You’ve probably heard the saying, “To every thing there is a season.”
As it turns out, the stock market could be included in this adage, because seasonal stock market trends can offer potential trading opportunities.
As traders, we’re constantly looking for an edge to earn money with the least amount of risk possible. As I teach my Trading Challenge students, some of the best ways to choose hot stocks are to look for trends and repeating patterns.
Could seasonal stock market trends give you an edge? Plenty of traders agree that seasonal trends exist in stocks, and books have even been written on the subject. But how can seasonal trends help your trading?
Here, I’ll address the mechanics of seasonal stock market trends. You’ll learn how to detect them, and how appropriately timing your buying and selling can help you potentially gain more opportunities by taking advantage of these trends.
Table of Contents
- 1 What Are Seasonal Stocks?
- 2 Stocks and Cycles
- 3 Stock Market Trends
- 4 Why Should You Implement a Seasonal Stock Trading Strategy?
- 5 Examples of Seasonal Stocks
- 6 How to Use Seasonal Stocks in Your Trading Strategy
- 7 Recurring Events During the Year
- 8 Strongest Months for Seasonal Stocks
- 9 Weak Months for Seasonal Stocks
- 10 Historical December Stock Market Trends
- 11 How to Come Up With a Seasonal Stocks List
- 12 The Bottom Line
What Are Seasonal Stocks?
Businesses, nature, trends. What do these things have in common? They are cyclical, and in many cases, seasonal. For instance, consider the example of a restaurant on the New England shore. It might make plenty of profits selling lobster rolls between Memorial Day and Labor Day. But come autumn, the demand will lower dramatically. It makes sense. After all, who goes to New England for a lobster roll in February? That business probably doesn’t boom in the off-season, and might even close down until the next late spring.
Now, think about a stock. A stock that is representative of a seasonal industry might boom during certain times of the year, but could be relatively inactive during the off seasons.
As an investor, you could potentially look at these seasonal trends and stand to gain from taking advantage of the resulting rise and fall of a stock. Of course, this requires plenty of in-depth analysis and research.
Stocks and Cycles
Stocks can follow a variety of different cycles. Here’s a roundup of just a few examples:
Seasonal stocks: These stocks are characterized by a demand at different times of the year. For instance, a company specializing in bathing suits is probably not as active during the fall and winter months, but may enjoy surges in the spring (when swimming attire debuts in stores) and throughout the summer.
That’s a pretty simplistic example, though. It doesn’t necessarily mean that you can reliably choose a bathing suit company, invest every spring, and sell every fall. There are other factors to consider.
For instance, when do the wholesale purchases take place? You need to do a deep analysis, look at financial and earnings statements, and compare historical data to gain a realistic picture of when might be the best time to trade.
Non-seasonal stocks: These are the types of stocks which aren’t affected by seasonal shifts. For example, say a stock is offered by a company that manufactures t-shirts. While there might be a slightly higher demand during warm weather months, many people wear t-shirts year round.
This means that the time of year won’t necessarily have a huge impact on the stock prices of companies within this industry.
Cyclical stocks: These are the types of stocks that follow the general trajectory of the economy. They don’t necessarily intend to do so, but they do because these stocks are tied to how people choose to spend their money.
For example, think of luxury brands. A big jewelry company, for instance, might have great sales when the economy is very strong, but if there’s a crash, non-necessity luxury items are one of the first sectors to suffer.
Companies with businesses that follow the economy’s cycles are often considered to be among the first ones to reflect a boom or bust in the economy.
Non-cyclical stocks: Unlike a cyclical stock, a non-cyclical stock won’t be as strongly affected by turns in the economy. For example, consider a manufacturer of aspirin or common over-the-counter medications. The demand for these items won’t be altered by the economy, because they attend to basic needs. Therefore, the stock price is less likely to make a big move based on the economy.
Stock Market Trends
There are a few pretty reliable stock market trends you can consider when thinking about seasonal stocks.
For instance, you’ll often see stock prices rise in times directly preceding seasonal occasions. For instance, right before Thanksgiving, Christmas, the Fourth of July, and so on.
You’ll also see reliable highs and lows in certain markets at different times of the year. For instance, in December, many investors want to unload losing positions before the close of the calendar year, so you’ll often see a lot of trading action at this time of year.
Examining stock market trends and the seasonality of different stocks can help you create a stronger plan of attack when planning trades.
