Contrary to typically accepted seasonality, the old adage 'Sell in May and go away' has not proven as applicable for CFD and spread betting traders this summer. May did indeed see share prices decline; however, it was followed by surprising strength over the course of the summer.
This has been maintained in September with impressive rises by global equities following further quantitative easing from the US Federal Reserve (Fed) and support for the Eurozone by a new ECB sovereign bond market intervention plan.
Looking into it more, the success of 'Sell in May and go away…' may in fact be overly dependent on market behaviour in September. Historically, the Dow Jones Industrial Average (DJIA) actually has a better four-month average performance in May through August than it does across any other four-month stretch run of calendar months.
What is the likelihood that September remains northerly-facing for equities? On average, September is the worst performing month for US equities since 1915, down nearly 60% of the time (Source: BTIG). Since 1950, the US tech index NASDAQ has fallen by an average 0.85% in September, while the broader S&P 500 has fallen 0.62% and the DJIA given up 1.41%. This may be to do with natural corrections after summer gains and uncertainty regarding corporates’ Q3 earnings reports, which are published in October, and whether they will have any bearing on FY guidance.
For those who are in the red for September, or have lost in previous years, bear in mind October’s stats. Since 1950, the S&P has increased by 0.56% in October; the NASDAQ has increased by 0.2% and the DJIA by 0.03%.
While very small numbers, they are at least positive. October typically gets a bad reputation because of its association with the 1929 and 1987 stock market crashes, however, if September has seen a correction following the summer, October can often see optimism rekindled in the fourth quarter.
Otherwise, December is typically a strong performer, showing a positive return three out of four years since 1940 and with a median monthly return of 1.55%.
This is, in part, because of the year-end run-up where investors buy/sell names which have done well/badly so as to flatter their portfolio snapshot at year-end. This goes hand in hand with the ‘January’ effect, where investors typically return to markets, pushing up small and value stocks.
If you decide to invest on historical and seasonal trends like this, data suggests that stock values typically rise more on Fridays than any other day of the week, and drop on Mondays (the Monday effect). There are also certain days of the month that tend to perform better; the best days of the month are toward the end and the very beginning and this is especially true of share prices that have been on the rise.
This is the ‘Turn of the Month’ effect. There is also a discernible trend around three-day weekends, where markets will rally ahead of a long weekend.
Seasonality is about taking a position before the market exhibits a strong change. Market timing and timing of trades, however, can be very difficult.
While seasonality effects are not enough to justify a trade, they are certainly a worthwhile element to consider for CFD and spread betting traders. If the effects are strong enough and consistent enough, they should certainly be taken into account.
Alyssa Zeisler is a research analyst at Accendo Markets. For more about Accendo go to accendomarkets.com
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Warning: Remember, particularly if you are new to trading in the stock market and in forex, that the prices of shares and other investments can fall fast and you may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. Also, the BullBearings free stock exchange simulation portfolios are a good way to practice trading techniques.
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