Friday, August 11, 2006

Market Seasonality

Terry Jacks wrote a song "Seasons in the Sun" which was a story about the frustration involved in trying to time the stock market. His lyrics contain a lot of metaphors about being whipsawed, the ETF manipulators, end-of-month shenanigans by institutional traders, and the gaming of options.  In the end, Terry stressed in the repetitive chorus that the stock market can be broken down into bad seasons and good seasons, the latter also known as "Seasons in the Sun."

I think being aware of these patterns can give one a heads up and help to anticipate market direction bias.  In April I mentioned the summer and election year patterns which led me to sell what I saw as a topping pattern in the market.   When I became more aggressive in June, I mentioned that I thought we were in a likely trading range for the summer but felt comfortable being long near the bottom of the trading range and just waiting for the bull market to resume.  I never thought that listening to the Terry Jacks song had such a major influence on my investing, but it all became clear yesterday as I was listening to Gary Kaltbaum's daily show yesterday.  Gary was interviewing  Pete Hoyt from Best Choice Software and discussed seasonal market patterns. 

Pete Hoyt opined that there are certain events during the year that affect the market.  He said that September is the worst month of the year historically.   According to Pete, he believes that the reason for this is that school is starting.  Folks sending their kids to college need a big chunk of change to pay school bills and have to sell large quantities of stock.  "Just like clockwork," said Pete.  Late January is the second worse period for the market.  What happens in late January?  Gary made a guess, "The Superbowl!"   Pete didn't pause much on that thought, and asked "What about all the credit card bills from Christmas?  It kills the market every year."   Gary agreed, "That is pure logic."

What about the absolute best time of the year?  In late October, the market (DOW) has gone up 86% of the time, or 31 out of 36 years.  Gary interrupted, "Halloween!"  Pete dismissed that briskly, and answered "Getting ready for Christmas."  He said this is when retailers are getting their supplies ordered and shipped as they ramp up for the holidays.  Pete added that if you want another slam dunk, it's the "ladies choice" of Hershey's chocolate in mid-February.  It's gone up 11 of 11 years.  Gary knew he had this one, "Valentine's Day!"  Pete rewarded him with "Exactly!" then added, "It's not a question of the event, it's knowing the patterns." 

There are the patterns described by Pete Hoyt.  Market seasonality is drilled in our head repeatedly in the mind-numbing chorus from Terry Jacks.  Just more information to add to the trading digest.  The big question that remains is that if the Terry Jacks song is played backwards, does it contain specific stock recommendations? I'll post my findings later.

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