What’s a Good Seasonal Stock to Invest In?
Sorry, but there’s no big reveal here. Usually, choosing a good seasonal stock to invest in boils down to common sense. For example, think about commodities like oil. During the summer months, when cars are being used more frequently for vacations and such, oil prices increase. Thus, it makes sense that oil stock prices might follow a similar trajectory.
So, in that case, if you chose an oil stock and purchased it before the height of the season and sold before the season ends, you could enjoy a classic ‘buy low, sell high’ profit.
Oil is a good example because it reliably shows up on best-of lists for seasonal stocks. The rise in price has happened pretty constantly on a yearly basis.
Of course, that’s just one example. In general, the best seasonal stocks will make sense in just such a way. So research some potential ideas and begin to examine stock charts. Form a hypothesis, and support it with your research.
Let me remind you: research is always key. Just because something like oil usually goes up in price most years doesn’t mean it will every year. Be sure to look at trends and research the company in question before making a trade.
Why Should You Implement a Seasonal Stock Trading Strategy?
What good could come of adopting a seasonal stock trading strategy? There are a few ways in which traders can potentially benefit.
For one, it’s a great way to make use of historical data. For instance, say that in reviewing a stock chart, you notice that a particular stock has high seasonality and always peaks from July through October, and then dips afterward.
If you see that the stock has done this for years in a row, this could be a good indicator that you might want to buy in June when the price is traditionally low, and sell in October, before the price dips again.
You can also often gauge certain sectors that might have more seasonality than others. For instance, oil, retail, health care, and banking are just a few of the industries in which you can notice seasonal trends.
However, don’t fall into the trap of thinking that seasonality is a done deal.
You can never know for sure how a stock will perform because the market constantly changes.
Examples of Seasonal Stocks
Curious about some specific examples of seasonal stocks, or wondering how to make the most of seasonal stocks at any every time of year?
Here, I’ll go through some examples based on the season and how they work.
– Seasonal Stocks for Summer
I actually used to take summers off, since on the surface, it seems like trading is slower. But in recent years, I’ve adopted a different mindset since I noticed that there have been plenty of plays available.
I’ve found that the summer can be very profitable for short periods of time if you notice the trends.**
What I’ve noticed is this: When the temperatures go up, it’s generally a good time to look at the stocks of companies associated with hot weather solutions like air conditioning and cooling, as well as travel-related services or products, since more people travel during the summer months.
– Seasonal Stocks for Winter
During the winter, you’ll likely see an uptick in the stocks for companies providing cold-weather services and comfort solutions.
For instance, during most winters, the demand for coffee and tea often increases, which can have an effect on stocks in the food and beverage industry.
According to a U.S. News article, other stocks to buy during the winter could include businesses like Home Depot (where people might go for shovels and snow equipment), snowmobile maker Arctic Cat, and companies like VF Corp, which owns — among other brands — the winter jacket manufacturer The North Face.
– Seasonal Stocks for Spring
Spring is generally seen as the time in between bear and bull markets with stocks. The cold of the winter is starting to subside, and in the stock market, just like in people’s demeanors, there is new hope for the season of growth ahead.
Products related to growth and agriculture, such as fertilizers, tractors, generators, and outdoor equipment of that nature may see a surge at this time of year.
– Seasonal Stocks for Autumn
In the autumn, it’s time to start thinking about the holiday season ahead. Consumer goods rule the school at this time of year as industries gear up for the busy shopping season.
Jewelry, cars, and luxury goods often see an upward trend during the autumn months.
How to Use Seasonal Stocks in Your Trading Strategy
Considering the time of year when seasonal stocks are most in demand can help you form more solid trading strategies.
For instance, you might not want to buy a stock during its peak season, because it might be fetching a higher price than at a more off-season time of year.
Recurring Events During the Year
Recurring events throughout the year can act as powerful catalysts for stock price increases or decreases. It’s all about looking at the patterns.
For instance, the Super Bowl is the biggest avocado consumption day of the year. So it makes sense that shortly before the Super Bowl, the demand for avocados will be higher, whereas demand usually dips immediately thereafter.
The same principle applies to stocks. Recurring events can cause a higher or lower demand for a given stock.
Strongest Months for Seasonal Stocks
What are some of the top months for seasonal stocks?
While it can vary, some of the typically highest-performing months for seasonal trends are July, January, and December.
