Seasonal Effects in Stock Markets

Instead, the volatility in the stock market has much more to do with perceptions and expectations. When a company is ready to announce their quarterly results, it can seem like the entire investment world stops in anticipation.

When the information is made public, a stock tends to rise and fall based on how well the company did vs. Investors pay up in terms of higher valuation multiples for strong growth and rising expectations.

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When expectations disappoint, stocks can get punished until management proves themselves worthy again over the next several quarters. Investors are constantly looking for the next breakthrough analysis that can give them deeper insights into the market and allow them to earn more money with the least amount of risk possible.

Amongst the many studies and research analysis are seasonal trends: Based on these trends, some investors, using qualitative research, alter their timing of buys and sells and believe that by following seasonal trends they can earn more in the market.

Market sentiment - Wikipedia

The sector rotation strategy is not necessarily a theory based on seasons, but it has everything to do with timing the strengths and weaknesses of the market. In its most basic form, this strategy tracks the momentum of large sectors of the stock market such as Financial Services, Energy, and Technology.

When certain sectors are performing well, investors who apply sector rotation strategy typically buy stocks in those well-performing sectors and ride the momentum until a signal shift tells them otherwise.

Thus, one can buy into a sector as it is rising and then use the sale proceeds as the sector downshifts in order to buy into and gain exposure in a different sector that is on the rise. This can enable investors to rotate in and out of sectors over time to take advantage of changes in business and economic cycles.

Trading sector-based ETFs are one way to easily increase or decrease your exposure to large segments of the market. When viewing the returns of the Dow from the s, one can begin to understand why this phrase has stuck with some investors for so long.

The months of November to April have yielded an average gain of 7. Less trading volume over the summer months when people tend to travel for vacations and more investment flows in winter are two possible explanations for this recurring pattern. Historically, September has commonly been an underperforming month compared to the rest of the year. If prices have dropped in September and one anticipates a rise in the coming months, it can be a signal for these strategists to buy.

Another common seasonal trend in the markets that you may have heard of is known as the Santa Claus rally. The average cumulative return over these few days is 1. No one can seem to pinpoint an exact reason for this, but some speculate it could be due to This seasonal trend could influence investors to buy shares before January starts and sell shares by the end of the month. The markets have adjusted and fewer people are actively selling at the end of December for the purpose of claiming losses on their tax returns, which previously spurred increases in buying during the month of January.

Some stocks have shown more seasonality than others. Research has shown upon viewing many years of data for these same stocks, that certain months have been historically more profitable than others.

Seasonal trends have been seen in many industries including banking, retail, oil, and even health care. Banking has historically been strong from October through May. Retail has shown strength between September and June.

And the oil sector has often experienced an uptick in December. Since the markets can be unpredictable, however, there is always a risk that such historical seasonal trends amongst certain industries may not continue.

While there have been observed trends across many sectors in the market, and some fodder for market commentators to discuss, there is no guarantee that those trends could continue in the years to come. For this reason, choosing to invest based on a point-in-time on the calendar and historical patterns may not fall within your risk levels or provide a solid foundation to validate your investment strategy. For example, the past Santa Claus rallies could have been due to emotion and people investing simply based on expectations that the market would rise and not on actual market strength.

Thus, investing on seasonal trends may be preferable to chartists and qualitative researchers which a short-term disposition who are looking for a quick gain based on a perceived market anomaly before selling their shares and searching for their next move. Keep in mind that investing based on season trends can be full of transaction costs, capital gains tax, and increased risk.

However you decide to invest, it is helpful to be aware of historical patterns and the various strategies that some investors apply at different times of the year. The more you learn, the better prepared you can be to make your own investment decisions. Motif Investing is an excellent destination for testing your own investment strategies, both short term and long term.

Sector rotation strategy sounds the most intriguing to me. The content contained herein is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security.

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Log In Open Account. Investing Based on Seasonal Trends 8 April in Investing No one can seem to pinpoint an exact reason for this, but some speculate it could be due to 5: Year-end tax related portfolio adjustments Optimism during the holiday season Short-sellers being on vacation The list may seem a little strange, but the positive gains are something to smile about.

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