How to Make Money with Seasonality Stock Market Patterns?

There are lots of identifiable seasonal patterns in the market. Below is really a description of the most popular ones, along with our opinions on why the pattern exists and how to utilize it to your advantage:


Santa Claus Rally

As mentioned earlier in the day, it’s the historical rise in stock prices in the last week of the twelve months. The Santa Claus rally is really developed by the next two patterns we’re going to cover. It is a combination of traders buying in anticipation of the January Effect, and fund managers buying stocks prior to the end of the year for Window Dressing.

There can be some short term profits to be made here in the event that you buy in prior to the rally. Plus, once you take profits, you obtain another year to cover the taxes as you sold after January 1st. Since these gains will be short-term, that does make a nice little tax deferral.

January Effect

This phenomenon is that small cap stocks outperform mid and large size companies during the month of January. The explanation behind the January Effect is that institutional and individual traders who are tax sensitive and painful tend to sell late in the entire year in order to take losses on riskier stocks.

IRS rules dictate that you must wait thirty days to buy the same stock back, or you’ll have a wash sale as well as your tax loss will undoubtedly be disallowed. So, 1 month after selling in December for taxes, there is more buying in small businesses in January.

Lately, the January Effect has been quite muted and you can find few, if any, arbitrage opportunities for investors who want to make use of the effect.

Window Dressing

This is the idea that stocks on an upward swing will get stronger at the end of the calendar quarter because mutual fund managers sell under-performing stocks from their portfolios and use the proceeds to buy good performing stocks that will make their funds appear more successful. It’s done as a marketing ploy.

There can be some short term profits to be made by picking the correct high flying stocks, but… it requires very little time for all those profits to disappear if you hold too much time.

Earnings Season

Earnings season comprises a lot of the month following the end of each calendar quarter. Companies will start announcing earnings as early as the next week of the month and inside a few weeks, the vast majority of publicly traded companies could have announced.

If you watch the larger, bell weather stocks early in the earnings season, quite often you can pick up on a trend of strong or weak earnings. While each individual company has the opportunity to buck the trend, generally, the majority will belong to either the camp of positive or negative results, and the market direction will observe the majority. These trends can be strong sometimes, but… every now and then, will reverse themselves mid-season.

Sell in May and Go Away

This saying is an old British adage based on the proven fact that the period from November to April has stronger historical market growth on average than May through October. Statistically, this is correct.

Looking at the performance of the S & P 500 dating back to 1926, a trader who each year sold the index stocks in-may and bought back October would have created an average annual get back of 8. 4% over the last 86 years. By contrast, those who followed the opposite strategy of shopping for in May and trying to sell in October could have generated a get back of only five. 1%. Both calculations include dividends and interest on the money that would be seasonably generated, but not transaction costs or taxes.

Therefore the adage is true, but… If you had maybe not sold in May possibly and held your stocks all year round, you would have generated a return of 10. 0% on the same time period, while minimizing both tax consequences and transaction costs.


Triple Witching

Triple Witching does occur on the third Friday of every March, June, September, and December. This is the day when stock options, index futures, and index options all expire on a single day. This day an average of has high trading volume with high levels of volatility, especially in the last hour prior to the stock market closes, that is known as, “The Witching Hour”.

Some day traders look at the increased volume and volatility as opportunities to create quick gains, which can be true, but… There’s also opportunities for quick losses and getting whipsawed. Our recommendation is to stay from it. We look at Triple Witching day as a great day to get out of the office and spend time doing something you enjoy.

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