Understanding the rhythm of financial markets can
give traders a significant edge. Seasonalities—lasting trends that repeat
themselves during some periods of the year—tend to influence the value of
assets and the overall market state. Identifying these cycles allows traders to
adapt their strategies better and make more informed decisions.
Understanding seasonal patterns
Seasonality in the financial markets refers to
anticipated fluctuations which recur annually, influencing asset prices and
market behaviour. Several phenomena well documented outline this phenomenon:
‘Sell in May and go away’
The stock market typically performs poorly between
May and October compared to the November-to-April period. Historically,
individuals who reduced equity exposure in May and returned in November
normally experienced better returns. However, it is important to remember that
market tendencies may change even though this pattern has been observed.
The January effect
The January Effect is a situation where the prices
of stocks, particularly small-cap stocks, rise more during January than any
other month. This often happens due to investors selling shares in December for
tax-loss harvesting and subsequent reinvestment in January, which results in
higher demand and, therefore, higher prices. Although the effect has weakened
over recent years, it remains a topic of interest for traders.
Santa Claus rally
This phenomenon indicates the rise in stock prices
during the last five trading days of December and the first two of January.
While the causes are unsure, holiday-season optimism and institutional
investors closing out their books may be reasons behind this rally. A lack of a
Santa Claus Rally activity can occasionally predict a bearish future for the
upcoming year.
Commodity seasons
Seasonal trends also occur in commodity markets. Oil
prices, for instance, rise ahead of increased usage during the summer driving
season as refineries produce more prior to increased usage. Prices then fall in
September as usage decreases. Similarly, farm commodities like wheat and corn
experience seasonal price trends because of planting and harvesting patterns.
Recent observations in late 2024 and early 2025
In late 2024, the traditional Santa Claus Rally did
not occur. The S&P 500 experienced a 0.2% decline over this period, marking
a departure from the typical year-end uplift. This absence raised concerns
among investors about potential market softness heading into 2025.
The January Effect appeared subdued in early 2025.
Small-cap stocks, which traditionally benefit from this phenomenon, showed
modest gains. The SPDR Portfolio S&P 600 Small Cap ETF (SPSM) recorded a 9.8%
increase over the
past year as of 6 January 2025, compared to the SPDR S&P 500 ETF Trust’s
(SPY) 25.4% gain, indicating a lag in small-cap performance.
Applying seasonal patterns in trading
Developing strategies based on a
variety of factors
Basing trading on seasonal trends involves analysing
past results to identify recurring patterns. However, one must pair this tactic
with other types of analysis so that irregularities and extraneous factors are
considered. For example, seasonal patterns can be blended with technical
signals to determine the best entry and exit points. If a trader observes a
seasonal pattern in a commodity to rise and a related buy signal from a
technical indicator like a Moving Average crossover, this convergence can support
the rationale of the trade.
Applying risk management
While seasonality trends are helpful, they are not
always accurate. The market may change the bullish or bearish trajectory
because of fundamental factors. ‘For
example, in 2018, there was no Santa Claus Rally. In December 2018, the S&P
500 fell by nearly 10%, marking one of the worst Decembers since the Great
Depression. This was due to fears of a global economic slowdown and rising
trade tariffs.’ — adds Kar Yong Ang, financial market analyst at Octa
Broker. In such cases, risk management involves conducting a thorough analysis
and applying moderate position sizes and tools like stop-loss orders.
Seasonality analysis platforms
Dedicated websites like Seasonsax can provide
traders with detailed analysis of seasonal patterns and trends, enhancing their
analysis and decision-making. For example, Seasonsax studies historical data to
identify recurring trends and anomalies that may affect asset value.
Conclusion
Seasonal trends can offer traders an advanced
insight into market dynamics if comprehended and factored into trade
strategies. Traders make more informed choices by combining historical insights
with technical analysis and sound risk management. One must continue to learn
and be responsive because market conditions continually evolve. Staying current
is the key to maintaining a competitive edge.
Disclaimer: Trading involves risks and may
not be suitable for all investors. Use your expertise wisely and evaluate all
associated risks before making an investment decision.
Octa is an international broker
that has been providing online trading services worldwide since 2011. It offers
commission-free access to financial markets and various services used by
clients from 180 countries who have opened more than 52 million trading accounts.
To help its clients reach their investment goals, Octa offers free educational
webinars, articles, and analytical tools.
The company is involved in a comprehensive network of
charitable and humanitarian initiatives, including the improvement of
educational infrastructure and short-notice relief projects supporting local
communities.
Since its foundation, Octa has won more than 100
awards, including the ‘Most Reliable Broker Global 2024’ award from Global
Forex Awards and the ‘Best Mobile Trading Platform 2024’ award from Global
Brand Magazine.
