Stock Seasonality

Some things tend to repeat themselves. Summers are almost always more warm than winters. The rainfall usually peaks during specific months of the year. Birds migrate in the anticipation of the fall. But seasonality, this inherent tendency of repetition, is not restricted to the weather or wildlife. It turns out that seasonal patterns might be seen in the stock market.

The most prominent example is the idea of summer doldrums. It ties the changes in the activity of investors to the fluctuations in the prices of stocks. It goes as follows. People generally tend to wind down more during the summer. School is out, the sun typically shines more, and so this is the period when people typically plan their holidays. And when investors and traders go on holidays, they do not always keep track of the market as much as during the rest of the year and they might not trade as frequently.

This would in turn mean that, overall, there is less trading in the market and, because of that, prices do not swing as vigorously. As a result, the market would typically become more stagnant. Some people even go as far as to say “Sell in May and go away!”, suggesting to get out of the market in May and not come back until September. But is this really the case? Can one boil stocks' seasonality down to such a convenient sound bite? We have actually checked this for our investors. Take a look at the chart below displaying the annual seasonality of stocks. We use the the S&P 500 Index as a proxy for the stock market. This chart shows the calculations for the year 2018, which are based on historical data from the years 2002-2018.

Stock Seasonality Chart

Stock seasonality chart

There’s a lot to process here but please, bear with us for a second. The most important part is the largest one with the red line reflecting the projected value of the index. This line shows how the S&P500 Index has behaved on average throughout the year. In other words, it shows the seasonal tendencies of stocks from an annual perspective.

A short glance at this chart shows that there in fact may be some stagnation in May. So, preliminary analysis suggests that we cannot readily discard the notion of summer doldrums as far as the stock market is concerned. At the same time, you can probably see that the period of declines, on average, starts well before the end of May.

Actually, the above chart suggests that the stock market appreciated, on average, in the period from October throughout April. This might be the time to be on the lookout for rallies. Coversely, the period starting in April and ending in August might be the time of the year to be particularly cautious as far as corrections to the downside are concerned.

If you are wondering, the above chart comes from one of our tools, True Seasonals. Using this tool, you can analyze not only the stock market but also gold, silver, mining stocks and indices. If you are curious about a specific part of the year, you can use the tool to zoom in on a given quarter or even month. The tool also gives you a measure of the reliability of its projections. The green line shows the value of Quality of Projection – our internal measure designed to show you whether the indications of True Seasonals are strong or only optional.

Hang on a sec, surely there’s more that influences the prices of stocks than only the part of the year we are in? You would be right to ask that question. Some investors and traders have been mystified by the trading activity around the expiration of futures and options. These dates do not always fall on the same day of the month and are typically not considered in seasonality analyses. Luckily, we have worked to include this factor in True Seasonals. So, when you are peering over the charts of True Seasonals, the influence of the expiration of derivatives is automatically taken into account for your convenience. And you can choose whether you would like to focus on the influence of precious metals futures, precious metals options or, maybe, stock options.

Of course, seasonality is only one of the aspects of the stock market. At times, other factors can trump the influence of seasonal trends. A prominent example is the period following the 2011 downgrade of U.S. debt, when the market was driven by this event and not by seasonal tendencies precisely at the time of the summer doldrums. It is crucial to combine stock seasonals with other signals, like the ones we provide in our Stock Trading Alerts or Gold & Silver Trading Alerts.

Whenever you feel like you want to dig deeper into seasonality and look at specific parts of the year for a wide array of assets, check out True Seasonals. You can analyze the market thanks to more detailed charts which we update for you. 

And if you're looking for an up-to-date and detailed S&P 500 seasonality analysis, please visit this page in our Charts section.