Let’s break it down …
July: July is well-poised on the calendar in advance of some major yearly milestones. First, you’ve got the back to school shopping season on the horizon.
Then, there’s also what’s referred to as the “holiday effect”. This is the time of year where there’s plenty of optimism before retailers gear up for big holidays.
December: December is a sort of unusual month in the stock market, but there are definite seasonal aspects at hand.
It’s often a time of big sales as traders ditch losing positions to gain tax write-offs; so, for tax reasons, they may want to make investments before the year closes.
January: January is often the slowest month for retailers. However, it’s a busy month for retail stocks, because in the first month of the year, the retailers post their sales figures from the most recent holiday season. Based on this, they may attract new buyers based on how successful they were.
Weak Months for Seasonal Stocks
There’s an old saying in the stock market: “Sell in May and go away.”
The wisdom behind this concept is the belief that the most gains will be earned between November and April, while May through October are the worst months for returns. But is that really true?
Many believe that June and September are among the worst months in the stock market. Here’s why:
June: Typically, June is slow in the stock market. Usually, big-cap companies have extremely slow moves, and there’s generally just not much going on. But this isn’t always the case.
“Since 1950, the month of September has seen an average decline in the Dow Jones Industrial Average (DJIA) of 0.8%, while the S&P 500 has averaged a 0.5% decline during September. Since the Nasdaq was first established in 1971, its composite index has fallen an average of 0.5% during September trading. This is, of course, only an average exhibited over many years, and September is certainly not the worst month of stock-market trading every year.”
While these are notoriously slow months, there are always opportunities out there … it’s just a matter of finding them.
Historical December Stock Market Trends
When it comes to trading in December, there are a few phenomena that you’ll hear traders refer to: the Santa Claus Rally and the December Effect.
The Santa Claus Rally: This is the idea that stocks rally between Christmas and for several days after the new year. It’s hard to say why, exactly.
It could be because of year-end adjustments to investments and portfolios, or it could be due to holiday season optimism. However, returns do tend to be higher during this period.
“The tendency of stocks to perform better in December than in any other month of the year. This may be because of increased sales and earnings due to the Christmas season, or because of expectations for new products at the start of the next year. In any case, December has usually, historically, been the best month for stock performance. It is also noteworthy that, in general, fewer bankruptcies are filed in December.”
How to Come Up With a Seasonal Stocks List
How can you come up with a solid seasonal stocks list?
Your first step is to evaluate seasonal trends. In reviewing the general trends occurring at different times of the year, you can begin to make a plan for what industries and when you might want to invest.
Once you’ve assembled a list of potentials, it’s time to get to work with your all-important fundamental research.
Seasonality with Technical and Fundamental Analysis
Once you’ve identified a few seasonal stocks to consider, it’s time to do your homework:
Set up alerts. Review and consider the trades to decide when might be a good time to get in and out, and set up alerts that can help you stay up to date on what’s going on with a stock.
Make a plan. Before you execute a trade, be sure to set up a detailed trading plan. Even with seasonality on your side, there’s still plenty of risk involved in any trade.
Be sure to be prepared by making a trading plan with pre-determined entry and exit points so you can keep emotions out of the trade as much as possible.
Should You Apply for the Trading Challenge?
Regardless of your account size, it’s important to have a strong basis of knowledge and an understanding of the rhythms of the market. This can help you make wise decisions at any time of year.
Adapting your mindset to follow the seasonal cycles of the market is one of those refinements that can potentially add up to more profits over time. It can help you build smart trading plans and chase the most appropriate stocks based on the time of year, rather than going on a wild goose chase.
In my teachings and webinars, I address issues like this frequently in order to help you refine your trading techniques. They say that the devil is in the details. While adapting to seasonal trends won’t make you zillions of dollars right away, it’s one of those things that can help improve your chances of success over time.
Remember, trading is an art as well as a science. As a student in my Trading Challenge, I want you to learn a balanced approach to the market as you work toward your goal of achieving a long, steady, and sustainable career as a trader.
The Bottom Line
Many things in life operate on a seasonal or cyclical basis, and stocks are no different.
By considering the seasonality of a given stock in your fundamental research, you can potentially make more educated decisions about whether to execute a trade.
Seasonal stock market trends are never absolute, but considering them is a fantastic way of refining your trading techniques. By expanding your knowledge of the market’s seasonal movements, you can get a better idea of how to choose stocks to trade in a more tactical way.
Do you consider seasonal stock market trends?