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Our lives are affected by the seasons during the year. Spring makes you happy! Autumn is sad. Winters are good. Summers are hot. Do the seasons affect the markets too? Are there any seasons in the markets too? Do the markets become exuberant too? Are there any gloomy days in the market? Yes, for the last one year the markets are gloomy. The first question that comes to your mind is that are these seasonal cycles real in the markets and how you can time your trading with these cycles? The stock market is full of sayings like, “Sell in May and go away”, as well as the conventional wisdom about the, “summer rally”, “the Santa Claus rally”, “the dark days of autumn”, “the presidential cycle”, and so on.
Markets are in a sense like living organisms. You should always keep this in mind that markets are always changing; money keeps on moving in and out of stocks, bonds, currencies, commodities and so on with the stroke of a mouse and speed of electron thousands of times every day. Technology, regulation, innovation, creation and new people make the markets a vibrant and ever changing place. Markets are about big banks, insurance companies, hedge funds, sovereign wealth funds, governments, mutual funds and individual investors creating a very diverse and dynamic environment.
Have you heard about Nicolas Darvas a ballroom dancer who in early 1960s made a fortune in around a year and a half with his Darvas System? He had made $2 million in stocks. In today’s money that is something like $20 million. He was a legend in his times. In his days, there was no online system. He would contact his broker via telex from far flung parts of the world where he would go for performing. In 1960s when big Wall Street players would go on summer off, volume would dry up and the market tended to have a slight upward bias. Now, with the high speed internet connection and satellites, any money manager can stay in touch with the market on his laptop or mobile phone even on family vacations in a remote island of Pacific! Life has changed. Technology has revolutionized many things in our lives. Still with such fast action, there is some seasonality in the markets that you should know if you are trading these markets.
Technology and innovation always bring change and new things. Past is gone. Everything is now real time. Breaking news is being flashed across the world in minutes if not in seconds. Twitter recently broke the record and spread the news of the death of Michael Jackson so fast that even search engines could not live up to the speed of Twitter. With globalization and the ability to communicate in real time, money has started to move in a less predictable fashion. This has altered the trading patterns. What used to work yesterday does not work today. Money flows very fast now days! In the past markets were a whole lot less complicated. Most of the money moved between US and Europe.
So the world has changed. Life is faster now. Money has no borders now. It flows where it finds the best rate of return. This is a more integrated world now. We are living in a global village. Are there any seasons left in the market? The seasons are still there but they tend to be mostly overshadowed by the fast paced nature of our world now. Everyday there is new breaking news so the seasons tend to get overshadowed. At the same time, you should be aware that there are times when the markets do tend to follow these seasonal patterns. You shouldn’t rely on seasonal analysis as your main method of trading stocks, bonds, currencies or commodities.
During the last 50 years the stock markets had an upward bias. It meant if you had bought stocks and kept them for a few years, there would have been an invariable price appreciation. No doubt, minor downturns were always there in the market but the overall trend in the markets had been up. Historically, September tends to be the toughest month of the year. For the past 50 years, the average return on S&P 500 for the month of September has been around 0.6%. Dow Jones Industrial Average has even preformed worse with return of -1%. Now stock markets have a certain tendency to move in certain directions during certain months of the year. This general seasonal trend is a good one to keep in the background of your mind. However, when you are dealing with seasonality, you should keep these facts in your mind:
1) The market is not longer static. Money has no borders now. With one mouse click money is transferred from one locality to another. The seasonal effect may get interrupted by other events. More and more people have real time access to information and larger amounts of capital than at any time in the past.
2) End of the year is special. Companies want to show good performance at the end of the year. At the end of the year, institutional investors want to make their results look as good as possible to their shareholders and tend to buy the stocks and so on. Institutional investors like mutual funds, hedge funds and insurance companies have become important players in the markets. So in case of an event free environment, seasonal tendencies may hold up fairly well.
3) People want quick profits. Many people make a living from investing and trading. These are the times for day traders and swing traders. With fewer people willing to hold stocks for longer periods, it is very difficult to predict seasonality. The days of long term investing or what you call buy and hold are dead! Frequent market crashes have taught the investing public that investing for the long term is fairly risky. So there is more short term trading going on. Value investing is gone and speculation is in.
4) A lot will be written about the recent stock market crash. What were the actual causes of the recent stock market crash? Why so many big banks went belly up in matter of days. What was so special that made this liquidity problem contagious with banks all over the world? The recent market crash was the result of CMO and Default Swaps bringing down the banks and Insurance companies in ways that had not been anticipated or foreseen by the analysts. Many had assumed that derivate securities are safe. Infact they have highly unpredictable tendencies. Derivates and outside the market trading activities can result in highly unpredictable patterns.
Many things are changing. The world is always changing. There is a change in demographics also taking place. With the aging of the population, the overall trend will be towards more income producing investments. So with everyone talking about the seasonal tendencies in the market, it reliability becomes less diminished.
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