How to Understand Seasonality and Calendar Effects on the Market
Oddly, equities and financial futures change according to the time of year. The changes are regular and consistent enough to warrant your attention. Seasonality used to be a word applied to agricultural prices, and calendar effects was a phrase applied to equities. Today, they’re used interchangeably.
You can discover the seasonality characteristics of any given stock by using seasonality trackers on various Web sites, including the best-known seasonality tracker, Thomson Financial. Their Web site allows you to see a chart of any stock with its associated average returns by month, starting in 1986. You can also see a table of the months in which the stock rose or fell over the years.
Jeffrey Hirsch discovered that nearly all the gains in the S&P 500 are made between November 1 and April 30. This rule isn’t true without exception, but it’s true for most years since 1950. When April 30 rolls around, you sell all your stocks and put the money in U.S. government Treasuries. Come November 1, you reenter the stock market. And when you’re not in the market, you’re not taking market risk.
Other calendar effects include
January Barometer: When the S&P 500 is up in January, it’ll close the year higher than it opened. Since 1950, this rule has an accuracy reading of 90 percent.
President’s Third Year: Since 1939, the third year of a presidential term is always an up year for the Dow. In fact, the only big down year in the third year of a presidential term was 1931.
Presidential Election Cycle: Wars, recessions, and bear markets tend to start in the first two years, while prosperity and bull markets tend to happen in the second two years. Since 1833, the last two years of a president’s term produced a cumulative net gain in the Dow of 718.5 percent, while the first two years produced 262.1 percent.
Hirsch and others have discovered many other calendar effects. Hirsch’s annual Stock Traders Almanac publishes the probability of any of the three major indices (Dow, S&P 500, and NASDAQ) rising or falling on any day of the year. The almanac bases this information on what has happened in those indexes on those dates since January 1953.
Statisticians don’t all agree on exactly how to measure seasonality effects. Seasonality statisticians quarrel with one another about matters big and small. If you have a talent for statistics and for judging among the available techniques, you can easily benefit by consulting seasonality studies or conducting your own.