Seasonality effects can be used in almost all financial areas.
Seasonality - What is it?
Do you know the expression "Sell in May and go away"? Or have you ever heard of a Santa Claus rally? Both result from the history of stock prices, in which prices tend to rise at Christmas and prices tend to fall from the month of May. Both are findings from seasonal analysis. But seasonality can do much more. For seasonality can be used to calculate a wide variety of time periods such as months, weeks days or their combination.
The following picture shows the results if one had invested in the SP500 at different months.
Investment from October 10 to April 30
Investment from 01 May to 09 October
The two "Summarised profit" and the profit curves show the different results.
Why stocks, indices, commodities, currencies or economic indicators show seasonal patterns often has very different reasons.
For example, agricultural commodity prices are highly dependent on the weather. The seasons are a natural seasonality. Another well-known example is retail sales, they usually peak during the Christmas season and decline after the holidays.
How it works.
For the calculation of seasonality, the historical prices of a share or an instrument are used to sum up the percentage movement of the individual days. In the calculation, all days are combined to form a year. This results in a yearly chart, which shows percentage movements seasonally.
Calculation of seasonality:
Historical prices to sum up the percentage movement of the individual days
For stocks, stock indices, commodities, etc., investor behavior influences seasonality. Investors are influenced by entrepreneurial profits.
Many companies are influenced by seasonal effects. For example, the travel industry, airline and hotel industry benefits from summer tourism.
Numerous supplier and service companies benefit at the beginning and end of the year from the budgets of the green companies.
At the beginning of the year new money is released and at the end of the year what is left is spent.
Especially in the fall and winter, stock prices rise the most. There are numerous reasons for this effect. While experts disagree on the reasons, they agree that the seasonal pattern exists and is a very good timing element.
Seasonality is one of the 5 major themes.
If you think of analyzing the stock market like putting together a puzzle of different sized pieces, seasonality and statistical analysis is one of the heavyweights.
Numerous studies have proven that seasonality exists in the financial markets and with the right strategy, very profitable gains are made.
If you want to delve deeper into the topic, you can find several books at Amazon.
The Profitable Truth About Seasonality: Breaking Trading Myths that Cost You Money
Gupta, K; Singh, B. 2009. Price Discovery and Arbitrage Efficiency of Indian Equity Futures and Cash Markets. NSE Research Paper
Nath, Golaka C. and Samanta, G. P. 2003. Integration between Forex and Capital Markets in India: An Empirical Exploration. Available from Internet: http://ssrn.com/abstract=475822
Sharma, J. L; Kennedy, R. E. 1977. A Comparative Analysis of Stock Price Behaviour on the B., London and New York Stock Exchanges, Journal of Financial and Quantitative Analysis 12: 391–413. http://dx.doi.org/10.2307/2330542
Seasonality effects can be used in almost all financial areas. A very well known seasonality is the statement "Sell in May and go away, but remember come back in September." and refers to the broad stock market. Other seasonal effects arise from consumer behavior. For example, November through January are the busiest times for retail sales.
And, of course, there are seasonal effects in the agricultural economy, which is partly dependent on the weather. So it is not surprising that numerous seasonal trends have their clock spring in the cyclical and seasonally dependent business model of individual companies.
From our experience we can say. You would be surprised how many seasonal effects there are in the stock market. You can find many of these trends with our Seasonality Screener.
Seasonality can improve the timing of their investment and trading activities. Analyze strong recurring trends and find the best opportunities with our Seasonality Screener.