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Despite market efficiency, when security prices accurately reflect all relevant and recent information, many seasonal effects that have been well documented still continue to exist in many markets. In this article, we’ll take you through some of these existing seasonal anomalies and show you how to take advantage of stock market seasonality by timing your buying and selling decisions according to daily, weekly and monthly trends.
Monthly Seasonality
The markets tend to have strong returns around the turn of the year as well as during the summer months, while September has traditionally been a down month. The average return in October remains positive, despite the record drops of -19.7% and -21.5% in 1929 and 1987.
How can you benefit?
An investor may consider buying more equities in September. However, please keep in mind that timing the market perfectly is nearly impossible and investors who trade frequently pay more commissions, but do not necessarily make more money. Furthermore, there is a difference between market timing and factoring in seasonality in investment decisions.
Market timing is based on short-term price patterns and trying to pick market tops and bottoms. Seasonality is about anticipating how the market will behave in a given time of a year and taking a position before the change will occur (e.g., if I know that December and January are usually strong then I may invest in November to make sure that I hold my investments in the following months).
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