A classic Twilight Zone episode entitled "A Most Unusual Camera" posed an interesting question. If you could take pictures of events that have not yet happened, then what kind of pictures would you take? The characters in that episode took the camera to the race track and snapped photos of the race results -- from tomorrow's races. Investors might be tempted to take pictures of tomorrow's stock prices.
Well, some investors do try to game the system that way, using historical data to predict tomorrow's hot stocks. It's called seasonal investing and can involve anything from how a specific set of stocks perform around a certain event, to how specific industries perform during certain times of the year.
There has actually been a great deal of analysis on this subject. Ontario, Canada-based investment adviser Brooke Thackray publishes an annual guide entitled "How to Profit from Seasonal Market Trends." This year's version, which spans more than 200 pages and can be bought on Amazon.com, runs through a broad range of trading strategies that can be deployed month after month.
In fact, this approach underpins the Horizons Seasonal Rotation ETF (HAC.TO), which trades on the Toronto Stock Exchange. (Call your broker to see if your account has access to Canadian stocks -- most do these days.) While the fund rotates assets in and out of various sectors that tend to exhibit historical seasonal strength, it also boosts its cash position from May to October, a period known for subpar returns.
As an example, the fund will own retail stocks, gold stocks, transportation stocks and others in the fall and consumer staples and energy stocks in the spring. The fund's managers go into greater detail about this approach at their website EquityClock.com. Click on the "seasonality link" for more time-based sector ideas.
Jeffrey Hirsch, who runs the stock trader's almanac, has looked at three dozen sector-specific trends and found that some of them exhibit remarkably consistent seasonal trading patterns. For example, cyclical stocks tend to fall nearly 10% from May to October, but rise 15% from October to May.
That sector has especially pronounced trading patterns, although a separate study through 2011, conducted by InvesTech Research, found that the whole market does better when it's cold outside, lending credence to the notion that you "sell in May and go away."
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As the Wall Street Journal's Mark Hulbert noted in 2013, there is a strong historical case to be made for this pattern, adding that it "is most pronounced among those U.S. stock-market sectors that focus on manufacturing and production, and is "almost absent" in sectors such as consumer goods, financial services, technology and telecommunications.
Coming out of the Great Recession, the spring-summer swoon appeared in place for several years in a row, but more recently, stocks have not experienced any sort of seasonal pullback. The fact that we have not seen a 10% correction in nearly three years is extremely unusual. Though one of these days we will revert back to the historical trading patterns we've seen over the decades.
| April 26, 2010 - July 1, 2010 (9 weeks) | -17% | July 1, 2010 - July 21,2011 | 33% |
| July 21, 2011 - August 8, 2011 (18 days) | -17% | August 8, 2011 - March 26, 2012 | 27% |
| March 26, 2012 - June 4, 2012 (10 weeks) | -11% | June 4, 2012 - Present | 66% |
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Here are some other seasonal factors you should consider if you are an active trader:
Don't invest on Mondays, which according to an analysis by Wharton Professor Jeremy Siegel in his book "Stocks for the Long Run," is the only down day of the week. Going back to 1885, he found that stocks fall around .1% on Mondays and rise an average 0.2% the other four days of the week.
Buy winning stocks in the middle of the third month of the quarter (which is now here). A few weeks later, fund managers resort to "window dressing," as they buy yet more shares of their best performers to pump up quarter-end results. The corollary: sell those stocks in the final minutes of the final trading day of the quarter.
Buy losing stocks at the end of every December, some of which are getting pummeled by year-end tax-loss selling. Such stocks often stage an impressive rally in the next month, known as the "January effect."
Take a break from stocks in September. According to 80 years worth of research from Ibbotson & Associates, it's the only losing month of the year, generating an average annualized monthly loss of -0.7%.
[More from StreetAuthority.com: ]On a broader level, markets tend to do well during the third year of a Presidential term (which is this year).
Risks To Consider: All of the trends and statistics cited in this article are long-term average share price moves and don't necessarily happen all the time.
Action To Take --> Whenever you are researching a stock, it's wise to look at the five-year chart to see if there are repeatable historical patterns of strength and weakness. You don't want to buy any stock at a time that has historically shown a period of weakness. Conversely, if any stocks in your portfolio are showing impressive recent momentum, check out how they have fared in prior years. You may just be looking at an approaching selling window, based on past trading trends.
If you're looking for solid investments that you can buy, hold and virtually forget about -- no matter the season -- then look no further than StreetAuthority's list of "The Top 10 Stocks For 2015." Since we first began publishing this annual research report in 2003, our picks have beaten the overall market eight out of 12 years, including years with average gains of 37%… 38%… and 39%. For comparison, the S&P 500 gained more than 30% in just one year since 2003. To learn more about this list of elite companies, click here
