Trading Seasonal Stock Market Patterns – StockRockandRoll
Trading Seasonal Stock Market Patterns
Posted on 09 February 2014. Tags: Seasonal Stock Market Patterns, Stock Market Patterns, Trading Seasonal Stock Market Patterns
Why Understanding Seasonal Stock Market Trading Patterns Is Important
It is no secret that trading seasonal stock market patterns can lead to better investment performance; however, many stock market traders and investors do not actually understand the seasonal stock market patterns and how to trade them. Taking the time to learn what the seasonal stock market trading patterns are and when to trade them is well worth the time and effort to become a more informed and successful stock trader and investor. Even if you do not want to actively trade the stock market, knowledge regarding reoccurring trading patterns can be useful when trying to decide when to make investments for the longer term.
Trading Seasonal Stock Market Trading Patterns
Some of the seasonal stock market trading patterns have become well known sayings, such as “the January effect” and “sell in May and go away”, while others are not so well known, but are nonetheless worth learning about to improve trading and investing performance.
The following is a look at some of the more common seasonal stock market trading patterns and how to trade them.
The January Effect is a seasonal rally in stocks that quite often occurs during January. The reason why stocks tend to rally in January is because investors and fund managers commit fresh money in the beginning of the year to stocks and bid up their prices. This is the shortest of the seasonal stock market trading patterns. To trade the January Effect, buy high growth stocks that outperform during times when the stock market rises. It can also be traded by buying beaten down stocks that often bounce in the beginning of the year, or by simply buying stock market index funds. Of course, you need to sell towards the end of January to lock in any January Effect gains.
Sell In May and Go Away describes the tendency for stocks to underperform from June to October. Traders looking to outperform the market sometimes sell their stock holdings in May and stay out of the stock market during the quiet summer season and the volatile early fall, until the traditionally strongest part of the stock market cycle returns in November. The saying can be interpreted as: sell stocks in May and go on vacation (forget about the stock market for the next few months).
Buy Retailers on Labor Day and Sell Them by Black Friday After Thanksgiving is a seasonal rally in retail company stocks that occurs from early September to the day after the Thanksgiving holiday, which is called Black Friday. Summer is usually a quiet time for stocks. When Labor Day arrives, retailers are in the spotlight of stock traders, as the “Back to School” buying season gets underway and the coming holiday season causes investors to bid up shares of retailer stocks. The buzz surrounding retail company stocks usually peaks on or around the big Black Friday shopping day after Thanksgiving. To trade the retailer Labor Day to Black Friday seasonal pattern, purchase stocks of some of the stronger individual retailers. To lessen exposure to specific retailers, the Market Vectors Retail ETF (NYSE: RTH) Exchange Traded Fund (ETF) offers exposure to many major retail stocks. To leverage a trading position, the Direxion Daily Retail Bull 3X Shares (NYSE: RETL) can be used to gain exposure at three times (300%) the movement of the Russell 1000 Retail Index, which measures the performance of the large-cap segment of United States retailers.
Buy In November and Hold Until May describes the tendency for stocks to outperform from November to May and post higher gains during the months of November through May. Analysis of stock market returns has found that being in the stock market from November through May and staying out from June through October leads to statistically significant higher rates of return. There are many ways to go long in the stock market from November until May, from buying individual stocks to buying long-oriented mutual funds and ETFs. To make the best of the seasonal gains, focus on stocks that have high earnings growth rates that will outperform as the stock market increases. To gain leveraged exposure to the stock market during November through May, consider the Direxion Daily Small Cap Bull 3X Shares (NYSE: TNA) ETF, which is designed to return three times (300%) of the performance of the Russell 2000 Index. The Russell 2000 Index tracks the performance of United States small-capitalization stocks.
How To Read Seasonal Stock Market Trading
Seasonal stock market trading patterns should be used as a guide for making trading decisions in the context of other factors that affect stock prices and the overall stock market. For example, if the economy is falling into recession and the stock market is in the middle of a steep bear market sell-off, many of the seasonal stock market trading patterns are not going to play out in the way they typically do during bullish stock markets in which stock prices are generally in an up-trend.
The Downside of Seasonal Stock Market Trading
Seasonal stock market trading does have some significant negatives. First off, traders and investors that remain out of stocks for months, as they follow seasonal trading patterns, will miss out on any dividends paid by stocks during the months that they are not holding stocks long. They may be able to make up for the lost dividends by logging above average gains in stocks; however, there are no guarantees that the seasonal trading patterns will play out as expected, and the expected gains will materialize. Another risk associated with jumping into and out stocks to catch seasonal stock market trading swings is that if the stock market moves in the opposite direction as anticipated, a trader or investor may miss out on significant stock market moves that could impact the performance of their portfolio. For these reasons, seasonal stock market trading should be limited to just a portion of a trading portfolio.
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