You have probably come across the term seasonality in trading and investing. Seasonality is a pattern that occurs on a regular basis, such as monthly or yearly. In the stock market, seasonality refers to the tendency of certain stocks or sectors to perform better or worse at certain times of the year. Just like the seasonal patterns in the northeast, sometimes it’s hot and sometimes it’s cold.
It is important to note that seasonality is not a perfect predictor of future stock prices. At best, it is a secondary indicator to the price and volume of a traded position. There are many other factors that can affect stock prices, such as economic conditions, interest rates, and company news. However, by considering seasonality, traders can make more informed decisions about when to buy and sell stocks.
There are several websites and resources that track seasonal trends in the stock market for either individual stocks, sectors, or industries. Traders can use this information to identify stocks and sectors that are expected to outperform or underperform at certain times of the year.
The chart above is the seasonality pattern Extreme Network (EXTR). Over the last 13 years in the month of November, it has been positive 100% of the time with an average return of 16.1%! Now, that is seasonality! Could it change this year? Maybe, but not likely.
In a trading business, I have found it important to recognize your own seasonality as a trader. After you have been in this business for several years, you will notice a pattern to your profit and losses. If you have been monitoring and graphing your trading business as I have recommended, you will see your own seasonal trend.
Does your P/L chart show a race horse out of the gate in the early going as seen below, only to flounder coming around the home stretch? Does it happen every year? Are you pushing too hard and risking too much when you should do the exact opposite?
Does your P/L go up and down exactly in line with the market? Perhaps you are trading just like an index fund matching everything the overall market does? The vast majority of managed funds do that every year.
Perhaps you need to learn how to trade a market down so you can profit on downturns. Remember as a Little Guy, you have a wide advantage over the big guys.
Continual improvement is one of the joys of life. Getting better as a trader forces self-reflection. Good traders get to know themselves very well. They know their tendencies and prepare accordingly so they can learn and grow. While personal seasonality isn’t everything, it is another feather in the cap of a trader who looks for every edge he or she can get. That is where the profits are!
Enuf said.