Seasonality has been observed to affect market volatility. The reasons for these seasonal market trends are quite interesting, and so we take a look at some explanations in this article.
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Offering his "expert advice" on the seasonality of stock trading, Mark Twain has been quoted as saying that October is the most dangerous month to speculate on stocks. He quips that the others “are July, January, September, April, November, May, March, June, December, August, and February." This is a light-hearted way to look at the risks of trading stocks, which are ever present, but there is little doubt that the stock market is also affected by seasonal trends.
Seasonal stock market trends refer to the general upward or downward trends in the market during certain months of the year. Statisticians have long observed seasonal volatility changes at various times during the year. While some dismiss these observations as the fruit of mere coincidence, a careful study of market data will reveal obvious seasonal patterns.
While a seasonal trading strategy does not guarantee profits, its proponents argue that understanding market patterns will gives traders a definite advantage. Trading seasonal trends is much like card counting in blackjack. Many rounds must be consistently played to see the odds stack up in one’s favor. However, not being able to follow the patterns consistently is precisely the challenge that most traders who use seasonal trading strategies have.
It can be difficult to consistently follow the strategy year after year to benefit from the patterns, especially when trading individual stocks. The patterns are most likely then not played out in market indices and other stock pools.
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Vacationing Traders and Holiday Spirits
Perhaps the simplest explanation for why the markets have seasonal patterns can be explained by the fact that it is humans who trade the markets. Therefore the ebb and flow of securities will mirror, or at least correlate, to how people spend their time and the general state of their minds during certain times of the year. As summer rolls around, investors and traders alike tend to think more about vacations and spending more time outdoors, which means they are spending less time biting their nails because of stock fluctuations.
Therefore, the rise in the number of vacationing traders often translates into a weaker summertime market. A seasonal boom is not noticed again until October rolls around. This trend often continues through the holiday season, as good cheer and the holiday spirit lifts endorphin levels, market activity and with it stock prices, so say proponents of the seasonal effect. Of course there are always exceptions. Individual stocks and sectors may move contrary to market trends, dependent on events that have significant implications for the survival and profitability of the companies in question.
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Earnings Releases and Seasonal Volatility Changes
Vacationing traders or not, earnings releases are major events that the markets look forward to. Not surprisingly, market activity tends to pick during earnings seasons as companies reveal what they have been up to. It is also the time when investors re-evaluate their holdings of certain stocks as they see earnings forecasts and the results of previous period’s activities.
As a matter of fact, stocks may trade relatively flat while they wait for new releases and in other instances they may move up or down in response to rumors and information leaks.During earnings season, even the vacationers will whip out their Blackberries and plug into the nearest Internet service to make a few trades.
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There is no doubt about it, markets rarely maintain the same levels of volatility throughout the year.Markets tend to be flat in the summer time as traders leave their desks to take vacations and enjoy the weather.Volatility may pickup again as the end of year holiday spirit sets in, but there are other events that may affect the level of market activity such as earnings releases.
While using seasonal trends to trade may seem like an exciting strategy, perhaps it’s best to use it in concert with another, more carefully crafted trading strategy, instead of trading it alone.