What is seasonal investing?
Most equity markets, sectors and stocks display a period during the year when they consistently show positive performance driven by one or more annual recurring events. Many of these events are tax related, including tax-loss selling near year-end and the timing of contributions into Registered Retirement Savings Plans in Canada and Individual Retirement Accounts in the United States.
Other annual recurring events include periods of rising seasonal demand for a product (e. g. copper, crude oil, gasoline, natural gas, gold, lumber and fertilizer), annual meetings, annual conferences, etc.
The role of the seasonality analyst is to examine annual recurring events to determine their relevance for the next period of seasonal strength.
What does seasonal investing include?
By definition, seasonal investing includes a start date for the investment, an end date and price strength between the start date and the end date. Most seasonal trades last from two to eight months. Special short term periods such as the annual Santa Claus rally at the end of the year lasting about two weeks also have been identified.
How is seasonality measured?
The performance of seasonal trade is measured in two ways: The average return during the chosen period expressed as a percent, and reliability, expressed by the number of periods that realized a profitable trade. The minimum number of periods to be used in a seasonality study is 10.
What does seasonal analysis not include?
Seasonal analysis does not include technical analysis or fundamental analysis. Using seasonal analysis as a standalone method to determine buy and sell signals can be hazard to your investment health. Seasonal strategies are profitable seven or eight times out of 10, but they are unprofitable two or three times out of 10.
Similarly, using technical analysis as a stand-alone method can be hazardous to your investment health. Even head-and-shoulders patterns only work 75% of the time.
Using fundamental analysis as a stand-alone method also can be hazardous to your investment health. Even the best analysts on Bay and Wall streets are not always right and sometimes are very wrong. The author of this column was employed at a firm that recommended Nortel as a "Top Pick" in September, 2000.
Conclusions
The secret is to combine seasonal, technical and fundamental analysis when making investment decisions.
Seasonality analysis is the bridge between fundamental and technical analysis: Fundamental analysis tells you what to buy and sell and technical analysis tells you when. Combined with fundamental and technical analysis, seasonality analysis tells you what and when to buy and sell.
Recent seasonality studies using 10 years of data indicated the seasonal patterns by major world equity indices. Notice that most periods of seasonal strength are followed by a period of random performance.
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