As an investor, it’s important to be aware of the seasonal trends that can impact the market and your portfolio. By understanding and anticipating seasonal shifts, you can make smarter investment decisions and potentially boost your returns.
In this article, we’ll explore some of the key seasonal factors savvy investors watch and how you can leverage them in your trading strategy:
Understand Major Calendar Events
One of the most basic but important seasonal factors to understand are major calendar events. Annual occasions like the December holidays or events like tax season in March/April often coincide with stock market movements.
For example, the stock market generally rallies in the period between Thanksgiving and the New Year. This is partly due to holiday cheer and partly due to investors locking in gains before the end of the tax year. Knowing this seasonal tendency, you may want to take advantage of buying into consumer discretionary stocks ahead of Black Friday.
On the other side, markets can sink leading up to the tax season as investors sell positions to cover upcoming liabilities. Being aware of this trend, you can look to trim losing positions in your portfolio in February/March to claim tax losses. Planning around major calendar events is one easy way to potentially boost returns through seasonal investing.
Watch Commodity Cycles
Commodity prices tend to follow seasonal cycles connected to supply and demand fluctuations. For commodity producers, these cycles heavily influence their operational results and stock prices.
For example, oil stocks tend to benefit in the spring and summer months leading up to peak driving season when fuel demand rises. Subsequently, these stocks may underperform in the fall and winter months when driving declines. Knowing this tendency, you may look to load up on oil stocks in February/March and sell in August/September to ride the seasonal trade.
Beyond oil, agricultural products like corn also follow seasonal cycles tied to planting, growing and harvesting schedules. Paying attention to commodity market dynamics can cue you into related stocks that will benefit at different times of the year.
Capacity on Sector Seasonality
While some sectors, like retail, have very obvious seasonal patterns tied to consumer behavior, other market sectors also exhibit seasonal tendencies. These are driven by a variety of macroeconomic and industry-specific factors.
For example, the materials sector tends to gain momentum in the fall heading into the year-end as industrial activity picks up. Healthcare stocks also tend to rally toward year-end, potentially on increased demand ahead of policy changes.
On the flipside, technology stocks historically underperform relative to the broader market in the summer months, possibly due to lower trading volumes. Being aware of these ingrained sector-based seasonal trends can help you position your portfolio to generate outsized returns at key moments.
Use Seasons to Inform Trading Approaches
In addition to timing trades around seasonal factors, you can also leverage seasonal trends to inform your trading approaches. Many active traders alter their strategies to align with expected market conditions in a given season.
For example, low summer trading volume lends itself well to swing trading strategies. Meanwhile, increased volatility around earnings season in the spring and fall may be better suited for options trading strategies.
Letting seasonal patterns guide your application of different trading techniques through the year is another smart way to maximize performance. Just like the weather, markets go through periods of calm and volatility – adjusting your tactics accordingly is the masterful way to trade.
By tuning your attention to major events, commodity cycles, sector tendencies, and trading strategies, you can put the odds in your favor. While past performance is no guarantee of future results, understanding historical seasonal factors impacting the market provides a leg up. Do your homework and harness these long-running seasonal factors, and you’ll be on your way to smarter and more successful investing year-round.