Seasonality in the stock market refers to the fluctuations in stock prices that occur at regular intervals during the year. It is believed that, in specific months, the value of securities rises or falls. With this valuable information, you can get the maximum benefit.
In fact, there are many different phenomena affecting pricing, and it cannot be said that seasonality is the only one. The importance of seasonality depends on the investor and their strategy.
What are seasons?
Officially, there are two seasons in the stock market:
- Season of reports.
- Off-season.
The reporting season is when the financial results of companies for a certain period (quarter, year) are out. Every business has its own reporting date. Many financial portals publish these reports.
The reporting season is divided into:
- Q1, Q2, Q3, Q4 – quarterly reports.
- Fiscal Year (FY) – yearly accounting report.
The reporting season is characterized by high market volatility. The price movement becomes faster and stronger and investors fall into panic or euphoria.
This is why, on the day of the release of a report, it is very common to see a “Gap” on the daily chart.
This price gap occurs post-market and pre-market when traders buy or sell shares outside of trading hours and in larger volumes compared to a quiet day. The banking sector is the first to report and sets the “mood” for the entire season. If the data from banks is negative, then, most likely, the entire reporting period will be under pressure from sellers. However, the main volatility occurs with the reports of large technology companies and blue chips.
The reporting season is the most productive period for traders and investors, as it provides good opportunities for quick earnings or fixing a long-term investment.
The off-season is the period when almost all public companies have reported. This “calm” is used by market participants to form a new position or add to an existing one. It is characterized by less volatility and smooth price movement (excluding other fundamental factors). Very often, in the off-season, short-term traders take a break from trading, and long-term traders and investors pay little attention to quotes.
What other seasons are there?
In addition to the listed seasons, there are also unofficial seasons that can last months, years, or even decades. These seasons are calculated as the average returns over a certain period of time.
According to statistics, May is considered a bad month in the stock market. Traders even popularized the expression “Sell in May and go away”. In May, most market participants go on vacation.
There is also a “Christmas Rally” period. It takes place at Christmas time and is characterized by an increase in price. The retail sector particularly loves this period. People buy gifts for their friends and family and this stimulates sales from retailers.
Statistically, September and October are also the worst months for the stock market. The explanation for this is the end of the financial year in the US and institutional investors rebalancing their portfolios.
Conclusion
The key problem of the investor is the formation of their position. Seasonality partly solves this issue thanks to historical data, but to base a conclusion solely on seasonality is not a good move. If in certain years, months, or weeks there was an ideal entry point, and all participants in the stock market earned, it would be phenomenal; but in reality, everything happens differently each time, and even the most accurate historical data on profitability can deviate in percentage terms. However, this does not change the fact that seasonality very often provides useful signals for traders to make successful trades in the stock market.
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