Updated: Aug 16, 2022
In trading/investing, the term seasonality describes regularly recurring, predictable patterns that tend to be repeated in every calendar year. Every sector exhibits unique seasonal trends based on solid fundamental factors, from which we can profit.
Among the best-known drivers of seasonal patterns are harvests or the weather; but the timing of interest payments, tax deadlines or balance sheet dates also play a role. For example, investment funds want to report a strong annual performance at 31 December and their window-dressing activities contribute to the disproportionately strong rally in stocks around the end of the year. People's festive and shopping mood is partly responsible for the year-end rally as well. Such factors influence price trends and create seasonal patterns over the years, i.e., recurring trends clustering at certain times of the year.
For the average trader, perhaps "Sell in May and Go Away" is the most recognized seasonal pattern in the US Dow Jones Industrial Average. The chart below shows the results of investing in that seasonal pattern since 1960.
This pattern works on other countries too, and the chart below proves it. Data is updated till end of April 2020.
I love seasonality as they add diversity to any portfolio. While there are many software tools available to do seasonality patterns research. Also there are sites that offer trading signals based on seasonal patterns. I do my own research, as I don't believe in black box signals. Like everything else, there is no perfect tool, but I find Seasonax is the best all around tool to find seasonal patterns on many financial instruments.
The first thing that will grab your attention is how easy and beautiful the graphical interface of the site.
The team behind Seasonx already have many research ideas that shows up on main page as the best ideas for the coming calendar period, or you can choose the instrument you are interested in and then pick the best research ideas from the menu on that instrument.
You can pick the date period exactly (up to 90 years depending on instrument), then you can filter out Single/Multiple years, Bull/Bear, Even/Odd or US election years or any combination, the possibilities are huge.
Once you filter a period, a chart will be presented to you based on your date/filter selections. Now you can pick any date range to see the return of the range and multitude of other data.
Also you can compare the return to a single year or single instrument.
Seasonal patterns are available on many financial instruments like Indices, Stocks, Commodities, Currencies, Bonds and Seasonx carries many instruments in each category with regular data updates and pattern updates.
I have a review on my YouTube channel, that will be live Oct 31, 2020.
While all this is good and beautifully presented, Seasonx have other tools in their arsenal that separate them from the others. Seasonality Screener is a tool to identify trading opportunities with above-average profits based on predictable seasonal patterns that recur almost every calendar year. Just pick the instrument you like from the over 20,000 instruments available, then pick the number of years, then date range to trade and winning % to filter
A screen with the best matches for your search will pop up to examine further as shown in the figure below:
When market is rallying up for years, it is hard to see any pattern, but you can detrend the chart to show the patterns more clearly as you can see from the charts below.
S&P500 index 10 year seasonality chart.
Below same above chart but detrended to remove the trend element from price so patterns can show prominently.
Due to the fact that by definition seasonality is based on yearly calendar, and even though it is derived by fundamental reasons, there are not a lot of trades to make it statistically significant for each instrument, but if you combine all the signals for all instruments, then you will have thousands of trades to base a statistical conclusion. In fact based on research done by Guido Baltussen and Laurens Swinkels from Erasmus University in Rotterdam, seasonality patterns is one of the best performing strategies right up with momentum.
As can be seen from chart below, MSFT tends to display unusual seasonal strength from October 10 to November 05; I have highlighted the period on the chart. The performance of MSFT in the seasonally favorable phase is excellent: MSFT rose in 21 out of 25 years, or put differently, MSFT rallied in these mere 19 trading days in 84% of the cases. The average gain was 7.52%, which due to compounding equates to an annualized return of 176.35%!
By comparison, the annualized gain achieved in the remainder of the year amounted to just 9.17%, i.e., less than one tenth.
As you can see, it was possible to achieve significant outperformance by focusing on a seasonally favorable phase. As an aside, the reason for this recurring rally is that MSFT regularly tends to report exceptionally strong quarterly earnings at this time of the year.
It is true that adding seasonal strategies to a portfolio will add diversification, but you can also create seasonal portfolios. Since Seasonx have more than 27,000 instruments with up to 90 years of historical data, basically you can create a strategy for each month and have twelve strategies in a portfolio using the same capital as each strategy will use the capital once a year. The number of strategies in a portfolio is fixed per month, as some patterns are a week long. Also each instrument can have multiple seasonal patterns in one year and correlated instruments doesn't have correlated seasonal patterns. For example Gold have different seasonal patterns than silver
I really like this tool and it adds a huge value to my portfolio. You can subscribe for free which will give you 20 instruments with full historical data to work with, plus you will receive bi-weekly news letter highlighting one of next calendar period patterns. As I always do with any tool I use, I managed to get a discount of 20% to all my viewers/students, you can get it here.