Gabe Velázquez
Online Trading Academy
Many have heard the Stock Market Axiom, “Sell in May and go away,” but is there any validity to seasonal patterns, or do markets just move randomly?
Throughout the futures markets there are seasonal patterns that buck the random movement that seems to happen on a month-by-month basis. These patterns are based on data that has been studied for very long periods of time as well as some fundamental factors that take hold during certain months of the year. The agricultural markets would fall into the latter category as there are planting and harvesting months that have some impact on how major producers allocate and distribute their inventory. Keep in mind that these seasonal patterns SHOULD NOT be the sole influence on longer-term or short-term trading decisions. Instead they can be used as a small piece of an entire strategy that is based on low risk and high probability turning points using supply and demand levels.
In today’s piece I’m going to focus on the seasonal pattern exhibited in the Stock market and Crude oil. We will leave the agricultural markets for another day.
In the stock market there’s a well-known adage stating that investors should “Sell in May and go away” and return to the market in the month of November. Since November is almost upon us, let’s explore this pattern so that we are at least familiar with it and can decide if it can be of use in your particular trading plan. There have been several studies performed on this theory and for the most part they seem to confirm that over long periods of time (one study looked at 300 years of data) indeed an investor would have garnered better returns being out of the market during that May through October period. Keep in mind that these findings don’t take into account transaction fees and dividends. What’s more, other than the months of the seasonality there was no supply or demand zones used to time the entries and exits, which I would guess would add to the returns. To take seasonality a step further, the months of September and October have been the worst months for the bulls and November and December the best.
Going back in history you will find two stock market crashes (1929, 1987) in the months of October. In the same month in 1998 the Dow suffered a five hundred plus point drop due to the implosion of one of the biggest hedge funds at the time (Long Term Capital Management). In the last 15 fifteen years there have been some very steep declines in the September-October timeframe. Recall the Lehman and Bear Stearns bankruptcies in 2008. And in 2000, after a multi-month rebound in the Nasdaq, September was the beginning of the precipitous drop that culminated in the Nasdaq 100 shedding 83% of its value. So indeed, there seems to be a propensity for the stock market to fall during these fall months, but just like with everything having to do with the stock market it doesn’t happen every single year and it depends on what part of the market cycle we happen to be in. For those of you trading Stock index futures this is something to keep in mind.
The last seasonal pattern in the US stock market is actually quite simple: the stock market tends to rally in the day preceding a major US holiday. Labor Day, Memorial Day, Thanksgiving and Fourth of July would fall under this tendency. This information is readily available throughout the internet and I would say that maybe there’s a bit of a self-fulfilling prophecy here because it’s so widely known to stock market professionals.
Since we’re on the subject of November, WTI Crude Oil (CL) has a very strong propensity to move lower in the coming month, based on the data from the last 15 years. As always make sure that you look at a chart and find the lowest risk entry point and that it fits with your trading plan.
In summary, seasonal data is there because it does tend to have a higher than average number of occurrences and perhaps may help increase the probabilities of being on the right side of the market, provided a trader has a proven process and the discipline to follow it.
Until next time I hope everyone has a great week.
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Editors’ Picks
EUR/USD hangs close to 1.1750, with eyes on Fedspeak
EUR/USD is holding its retreat from 10-week highs near 1.1750 in the European session on Friday, capped by a modest rebound in the US Dollar. The potential downside for the pair might be limited amid expectations of divergent Fed-ECB monetary policy outlooks. Fedspeak is awaited,
GBP/USD holds steady below 1.3400 after mixed UK dta
GBP/USD is keeping its range trade intact below 1.3400 in European trading on Friday. The UK GDP unexpectedly fell by 0.1% in October vs. a 0.1% growth expected, while the Manufacturing Production rose 0.5% over the month in the same period, missing the estimated 1% increase. Mixed UK data have little to no impact on the Pound Sterling.
Japanese Yen bulls have the upper hand as hawkish BoJ outlook offsets risk-on mood
The Japanese Yen remains on the back foot through the early European session on Friday, though it lacks bearish conviction amid hawkish Bank of Japan expectations. Traders have been pricing in the possibility that the BoJ will hike interest rates as early as next week.
Editors’ Picks
GBP/USD holds steady below 1.3400 after mixed UK dta
GBP/USD is keeping its range trade intact below 1.3400 in European trading on Friday. The UK GDP unexpectedly fell by 0.1% in October vs. a 0.1% growth expected, while the Manufacturing Production rose 0.5% over the month in the same period, missing the estimated 1% increase. Mixed UK data have little to no impact on the Pound Sterling.
EUR/USD hangs close to 1.1750, with eyes on Fedspeak
EUR/USD is holding its retreat from 10-week highs near 1.1750 in the European session on Friday, capped by a modest rebound in the US Dollar. The potential downside for the pair might be limited amid expectations of divergent Fed-ECB monetary policy outlooks. Fedspeak is awaited,
Gold remains close to its highest level since October 21 amid Fed's dovish outlook
Gold remains on the back foot through the Asian session on Friday, though it lacks follow-through and trades near its highest level since October 21, touched the previous day. A generally positive tone around the equity markets undermines demand for traditional safe-haven assets and acts as a headwind for the commodity.
Bitcoin and Ethereum eyes breakout, Ripple steadies at support
Bitcoin and Ethereum are nearing the key resistance levels at the time of writing on Friday, and a successful breakout could open the door for a fresh rally. Meanwhile, Ripple is stabilizing around a crucial support zone, hinting at a potential rebound if buyers maintain control.
Big week ends with big doubts
The S&P 500 continued to push higher yesterday as the US 2-year yield wavered around the 3.50% mark following a Federal Reserve (Fed) rate cut earlier this week that was ultimately perceived as not that hawkish after all. The cut is especially boosting the non-tech pockets of the market.
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