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. So 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?
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.
Still such fast action, there is some seasonality in the markets that you should know if you are trading these markets. In 1960s when big Wall Street players would go on summer off, volume dried 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!
In the past markets were a whole lot less complicated. Most of the money moved between US and Europe. But 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.
At the same time, you should be aware that there are times when the markets do tend to follow these seasonal patterns. You shouldnt rely on seasonal analysis as your main method of trading stocks, bonds, currencies or commodities.
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.
Holidays means party time. Everyone wants to enjoy holidays. Holidays means investors are in a cheerful and exuberant mood and the money managers want to show a good performance at the end of the month. September has been traditionally a bad month and November has been a good month for the bulls. The S…P 500 Index has the general tendency to rise in the month of November. December is another typically strong month. December is the month of holidays and the end of the year.
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