Stock Market Seasonality – Time the Stock Market by Knowing the Seasonal Trend Strategy

Typically we look at charts in chronological orders, one day follows the next, one month follows another, and each year proceeds in sequence. The typical chart chronicles the price path of a stock, or a stock index, over the years and can provide a lot of information for technicians to use. Yet, we can also look at a stock market seasonal chart to gain insight into market information not readily available on standard charts.

To find the stock market seasonality, we will use the S&P 500. So what are the S&P 500 seasonal trends? Or an S&P 500 seasonal chart? For our purposes, stock market seasonality is the tendency of stocks to bottom or top at certain points in the year.

Instead of looking at the last 30 years of price data in chronological order, what if you took each year (January to December) and could put each year on top of each other. All 30 years are then averaged and set to an initial value of 100 to provide one line which shows how the price acts on average between January and December, over the last 30 years (below we take a look at the 5, 10, and 15 years averages as well as the 20 and 30 year averages). Will the average show a stock market seasonal trend where the S&P 500 generally turns higher in certain months, or turns lower in others?

Below we look at the S&P 500 seasonal trends in the futures market. While you may not be a futures trader, seasonality of course affects stocks, the broader market which the S&P 500 futures represent, and the patterns can also be used to trade S&P 500 related ETFs such as the S&P 500 SPDRS (NYSE:SPY).

S&P 500 Seasonal Trends – 5, 10, 15 Year

There is stock market seasonality, and we can see it by looking at stock market seasonal charts. The seasonal tendencies are then extracted from the charts can be used to provide a context for trades which occur within the year. By using a seasonal trend strategy we can isolate high probability times to buy stocks based on stock market seasonality.

When looking at a seasonal chart to find stock market seasonality trends we find the following about the S&P 500 over the 5, 10 and 15 year time frames.

  • Market usually move lower through the first couple months of the year, putting in lows early to mid-March and then head higher in mid-May.
  • The middle to end of May is usually weak followed a short rally into early June which could potentially reach May high levels, but not always (hence the “Sell in May and go away” saying).
  • Beginning of June is also often a short-term peak, followed by a decline into at least early July.
  • Mid-September to early to mid-October is generally weak.
  • Stocks usually bottom out again in mid-November and rally into the end of the year.

S&P 500 Seasonal Trends -20 and 30 Year

By expanding the time frame we can see which of the tendencies listed above also align with the longer-term S&P 500 seasonal patterns over the last 20 and 30 years.

With this much data the trends are much less choppy. We can see clearly the times when stocks generally bottom and top during the year. Here are the tendencies based solely on the 20 and 30 year stock market seasonality chart.

  • Stocks start off the year lower and then bottom in late January. Rally kicks in by (possibly before) mid-March.
  • Top out in late May or early June.
  • Middle of August to end of August is usually a rally time, potentially putting in new highs.
  • Middle of September to middle of October is a bearish time.
  • Middle to late October stocks turn higher and go higher into the end of the year.

High Probability Stock Market Seasonality Patterns

Using all the time frames we can isolate the highest probable turning points. This is an average not a rule. In any one year anything can happen, but that said here are the dominant stock market seasonality patterns which have, on average, occurred on all time frames discussed.

  • Mid-March to mid-May is generally a bullish time.
  • Mid-September to Mid-October is generally a bearish time.
  • Mid-November into the end of the year is a bullish time.

Why Should You Care?

When looking to buy stocks, the seasonal patterns can aid in timing those purchases so stocks are bought during high probability time of overall stock market appreciation. It can also signal potential exits if the trader does not want to hold through a time that is usually bearish. Investors can use this information to buy stocks on dips at certain times of year. Swing traders can also take advantage by making trades in alignment with the stock market seasonality and exiting before probable turning points.

It is important to keep the overall trend of the market in mind. In uptrends use seasonal low points to buy stocks. In overall downtrends, use seasonal high points to get short or to sell.

How Much Does It Cost To Invest In The Stock Market?

The answer to “how much does it cost to invest in the stock market?” depends on a number of factors including but not limited to the kind of investor you are, the type of stock you buy and the company you choose to invest in. The stock market is risky business because the probability of you losing money is high. That is the reason why you need to understand the fundamentals of the business before you invest. Before you can determine the cost of investing in the stock market, you will have to understand how it works.

What Is the Stock Market?

Stock market is the buying and selling of stock (shares) of a company. The shares are securities that are listed on the stock exchange. Once you buy the stocks of a company you automatically become a shareholder in the company. You will earn from the stock you bought in two ways; first through the dividends that are paid by the company to the shareholders. The second way you earn money is through the appreciation of the company. Depending on the type of stocks you bought, the dividends are usually calculated on a fixed rate or variable rate.

The Different Types Of Stocks Can Affect How Much It Costs

When it comes to calculating how much it costs to invest in the stock market, you will have to determine the type of stocks you are buying. There are different types of stocks and they all have different market value.

