Seasonality In The Marketplace

Different Seasons Mean Different Trading

Seasonal shifts in market action are an underlying cause of market direction that many traders fail to recognize. I know that I for one took a long time before I began to rely on things like the Traders Almanac and other sources of information that shed light on the subject. There are times on an annual, monthly and daily basis that are noted for low or high volume, buying or selling, expansion or decline and other factors that can influence the outcome of your trades. In an earlier piece I called “When Not To Trade” I detailed this same cycle but on a daily basis, outlining when and why different times of the day were better or worse for trading. In this piece I will detail some, but most certainly not all, of the longer term week to week, month to month and annual seasonal factors affecting the markets. These include the change of seasons, summer break, xmas break, fall/winter market seasons and the ever important earnings season.

The point of this article is not to discourage you from trading at any one time or another. It is to encourage you to be aware of WHEN you are trading in terms of the calendar, earnings and market year. This awareness is crucial for making sound trading decisions and can have a big impact on not only what you trade but the expiry and direction of your trade. Not to mention that being in touch with the calendar cycles is a great way to stay in tune with the market in a way that leads to intuitive trading.

The Change Of Seasons – The changing of the seasons can have a big impact on market expectations and overall price direction. Some seasons are known to be more or less active in terms of the consumer, construction, manufacturing and other fundamental drivers of the economy. As the seasons change so do the expectations of the market and by extension what the market is trading and how. Over the winter construction is low because of the weather but manufacturing can continue. In the fall and early winter the consumer is out in force for back to school, seasonal and holiday shopping. In the spring jobs creation picks up as summer service and other seasonal jobs become open. Keeping abreast of this is one foundation for longer term fundamental analysis and a big help in choosing trades.

Earnings Season Is A Season – Earnings season is a market season the same as those in the weather. Although there really isn’t an actual “season”, earnings are released all the time nearly every day, there is a period accepted as one and market as important by the market. This season loosely coincides with the calendar seasons and begins each time with the release of earnings from Alcoa. Alcoa, as the worlds leading producer of aluminum and aluminum products, is seen as a leading indicator of the market and therefore important as such. Earnings are like a report card for the market and have a very strong impact on future expectations. What really makes the season is the concentration of earnings reports. Between the time Alcoa reports and about 6 weeks later 95% of S&P 500 companies and near 100% of Dow Jones companies report earnings.

Fall And Winter Market Seasons – Now, keeping in mind the change of the calendar seasons and the seasonality of earnings, we can move on to the fall and winter market seasons. These are the two, roughly 4 months long, times of the year when the market is what I like to call “In session”. This season exists from September to May, divided by the summer and punctuated by the seasonal mid-winter holiday (Christmas, Kwanza, Hanukah, Winter Night etc). What marks this time is that is when 100% of the market, discounting those on the sidelines, is present and engaged. This is when the real market movements take place, the real trends and the real money. Other times of the year can be severely hampered by lack of presence in the market, not just lack of volume. There may not be a lot of trading volume during the fall/winter seasons but you can be assured that the market is present.

The Holiday Seasons – For this part I am going to include the summer break and the mid winter holiday together. The summer break is usually about a month long, typically in August, and ends with the start of school in the fall. The mid-winter break is about the same length but usually a little shorter. It begins mid to late December and runs until the first week of January. It really depends on what days Christmas and New Years fall on. What is important to remember about these two seasons is that there is incredibly low market volume and participation. Traders have left for vacation ranging from day traders to institutional investors. Any moves in the market are likely to be very light, without conviction and trapped within near to short term support and resistance. These times are often become market consolidations as previously placed orders and speculative position are filled and flushed out of the market.