There are thousands of strategies investors, financial analysts, and traders use on a regular basis to make sense of the waterfall of data and information they must process and interpret. And while there are trading strategies based on a wide variety of beliefs, it’s hard to argue against the role of seasonality and how cyclical market movement establishes a sense of predictability.
5 Seasonal/Cyclical Trends to be Aware Of
“I am always amazed at how the calendar can predict price movement,” experienced trader Martin Rimes says. “Seasonality is all about the study of repeating price action occurring ‘more often than not’ each year. We are talking about ‘herd’ behavior. Like animals, traders move in packs with the primal belief of safety in numbers.”
Depending on what commodities you’re trading and what your objectives are, there are a number seasonal/cyclical trends you can use to maximize your ROI and simultaneously lower risk. Let’s take a look at a few of them:
- The January Effect
One of the most common seasonal trends you’ll hear investors talk about is the January Effect, which – it should be noted – has held true in 2018.
“The January effect is a seasonal increase in stock prices during the month of January,” Investopedia explains. “Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a sell-off.”
- Halloween Effect
Perhaps you’ve heard the saying, “Sell in May and go away.” This is a common statement in the world of finance and refers to the cold period between May and October, which is traditionally the weakest time for the stock market. Some call this phenomenon the Halloween Effect.
By selling in May and then buying again in October, you historically maximize your return and avoid getting tied up in the declining values that permeate the summer months.
- Turn of the Month
One strategy is to buy on the last trading day of the month and sell after the first three or four days of the following month. This usually works because of the way money managers “dress up” their portfolios at the end of the month.
As global technical strategist Richard Ross says, “If you get a pickup in the first couple of days, money is definitely coming off the sidelines out of retirement programs, and money managers have a clean slate and you get a nice lift up.”
- Commodity Seasonality
When it comes futures trading and physical commodities, seasonality is especially present. Not only do weather patterns influence different crops, but so do consumption habits. Grains are a good example.
“When the crop is most vulnerable – i.e. when it is planted in the spring – the price tends to be higher than at the harvest time in the autumn,” RJO Futures points out. “Similarly, commodities such as Heating Oil or Natural Gas are usually higher during the winter months due to higher demand. These seasonal changes are expected and usually priced in the future contract.”
- Fed Days
Each year, the Federal Reserve meets eight times to review and update interest rates. In the hours after the release of these meeting notes, there is usually significant volatility in the market. This volatility has become less sharp over the years, but savvy investors pick up on the smart money and can usually ride it into the following week with strong returns.
Putting it All Together
Seasonality can’t explain everything the market does, but it’s nice to understand some of the cyclical movements that come into play from time to time. This sort of predictability can prove to be a valuable safety net in times of uncertainty.
The more you study these trends, the more educated you’ll be.