Common Stocks; These are securities that represent ownership of a company. Once you buy these stocks you will have a right to vote at any shareholder meeting. The common stock shareholders however, are usually at the bottom of the priority ladder. This means if the corporation goes bankrupt, the common shareholders will only receive their money after the creditors and the preferred shareholders. In terms of cost these stocks have a less yield.
Preferred Stocks; These stocks give you a little ownership of the company but you don’t get any voting rights. The preferred stock shareholders usually receive dividends that are calculated on a fixed rate. The preferred stocks have a higher yield per stock as compared to the common stocks.
Penny Stocks; these are usually referred to as common stocks of the small public companies. The penny stocks are usually priced at $5 and below.
Factors That Affect Stock Prices

The price of a stock influences how much it will cost to invest in the stock market. It is thus important to understand the factors that affect the stock prices.

Company Performance

This is the major factor that influences the stock prices. The company performance, refers to the company earnings, both current and future earnings. The performance of the company may be affected by factors like employees’ layoff, change in company management, a new service or product, scandals and many more. These internal factors directly influence the price of a stock.

Inflation And Deflation

Both of these factors directly affect the stock market. Inflation is where the prices of goods and services rapidly go up. This causes the cost of manufacturing and transporting of goods to go up. In an event of inflation, the stock market drops due to the decrease in revenue. Deflation on the other hand is usually the drop in the prices of goods and services. While deflation is supposed to be a good relief, most investors don’t invest in the stock market. This is because they believe that the economy is weak. This causes the stock market to drop.

Interest Rates And Foreign Markets

The interest rates that are imposed on a company while borrowing money from the financial institutions usually affect the prices of the stocks. Higher interest rates usually affect the company borrowing which will in turn reduce their profits and dividends. Foreign markets on the other hand affect the stock prices indirectly. When the economic status of the countries goes down, it affects the stock market negatively. Once the economic status changes, it influences how the foreign countries will trade with the said countries. This will in turn affect the stock market of the foreign countries.

Tips Of Determining the Cost Of Investing In the Stock Market

Time to invest; when it comes to the cost of investing in stock market, it is not only money that matters. The time you invest in financial market is also important. You need to determine the amount of time that you are willing to invest in the stock market.

The number of shares you are willing to buy; the number of shares that you are going to buy will determine the total amount of money you will use. If you are new to the business is advisable you buy a few stocks as you learn about the business. Also remember not to buy all your stocks from one company, diversification is very important.

What Does It Mean To Invest In The Stock Market?

Investing is a term that is used to refer to the act of putting money into financial schemes or shares with the expectation of receiving a profit, when it comes to the stock market, investing means buying and selling of stocks or securities. For you to successfully know how to invest in the stock market, you have to understand the basics of how the market works. That includes the rules and the risks involved in the stock market. Understanding the stock market and the way it works is pivotal if you want to be successful in the business. First and foremost it is important to note that it is not a quick money scheme and that it takes skills and expertise to be able to succeed in this business. Secondly, the financial market is not for the faint hearted. This is a business that is risky and you need to be able to cut your losses.

How Does The Stock Market Work?

Before you can understand what it means to invest in the market, you have to know how the stock market works. It is basically the buying and selling of shares (securities) that are listed on a financial market for sale. Once a company goes public it lists shares in terms of stock, you can then buy the stocks. The stocks give you some ownership of the company and depending on the type of stock you buy you can vote at any shareholders meeting.

Understanding The Stocks

Investing in the stock market means that you have to buy and sell stocks. That is the reason why it is important to understand what stocks are and the different types that are available. The major type of stocks on the market, are called the share stocks. The share stocks are the smallest unit in the ownership of the company. There are two types of share stocks;

Common Stocks

Preferred Stocks

These two types of stocks are different in features. Once you buy a common stock, you are guaranteed a voting right. Every share earns you a vote so the higher the shares the higher your voting power. Preferred stocks on the other hand don’t have the voting rights, but the shareholders get dividends that are calculated at a fixed rate. The common stocks are calculated in variable rates. In an event of liquidation, the preferred shareholders are paid first before the common stock holders.

How Do You Earn In The Stock Market

Investing in anything usually means that you will get your money back with interest. Now, when it comes to the stock market, you get your returns in two ways. You can get your money back through dividends that are paid by the company either quarterly or semi-annually. The dividends are usually calculated in reference to the company’s earning and performance. The dividends are usually calculated in fixed rate or variable rates. The other way that you can earn money from the stock exchange is when the stock you bought appreciates and you sell it. The market is very unpredictable and you are advised to sell your stock once it appreciates if you want to earn good money.

Considerations

There are certain considerations that you must keep in mind if you want to know the stock market business.

1. Factors Affecting The Stock Value

You have to know and understand the factors that affect the stock value before you can invest in the stock market. There are internal factors that affect the value of the stock directly. The internal factors include the introduction of a new product and service to the market, the employee layoff, the change in management and many more. The external factors may affect the stock value directly or indirectly. The external factors include the foreign exchange market, the inflation, interest rates, just to mention a few.

2. Time

For you to successfully invest in the market, you have to commit not only money but time. You have to consider the amount of time you are willing to invest in the business. You can choose to become a part time or a full time trader.

3. Number Of Stocks To Buy

In the stock market you can buy and sell as many stocks as you want as long as you know the risks involved. You are however advised not to buy many stocks from one company. It is recommended that you start with buying a few stocks as you learn the business.

Effects Of Investing In Stock Market

Stock market is a risky business and if you choose to invest in it you must be ready to cut your losses. It’s estimated that only a small percentage of the people in the stock market become successful in the business, while the remaining number loses most of their investment. You have to invest time to understand the stock market, and acquire the relevant skills.