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Stock market seasonal cycles: Seasonal patterns in shares should we sell in May and go away and what about renewed trade war fears?


As management companies like mutual funds generally report their holdings every quarter, they don’t want to show investors that they have been buying losing stocks. Thus, stocks that have performed poorly often suffer again at quarter-end as institutions unload their losers. Historically, the S&P 500 has only returned 0.7% on average during years with mid-term elections, and seven out of twelve monthly returns have been negative on average. In these months of the year, the S&P 500 index grew by an average of 1.4%, 1.3% and 1.6%, respectively.

october period

For the remainder of this secular bear—which can be expected to last many more years—we can expect a couple or several years of surges punctuated by a year or two of decline. A bear trap denotes a decline that fools market participants into opening short positions ahead of an upside reversal that squeezes those positions into losses. The fourth and final phase in the cycle is the most painful for those who still hold positions. Many hang on because their investment has fallen below what they paid for it, behaving like the pirate who falls overboard clutching a bar of gold, refusing to let go in the vain hope of being rescued. It is only when the market has plunged 50% or more than the laggards, many of whom bought during the distribution or early markdown phase, give up or capitulate. As this phase begins to come to an end, the late majority jump in and market volumes begin to increase substantially.

An understanding of the patterns and drivers can greatly enhance success in the market. The market is not a random pattern of results or a simple game of chance, such as flipping a coin or spinning the roulette wheel. Yet conventional wisdom too often includes shortcuts that create blinders to insight. Whether you invest or trade, an understanding of the cycles and their implications can be invaluable toward financial success. The stock market has also benefited from increased spending and decreased interest rates leading up to an election, as was certainly the case in the 1996 and 2000 elections. Unfortunately, this is a buy signal for early innovators and a sign that a bottom is imminent.

These types of investors are also called contrarians since they are going against the common market sentiment at the time. These same folks sell as markets enter the final stage of mark-up, which is known as the parabolic or buying climax. This is when values are climbing fastest and the sentiment is the most bullish, which means the market is getting ready to reverse.

Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas. He holds a BS from the University of Illinois at Urbana-Champaign and an MBA from Illinois Institute of Technology, Stuart School of Business.

During election years in the United States there is a lack of clarity regarding the economic policies that will be prioritized as investors do not know which political party will hold majorities in Congress. In between trading stocks and forex he consults for a number of prominent financial websites and enjoys an active lifestyle. Most season patterns are not statistically significant, meaning they are not based on enough data or haven’t accounted for other factors. Even during months that have a high probability of rising, stop losses and risk control should be used, because if the price drops, we don’t know how far it will drop. The number at the top of the column is the percentage of time the stock index has risen. If it says 70, that means the stock index went up in that month 14 years out of 20 (70%).

And as with all of these seasonal stock market trends, it’s not necessarily one that a trader can bank on with any regularity. Seasonality tells us what has happened in the past, which is the historical tendency. There is certainly no guarantee that past performance will equal future performance, but traders can look for above average tendencies to complement other signals.

Market Cycles: The Key to Maximum Returns

As noted earlier, in recent years anticipation of the “January effect” has caused buying to pull it forward into December. Calendar year end window dressing by fund managers may have also added to this tendency. Since 1985 US share prices for December have had an average monthly gain of 1.5% monthly gain. This compares to an average monthly gain across all months of 0.76%.

84% of retail investor accounts lose money when trading CFDs with this provider. For a full swing trading method, including scanning, stock selection, placing trades, and taking profitable exits, see theComplete Method Stock Swing Trading Course. The NYSE Composite is all the stocks listed on the New York Stock Exchange so it’s a very diverse stock index. The S&P 500 includes only the largest companies in the US, and the Nasdaq 100 includes large companies that are primarily technology-based. The number at the bottom of the column is the average gain or loss in that month over the 10 or 20 years.

Blackberries are a summer fruit, while pears are harvested in autumn, and if you thought that the stock market couldn’t be affected by seasonality, or recurring patterns in the returns, you were wrong. There are a number of specific seasonal patterns in stocks that people have noticed and tested. Beyond the return that is driven by earnings growth and the change in P/E, an investor also receives dividends from a portfolio of stocks. So dividends add a final component to the total return from the stock market. When inflation and interest rates are high, investors want higher returns, so they pay a lower price upfront for stocks.


The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in. CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely. The Nasdaq 100 did even better than the S&P 500 in terms of average returns in November (2.2%), December (1.5%) and April (1.6%). Astute chartists may have noticed that the slider at the bottom shows 20, which implies 20 years.

Toxic Investments You Should Avoid

Seasonal patterns typically see shares do well from around November to May and not so well from May to November. This partly reflects a combination of tax loss selling in the US, new year cheer and the pattern of capital raising through the year. A climax occurs at the end of a bull, or bear, market cycle and is characterized by escalated trading volume and sharp price movements. In the markets during the last few trading days of an annual quarter. There’s no hard proof that funds rebalance every quarter, but it’s not a bad assumption.

Chartists can confirm this by looking at the individual seasonal charts for $RUT and $SPX. As of January 2014, the average gain for the S&P 500 was 1.6% in December and the average gain for the Russell 2000 was 3.6%. So, the explanation discussed earlier explains why it likely persists. The distribution phase is a very emotional time for the markets, as investors are gripped by periods of complete fear interspersed with hope and even greed as the market may at times appear to be taking off again.

seasonal patterns

Sentiment moves from neutral to bullish to downright euphoric during this phase. The problem is that most investors and traders either fail to recognize that markets are cyclical or forget to expect the end of the current market phase. Another significant challenge is that even when you accept the existence of cycles, it is nearly impossible to pick the top or bottom of one. But an understanding of cycles is essential if you want to maximize investment or trading returns. Here are the four major components of a market cycle and how you can recognize them.

NYSE Composite Seasonal Patterns

Seasonality is essentially an average, based on history, of how the stock market tends to perform throughout the year. Averages are a guide, a tool, but don’t forecast with accuracy what will happen this year. That said, some investors and traders may use seasonal tendencies to build strategies or enhance existing ones.

The percentage of times the S&P 500 index has recorded positive returns is also very high, 68%, 74% and 71% of cases respectively. Commodity and historical index data provided by Pinnacle Data Corporation. The information provided by StockCharts.com, Inc. is not investment advice. Learn how to day trade stocks, capitalizing on patterns that repeat over and over each day. This one is highly documented and generally quite profitable, yielding an average of about 1.1% per trade in an index like the S&P 500. The strategy requires holding for the last 4 to 5 days of the year and then selling two to three days into the new year.

Gasoline and petroleum demand increases during the summer months, when a large part of the population is driving and vacationing. Investors can use seasonal expectations, albeit cautiously, to enhance their portfolio returns. Sign up for our daily newsletter for the latest financial news and trending topics. Every financial advisor recommends having an emergency fund, but in what type of account or investment vehicle should you keep this emergency fund?

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