Seasonality and Investing

Investors hate uncertainty. Since 2008, the investment markets have been overrun by many problems that continue to cause consternation. After losing money during the 2008 stock market collapse, many investors are considering other investment strategies, like Seasonality.

Seasonal investing strategies are alternatives to the traditional investing techniques of "buy-and-hold," which focus on "What" to invest in and "When" to invest.

Traditional investors hold onto a stock for a long period of time, gaining profits through inevitable price increases and dividends. These traditional "buy-and-hold" investing strategies lead to "higher risk" during negative times due to the longer period of exposure to market vicissitudes.

"Cyclical Trends"

Seasons change. Seasonal trading is based on cyclical market trends that repeat themselves at certain times each year. Some products are so linked to the seasons that stock valuations change dramatically based upon the time of the year.

Usually, seasonal investing is for shorter periods of time - under six months - permitting quick entry and exit from the market. The seasonal investment technique can be seen as a "Risk Management" strategy when used in conjunction with another investment strategy.

Seasonal investment methods are great tools for determining when to buy or sell stocks you will hold for short- or long-term periods. Some stock trading experts have proven that superior investment returns can be accomplished when seasonality is considered.

"Seasonal Sales"

Certain products and services are associated with different seasons of the year: bathing suits, snow shovels, and landscaping, to name a few. Knowing when the "season-specific" products have their "peak" and "off" sales periods enables professional traders to make profits by timing the markets effectively.

"Seasonal Trading Steps"

Seasonal trading consists of at least three major steps: 1) Research past market prices, 2) Analyze data, and 3) Calculate best timing for executing trade.

Traders should consider a couple of years, if not decades, of past seasonal market data to see if a clear seasonal trend can be determined where a stock rises or falls.

Many statistical algorithms, models, and tools are available for analyzing the collected data, including the following: Moving Average Convergence Divergence (MACD), Stochastics, and Relative Strength Index (RSI). Two points must be compared to find stocks that "outperformed" the market average during a specific season.

Once a seasonal trend has been identified, the stock trader must time the execution of the trade to buy the stock at its seasonal low and sell it at its seasonal high. Seasonal stocks naturally go up or down at a certain time. Market timing is the key to making a profit using seasonal investing techniques.

"Commodities"

Agricultural markets are the primary seasonal product sector; the August harvest was a very important market indicator when a larger proportion of the American population worked in the agricultural sector. Wheat, orange juice, oil, and gold have price changes based on seasons.

+ Although wheat can be harvested at different times during the year, the weak period for wheat stocks is between January and February.

+ Orange juice sees a decrease in its price from November to January.

+ Gold is strong from July to October because of its use in jewelry.

+ Oil prices are strongest from February to May.

"Consumer Stocks"

Consumer companies are divided into "Staple" and "Discretionary Spending" categories. "Staple" companies provide the basic necessities consumers need every day - toothpaste, soap, and food - these sales don't change dramatically during tough times.

When people have a little "extra" left after paying their bills and buying the basics, they can engage in "discretionary spending" on luxury items, like jewelry and electronics. During difficult economic periods, people cut discretionary spending the most.

"Timing Holidays"

Holidays provide another opportunity for seasonal trading in this modern 24/7/365 world since some stock exchanges remain open while others are closed. A short-term seasonal trading strategy consists of buying a stock before a holiday and selling it after the holiday.

"January Effect"

Some seasonal data reveals potential bearish or bullish trends. There is a close correlation between how the stock market has performed during January and its total performance for the year, called the "January Effect." In January, many stock traders have returned from holiday vacations and are reconfiguring their portfolios. Seasonal traders must compare the stock price on the first and last day of the month.

"Sell in May, Go Away"

Historical data confirms that most profits are made in the first six months of the year. This seasonal strategy offers a clear entrance and exit point while allowing traders to take the entire summer off.

"September Effect"

September is usually the worst month for stock markets as experienced traders sell stocks that have appreciated in value. Children have gone back to school and the end of the year is right around the corner.

"October Effect"

After many investors wound down their trading activity in September, October trade volumes decline. Professionals become more conservative because they don't want to lose paper profits. Thus, October has seen some of the most dramatic stock collapses as demand wanes.

"Market Timing"

Seasonal investing requires discipline in buying a stock before its price runup. Traders don't want to be too greedy and sell too late when the stock begins to decline. Seasonal trading is most effective when used in concert with other more traditional investment strategies because it provides a better signal for when to enter or exit stocks.