How I Deal With Seasonality

  • April 23, 2003
  • Rob Hanna


A friend of mine brought up the topic of seasonality
with me recently. He’d read an article that had discussed how the six months of
November through April have historically far outperformed the period of May
through October. His concern was that the end of April was fast approaching, and
how should he factor this bit of information into his trading strategy?

Seasonality is a valid
phenomenon. In fact, in a study done from 1950 to 1997, if you had invested
$10,000 in the Dow from November through April, and sat in cash the remaining
six months, your $10,000 would have grown to $276,113. The same $10,000 invested
in May through October of each of those years would have grown to only $11,484.*

Other seasonal studies indicate
such things as:

  • There is a bullish bias
    during the first four trading days and the last trading day of the month.

  • The two days preceding major
    holidays tend to be market positive.

  • The first half of the month
    has shown significantly greater returns than the second half of the month.

  • January is a historically
    good month for the market, while September and October are bad.

  • Monday is the best day of
    the week for the market.

  • The third year of a
    presidential term is typically the best for the stock market.

Whether studies such as these
are market voodoo or completely valid makes little difference to me. I do
believe them. I just don’t trust them. While I find these statistics
interesting, I have found no significant use for them. I look for trends of
strength or weakness in the markets. I then use fundamental and technical
analysis to try and exploit those trends. Trying to factor in what day of the
week, or time of the month or year it is, would not a productive use of my time
and energy. 

I believe seasonality is a
valid concept. I’m sure people could put together trading strategies to take
advantage of seasonal factors. That said, trying to incorporate seasonal studies
into an already well-devised trading plan would be difficult at best. It would
be especially frustrating during those times where the market departs
dramatically from its seasonal norms. “It was a beautiful breakout, but I didn’t
take it because it was the third Wednesday of the month,” is not something
you’ll hear from me.

I’m sure you’ll see these types
of studies, if you haven’t already. My advice (whatever that is worth) is to
either build an entire trading plan around seasonality, or ignore it. Don’t let
it become an outside factor that clutters up your mind and keeps you from
executing your trading plan.

With regards to the market, the
range was finally broken! 



We’ve had good price-and-volume
action over the last few days. Many leading stocks have been acting well. 
Things are looking up. The only caveat, which has also been noted by several
other traders on this site, is that the VIX is showing complacency, and other
sentiment indicators are overly bullish. I suspect we will see a sharp pullback
sometime in the near future. Hopefully this will put a little fear back into the
market, and we can continue to move higher. Overall, it looks to me like the
long side is the best place to focus for the time being, even with the dreaded
May-October period coming up.

Best of luck with your trading,

Rob Hanna



robhanna@rcn.com

 

 

* Seasonal study statistics
taken from “How I Trade For A Living”, by Gary Smith.

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