Much as it sounds, seasonal investing refers to a concept where people base at least some of their investment decisions on seasonal trends. These seasonal influences may impact individual stocks, or they may be something that tends to have an effect on the entire stock market.
Understanding seasonality and its role in investing is a good way to gain an advantage, and while trends and the use of seasonal stock charts can be beneficial, of course, outcomes aren’t guaranteed.
The following are some key things to understand when it comes to seasonal market trends and seasonality in investing.
The Halloween Effect
One of the most widely recognized seasonal trends in investing is called the Halloween effect, or the Sell in May indicator. This refers to the idea that stocks are usually weaker in the summer months, as compared to winter.
This isn’t uncommon, and you can even see it when you just look at the performance of retailers.
A lot of advisors and analysts have seen that selling in May and coming back in September is effective for investors. The patterns to support this idea can be viewed in the Dow going back as far as the 1950s. On average the months of November through April have yielded gains of 7.5%, while the months of May through October have earned less than 0.3%.
This is likely due to the fact that people are traveling and less focused on trading and even business in the summer months.
Santa Claus Rally
Another commonly referred to seasonal trend is nicknamed the “Santa Claus Rally.” This relates to the idea that stocks tend to rise during the days between Christmas and the start of a new year.
No one’s exactly sure why this is, but there is a theory that there is more optimism during the holidays and investors are also making adjustments to their portfolios at the end of the year because of taxes.
Many investors will sell their underperforming stocks at the end of the year for tax losses, then people who want a good deal can often scoop shares up at lower prices, which leads to higher demand.
The concept of sector rotation in investing isn’t necessarily based on seasons, but it is about learning how to understand and follow certain patterns of strength and weakness in the market. This theory is about buying top-performing stocks while they have momentum and then selling when indicators are showing there could be a slowdown in these sectors.
Sector rotation has been shown to outperform a buy-and-hold strategy the majority of the time, and sectors don’t rise and fall at the same time.
When you’re a sector-based investor and you’re following these trends it allows you to diversify based on your knowledge of the business world and general economic indicators and cycles. One of the simpler ways to manage sector rotation is to buy and sell sector-based ETFs.
Of course, there’s quite a bit more that comes with understanding seasonality in the markets, but the above topics give you a general overview of these concepts.