Stock Market Seasonality – Interpretation 1 (Emini weekly)
Stock market seasonality analysis can be very dangerous. Yes, I agree that some seasonal patterns do exist and have strong fundamental backing:
- Investors take profits at the end of March to pay their taxes in early April
- Investors close out losing positions in September to claim tax losses
- Companies downgrade earnings in September when missing end of year forecasts
- Professionals re-balance portfolios at the end of the quarter and the year
- New investment funds tend to be invested at the start of the month, and
- Investors are more bullish leading into holidays like Thanksgiving and Xmas
However, can you use the resulting stock market seasonality patterns to trade?
I’m sure many successful investors and traders do. But for me, it biases my judgement and leads me to break Rule Number 1 – Trade what you see, not what you think.
A few years ago I did a lot of analysis on stock market seasonality. One of the results was the Weekly Seasonality line plotted on the Emini chart above. It takes S&P data from 1970 to 2003, de-trends it and calculates the underlying stock market seasonality.
The chart shows that three broad trends, anticipated by the seasonality pattern, did exist last year. The early part of the year was strongest, the middle was weakest and the end was flat to up.
Stock Market Seasonality – Interpretation 2 (Emini weekly)
However, when looking at smaller portions of the seasonality pattern I can’t find much of a match. Check out the second chart above. Can you see any fit between the seasonal forecast and the actual market?
For me, I would rather focus on my basics (price trends, volume momentum and professional/amateur activity) than shoe horn my market analysis into some kind of pre-conceived seasonal pattern.