I am a firm believer in certain seasonality plays.  For those unfamiliar with the term seasonality, it’s a term used to describe certain observable trends that occur based on certain dates, times of year, or other time related criteria.  Everyone is familiar with the term “sell in May and go away.”  This old stock market adage has roots in the fact that November through April tends to produces the best stock market returns over the course of the year.  There are many other types of seasonality.

January Effect: Stock prices generally increase in January.  The idea behind this seasonality is that investors will often sell under-performing securities in December to book a tax loss and then buy them back in January.  Apparently this effect is particularly observable in small cap/growth stocks.

So goes January, so goes the year: If January produces a positive monthly return the remaining year will produce a positive return.  If January produces a negative monthly return the remaining year will be negative.  Pretty self explanatory. We hear about this at the beginning of every year from the Stock Market Almanac and CNBC crowd.

Thanksgiving Rally: General sentiment in the US is positive going into the holidays, therefor investors are less likely to sell stocks or become overly bearish.  Lately, this one has been pretty accurate.  I feel as though investors game the Santa Rally and start exploiting it earlier and earlier each year, creating good buying pressure into Thanksgiving.

Santa Rally: Like the Thanksgiving Rally, the Santa Rally is predicated on general positive investor sentiment going into Christmas.  It also coincides with the strongest time of the year for the retail sector.

Month-end Seasonality/Window Dressing: Pioneered my Norman Fosback, many investors feel that there is a month-end upside bias as a result of Mutual Funds and other institutional investors putting money to work before the month ends.  Investors often call this “Window Dressing” because a flurry of buying right before the end of the month can paint a slightly more rosy picture of the portfolio when the clients’ monthly statements are mailed out.  While I believe this to be the case in many instances, there are certain instances where the opposite occurs.  For example, if institutional buying is strong all month, what are the chances that they will have money left over to put to work in the last couple days?  Institutions run out of money too!  They need to wait until the next round of funding via additional monthly 401k (or equivalent) contributions in order to continue buying.  Besides, if it’s already been a strong month, what motivation do mutual fund managers have to punch up their portfolios?  I play this effect every month slightly differently depending on the monthly institutional footprint.  My hedging ratios always change five days prior to month end.

Mutual Fund Monday: Mondays are considered a favored day for institutional buying.  I’m not sure if there is any hard evidence for this, but it is certainly an observable phenomenon in the last couple years.  I rarely fade an into Monday rallies.

4-Year Presidential Cycle: This is a long-term seasonality play that could be categorized under market cycles.  I pay very close attention to this one.  The major premise being that the second year of a presidential cycle can produce a meaningful bottom in the stock market.  The fourth quarter of the second year of a presidency typically produces large gains and the third year produces positive gains in all quarters.  This is in effect right now.

2-Year Tech Product Cycle: This one can also be categorized as more of a market cycle rather than seasonality.  Technology drives productivity.  Semiconductors roughly double their computational capacity every 18 months.   This continuous advancement of computational capacity drives new innovative product cycles. This relentless product cycle translates into roughly two-year observable market phenomenon where technology stocks create relative highs every two years.  Take a look at a chart of the Philadelphia Semiconductor Index SOX, to see what I mean.

Individual Sector Seasonality: Certain stocks and sectors develop seasonal characteristics.  Different monthly and quarterly seasonality plays exist in precious metals, commodities, tech, and a host of individual stocks.

Not all seasonality plays are created equal (So goes January, so goes the year being one of the most suspect).  I play all of the above situations with varying degrees of conviction based on what is currently playing out in the market.

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