Top Advisors Corner

Seasonal Turns Arriving Early

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Analysts use seasonal patterns quite frequently these days. More computing power and more data makes the task a lot easier. But what most of them miss is that not everything operates with annual seasonality. Gold, for example, has a 13-1/2 month cycle, so any appearance of seasonal behavior is just coincidental and transitory.

What they also miss is that the market can sometimes deviate just slightly from its normal seasonal behavior, while at the same time fulfilling it. This week's chart is a great example of that principle. 

The Annual Seasonal Pattern is formulated by chopping up price data into 1-year chunks, then averaging them together. It shows you what the typical behavior is at every point throughout the year. It can help us visualize the principle of "Sell in May and go away" (even though July is a better moment to sell, but it does not rhyme as well). 

Looking only at the "normal" seasonal tendencies without comparing it to actual prices can lead the observer to miss things, which is where this week's chart shows its importance. If you tilt your head just slightly, you can see that the movements of the DJIA this year are matching the pattern of the Annual Seasonal Pattern, but they are just doing so a little bit early. It is like the teeth of a key fitting into a lock, just offset a little bit. That is what the slanted lines are intended to help the eye to see.

This unlocking of the actual behavior is important, because the Annual Seasonal Pattern shows a minor top just a few days ahead. But, tilting your head again, you can see that this minor top is actually due right now, and then a dip is due just after it. 

September has a bad reputation as a awful month for the stock market. This year, that bad stuff is likely to wrap itself up early in the month, then surprise a bunch of analysts by bringing a rising stock market for the rest of the month.

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