“To everything there is a season..”
It’s September and market watchers are talking about seasonality. In the stock market this term is used to highlight the tendency of markets to perform better or worse during certain periods of the year. Historically (or at least since 1950) November to April have been the best six months of the year, with August, September and October traditionally coming in last. March, however, can be terrible. October, in fact, is so feared there is even a term, the October Effect, that describes the psychological anticipation of a pending financial decline. This is due to the fact that three of the greatest market declines in history took place then; the Bank Panic of 1907, the Stock Market Crash of 1929, and Black Monday 1987.
There are other seasonality patterns in the market too. There is the Santa Claus rally, which tends to come in the last weeks in December (often followed by a weak January and February). The summer lull which has prompted the market advice to “sell in May and go away.” There is also sector specific seasonality. Retail tends to do better in the last quarter of the year as people buy for Christmas. Some healthcare or tech stocks will rally around specific annual conferences. Residential REITs (Real Estate Investment Trusts) do better in the spring.
There is a logic to some of these observations and they are worth paying attention to, if only because they seem to feed into the overall vibe of the market. I too get cautious in September and October as those are the months I have most frequently seen large declines in. Given there has been no major market pullback in months, seasonality is being talked about a lot on the business channels. As in, given the season, the big pullback must coming. It sometimes feels as if enough people talk about it, it will become reality.
In my experience, it pays to know about seasonality and specific sector patterns but never to bank on them. Every year will have exceptions to the rule. In the last the ten years, I have been down in August seven times (the summer lull), but up in three. In almost all of those down years, September and October more than made up for the losses (so much for the October Effect). Based on this experience, I tend to use the August lull to buy if there is some stock I have had my eye on that drops a lot. I may end up buying more in September and October if the market drops more. I watch for the patterns but do much better following real time events and taking advantage of them. The only pattern that consistently works for me is reversion to the mean. If stocks fall in one period then tend to rise in the next, and visa versa, seasonality be damned. Just look to December 2018 - no Santa Claus rally then and yet January and February were terrific.
In general, I do like the fact that market participants may be wary because of seasonality. There is a saying that the market climbs a wall of worry. This phrase highlights the stock market's ability to show resilience in the face of weak or bad economic, political or corporate news that might otherwise spark a selloff. Instead, after maybe a brief blip to digest the news, the stocks keep pushing higher. To me, this phrase means that the market is more likely to continue to rise when not everyone is bullish. So worry away, my market friends. Fear seasonality, keep that wall of worry strong and we should continue to see the market rise. But just in case, I am selling calls and buying a bit of protection. Never said you should ignore reality.
Market Today: The market slipped today. S&P and Dow were down and Nasdaq eked out a gain. Volume was very light (usual after holiday weekends). I traded in and out of my call options. The underlying stocks were negative (which made the calls very positive) but they all became less negative at certain points in the day, so I could re-sell them and buy them back. Two (eg ZM, ROKU) I did three times. I also sold and then bought back puts. Again I sold puts as the underlying stocks were negative, but as they became less negative during the day, the option value became slightly positive. Normally I wait to buy back calls or puts until the following day as the stock values tend to revert, making my options nicely positive. Given, however, that the market might drop tomorrow, I am cautious and close things when I can. I would rather make less but not leave myself as exposed.