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Use Seasonal Patterns to Trade Stocks

Carl Capolingua Carl Capolingua 05/01/2021
Use Seasonal Patterns to Trade Stocks Use Seasonal Patterns to Trade Stocks
Use Seasonal Patterns to Trade Stocks Carl Capolingua
US equities got off to a rocky start to 2021, with each of the major indices falling around two percent before closing just off their lows for the session. As always, there are a range of factors currently at play which are impacting stock prices. For example, the continued rampant spread of the Coronavirus in several key economic regions, the potential for the Georgia Senate run-offs to change the balance of power in the US Senate, and question marks over whether we will get a smooth transition from the current Trump administration to a Biden one. We could go on…

But, underlying the day-to-day ebb and flow of headline grabbing market matters, we often find that there are “seasonal patterns” at play. A seasonal pattern is a move in a market, it could be in a commodity like coffee, or in a stock market index like the S&P500, which tends to occur around the same time each year. We say “tends to occur” because seasonal patterns are calculated by looking at the average price movements of a particular market at certain times of the year. And whilst there are generally repeating actions by market participants which contribute to seasonal patterns, for example, harvest time for an agricultural commodity, there are no guarantees that seasonal patterns are going to play out in any future year.

In the stock market, and we will focus on the largest and the most influential benchmark index in the world, the S&P500, there are several clear seasonal patterns investors should be aware of. Perhaps the best-known pattern is the “Santa Claus” rally which gets its name from the tendency for the S&P500 to rally in the period leading up to, and shortly after Christmas. In fact, since the year 2000, nearly half of the index’s average annual return came in the three months between October and December. 

Impressive. But did you know that there is an even better three-month period of the year for the S&P500 over the last 20 years? The months of March, April, and May have typically delivered the best three-month return with an average 3.5% gain over the period. That’s roughly half of the S&P500’s average annual return since 2000.

You’ve probably heard the well-worn investing phrase “Sell in May and go away”. Now you know part of the reason why. The rest of the puzzle lies in the fact that June is on average a bearish month for stocks. Since 2000, it tends to see just over 0.5% wiped off stock prices. The most bearish month of the year by far though is September, with an average 1.1% decline.

Which brings us to the current price action in the S&P500. Much like June tends to be a “hangover” month following the strength in March-May, January (-0.3%) and February (-0.7%) tend to undermine the Christmas cheer from the October-December rally. Setting aside September’s typical big drop, January and February are on average the most bearish consecutive months of the year. So, perhaps we need a second stock market adage, “Sell in January, and come back in March!”.


(Source: AusbizTV January 4, 2021. "ETFs to play the Asia Resurgence this year". Available from: https://www.ausbiz.com.au/media/etfs-to-play-the-asia-resurgence-this-year?videoId=6375)
 

Seasonal Trends in S&P500 Since 2020:

Oct-Dec +2.9%
Jan-Feb -1.0%
Mar-May +3.5%
September -1.1%


Post-Christmas Hangover:

(Since 2010 Dec high to Jan/Feb low)
2020 -3.6%
2018 -11.8%
2016 -13.0%
2015 -5.3%
2014 -6.1%
2010 -9.2%

This information has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication only. No representation or warranty is given as to the accuracy or completeness of this information.


Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.


Investing in derivative products carries significant risks and is not suitable for all investors. Please be aware that you do not own, or have any interest in, the underlying assets. We recommend that you seek independent advice and ensure you fully understand all risks before trading.

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Meet our contributors
Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Lesego
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Lesego Mthombothi
Market Research Analyst, South Africa

Lesego Mthombothi is an experienced market research analyst and investment professional who proudly holds an honours degree in investment management and completed her CFA level 1.
 
 
 

Mahmoud Alkudsi
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Mahmoud Alkudsi
Chief Markets Analyst, MENA

Mahmoud is a market analyst, with over a decade of experience in financial markets. He follows main market movers and tracks their effect on the price chart. Mahmoud mixes technical and fundamental tools with a deeper focus on the technical side, and with his wide experience in providing educational and guidance materials to all levels of traders, he helps them in making informed trading decisions. Before joining ThinkMarkets, Mahmoud was head of market research departments in different reputed financial companies, where he provided market analysis for a variety of asset classes, including FX, equities, indices, and commodity futures. As an experienced market commentator, he was hosted by too many print and broadcast media, including not limited to Sky News Arabia, France 24, Alarabyia, Alsharq-Bloomberg, and CNBC Alarabyia to discuss key risk events their clear impact on the price action. Mahmoud holds a Master of Business Administration (MBA) from Cardiff Metropolitan University of Wales, UK, and speaks Arabic, English, and Spanish.

Shawn
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Shawn Lee
Market Analyst, Malaysia

Shawn Lee has over eight years of experience in the financial market as a market analyst. Shawn provides market key insights and trade ideas through the market and technical analysis. He also held trader roles and guided traders in maximising one’s trading success.

Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Lesego
Lesego Mthombothi
Lesego Mthombothi is an experienced market research analyst and investment professional who proudly holds an honours degree in investment management and completed her CFA level 1.
Mahmoud Alkudsi
Mahmoud Alkudsi
Mahmoud is a market analyst with over a decade of experience in financial markets. Mahmoud mixes technical and fundamental tools with a deeper focus on the technical side, and has experience in providing guidance to all levels of traders.
Shawn
Shawn Lee
Shawn Lee has over eight years of experience in the financial market as a market analyst. Shawn provides market key insights and trade ideas through the market and technical analysis. He also held trader roles and guided traders in maximising one’s trading success.

This information has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication only. No representation or warranty is given as to the accuracy or completeness of this information.


Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.


Investing in derivative products carries significant risks and is not suitable for all investors. Please be aware that you do not own, or have any interest in, the underlying assets. We recommend that you seek independent advice and ensure you fully understand all risks before trading.

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