information Technology ex.) goes through a weak period where investors wouldn’t want to invest.
Stock Market Seasonality - Example
The graphic below is from EquityClock.com and is a good baseline for strong seasonal periods for 9 of the 11 stock market sectors.
You can see that the Health Care Sector has a strong seasonal period from April 25th to December 4th.
This is the time of year where stocks within that sector perform the best based on historical data.
As an investor, you can use this type of data to tilt the odds of making successful trades in your favour by investing when certain companies should perform best.
Focusing on Health Care again, you likely wouldn’t want to invest in that sector outside of it’s seasonal strong period.
There would be better opportunities - statistically speaking - in other sectors.
Stock Market Seasonal Trends
There are very logical reasons for seasonal trends in the stock market.
When investing its important to think about the bigger picture of what’s happening to the market and what’s driving the human psychology during that period.
The better you get at anticipating trends the more profitable your trading will be.
Let's look at a couple of examples.
Santa Claus Rally
This phenomenon of seasonality occurs over the last two weeks of December and runs into the first week of January.
Consumers are shopping for the Christmas holiday, Wall Street traders are investing their end of year bonuses and there is a general feeling of happiness going into the end of year break.
All this often leads to a strong period for the stock market which you can see on the following chart and look to the uptick in the last half of December for the S&P 500.
Another great stock market seasonal trend to be aware of as a newer investor is the summer period between May and October.
A big reason for the decline in the markets during this time is that most people are busy doing other things other than investing in stocks.
Wall Street trading firms and large hedge funds employ people like you and me, and they like to take vacation, go to the cottage, road trip with friends and get out of the office during the warm summer months.
This leads to less time for investing and this is one of the reasons the summer months tend to not perform as well across the board compared to October to April.
There are still opportunities to make money during this period and some key takeaways from Investopedia.com can be seen below:
Stock Market Monthly Trends
In addition to the the examples shared above you can track how major stock indexes like the S&P 500 or Nasdaq (tech sector) have performed and build your own seasonality charts based on the data.
For the S&P 500, the months of April, July and November on average have the greatest frequency of positive gains.
It just so happens that earning reports come out in April and July and November can capture some early magic from the Santa Claus Rally.
For the Nasdaq, the month of October provides the highest average return and is positive 65% of the time.
You can also see that June has an average return of -0.5% for the month and it’s a complete coin flip at 50% as to whether the month will be positive or negative.
So when looking to invest in a sector like technology it’s always a good idea to look at the seasonal period.
See if it’s in a weak or strong season and try and project where the sector is headed in the short term before deciding to invest.
It’s about tilting the odds in your favour as much as possible.
Stock Seasonality Analysis - Apple Inc.
If you want to invest in specific companies like I do with options trading, you can look at seasonal charts for individual stocks and do you analysis from there.
Here is a seasonal chart for Apple Inc.
It’s actually a pretty sexy chart and there isn’t too much weakness shown.
But from it there are a couple timeframes that stick out as periods where you should think about holding off from buying Apple shares or trading options.
The second halves of January and April, the month of June and early November are all areas where Apple stock is seasonally weak.
But the rest of the year looks a like a good time to invest in the company.
When a stock does enter a period of weakness, you can just invest in a different company or sector - which is why I like to have a shortlist of 10-15 companies I can rotate money into at different times of the year.
Using Stock Seasonality Analysis As A Trader
When you combine stock seasonality with your trading you are essentially trying to piece together a puzzle.
A puzzle the gives you a roadmap of what to invest in and when to invest in it.
But also, when not to invest in it and look for better opportunities elsewhere.
Let me also say that even the best stock traders use stock seasonality when analyzing their decisions and it’s not 100% accurate.
Some years the data doesn’t hold up.
There are so many other factors that influence the stock market like war, elections, economic policy, interest rate changes, earning reports and more.
You can’t expect that because the seasonally strong period starts on June 1st for example that on that day the stock will automatically go up.
That’s not how it works.
As a trader you need to combine the average seasonal trends with technical analysis of what’s happening on the stock chart and also how a company is growing and increasing things like revenue and free cash on hand.
Stock market seasonality is kind of like if you were to pull up to a traffic light that was yellow.
It’s letting you know that the light is about to change so proceed with caution because this light could go red or it could go green.
But you’re aware that something is about to happen.
You can then go look at other indicators and make your guess if the seasonal trend is going to happen and the light is going to turn green.
If it is, then you make your trades and continue to monitor them as time goes on.
Seasonal Trends In The Stock Market
If you want to learn more about seasonal trends in the stock market there are a few great resources out there.
We’ve already used EquityClock.com a lot in this article but it remains a great free option for those who want to keep their research budget friendly.
If you don’t mind spending and want a more comprehensive data source, Brooke Thackray releases an investing guide every year focused specifically on expected seasonal trends.
And last but not least, I also include updates on trends and stock market analysis in my free weekly newsletter.
If you haven’t joined the mailing list yet you can do so by filling in your name and email on this page right here.
That way you’ll get the need to know points of what’s happening in the stock market on a weekly basis.
Remember, stock market seasonality isn’t perfect, but can be used to give you a leg up with your investing and allow you to invest in periods of strength and stay away during times of weakness.
Use the data that’s available, combine it with your own knowledge base and continue to learn as you go with your investing.
Andrew "In Season" Ferguson
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