Seasonality is an important concept for investors and traders in the financial market. This is because, historically, some periods have proven to be relatively volatile than others.
Similarly, the volume traded in most exchanges tends to differ according to the season. In this article, we will look at some of the key seasons that happen in the market and how to use them well.
In the United States, companies are asked by law to publish their financial results every quarter. This is a relatively divisive issue among many market participants.
Some members claim that the quarterly updates incentivizes short-termism by companies. As such, at times, many companies are afraid of making long-term investments since it will hurt their short-term profits. The other side argues that these reports are useful in helping investors make the right decision.
The earning season is a period when most publicly traded companies in the United States publish their quarterly results. The season happens four times per year at the end of every quarter. The season starts when big banks like Citigroup, Wells Fargo, and JP Morgan publish their results. In the following weeks, other companies in the consumer staples and discretionary and technology sectors release their results.
The earning season is characterized by two things. First, there is usually a lot of volatility among stocks as investors digest the latest numbers. Second, most corporate announcements like mergers and acquisitions (M&A) happen during this period.
There are several strategies of trading and investing during the earning season:
Use the earnings calendar – The calendar is provided for free on platforms like SeekingAlpha and Investing.com. It will help you know the companies that will publish their results in a certain period.
Expectations – For the companies that you follow, look at what other Wall Street analysts are expecting. A simple Google search will show you those resources.
Numbers to watch – You should know the key numbers to watch when a company releases its earnings. For social media companies, the data to watch is the monthly or daily users while for Wall Street banks is the income from FICC (Fixed Income Commodities & Currencies).
Conference call – Most companies have earnings calls with analysts. You can listen to these calls directly from your broker or read the transcripts.
The summer period starts in June and runs to September. The season is widely known as a period when many people and investors travel abroad for holidays. As such, this period is usually characterized by lower volume than in the first part of the year.
Indeed, there is a common saying that recommends selling in May and going away. Data compiled by some analysts have shown that stocks tend to underperform from May.
Still, there are several strategies you can use to benefit from this period. First, look at specific companies instead of the broad market. At the same time, in a calm market, opportunities do emerge, meaning that you can find companies that are reasonably priced.
Election season investing
Washington is an important part of the stock market because of its role in policymaking. As such, investors pay close attention to the election cycle. There are usually two main elections in the US. First, there is the presidential election that happens every four years. This election is accompanied by that of some Senators and the House of Representatives.
While investors focus on the presidential poll, most pay closer attention to that of the House and Senate. That is because the success of a president depends on the composition of Congress. For example, if a Democrat president wins, investors tend to prefer Republicans to win one of the two houses. By this happening, it means that the possibility of higher taxes and tough regulations will be minimized.
The presidential election is followed by the mid-terms. This is where some House of Representatives and Senators are elected.
As a stock investor, you should pay close attention to the two elections and their outcome. At times, you will need to rebalance your portfolio depending on who wins. However, historical data shows that the US stock market does well regardless of the president.
Santa rally and the year’s end volume
Another common concept of seasonality in stocks is the so-called Santa rally. This is a period when stocks rally ahead of Christmas. Historical data shows that stocks tend to gain two weeks before the year ends.
However, this rally is usually followed by high volume slightly before and after Christmas. This happens because many institutional investors and traders tend to sell some of their holdings so that they can start the year afresh. Therefore, this high volume tends to lead to some volatility in the stock market.
This volatility is also because of the Federal Reserve. In December, the Fed typically holds its final decision of the year and provides hints of what will happen in the coming year. These statements lead to some volatility in the equities market.
There are other popular seasons in the stock market. For example, at times, stocks tend to decline at the beginning of April. This is because April 15 is usually Tax Day, which is the deadline for filing taxes. As such, many investors sell some of their loss-making investments to offset their capital gains taxes.
Another season is in January, where many people are motivated to start their portfolios. Also, many institutional investors tend to buy more stocks during this period. As a result, this leads to more volume at the beginning of the year.
Seasonality is an important concept to grasp, no matter the type of market participant you are. Having a good understanding of these seasons will help you understand what is going on in the financial market at certain times of the year. For example, it will help you understand the reason for low volume in Summer and high volatility during the earnings season.