Skip to content Skip to footer
Seasonal trading

What is Seasonal Trading and how to use it?

Every trader is after an edge on the markets, something to help them choose their next profitable trade. The more books about the markets that you read the more ‘edges’ you might find. (I’ll list a couple of books below on seasonal trading that are useful). But which of these edges work best for you?

Today we will go over one of these edges, Seasonal Trading.  It’s a great time to do so because at the time of writing we have just seen the back end of earnings releases in April from most of the major constituents of the DOW, Nasdaq, and S&P500. 

We had a very strong set of earnings overall. With Amazon beating their estimated earnings per share by a whopping 60% and adding increased sales of 44%. 

Apple also posted a record quarterly revenue of $89.6bn up 54% so what can we do with this knowledge?  Well, we know that these companies are going to report and when. We just don’t know if they are going to be stellar results or not, and how the market will react. 

One trend using this seasonality is to buy into earnings and then sell just before or just after the results. Depending on the current consensus, we will talk more about pairing this with other seasonal releases below. 

These earnings, economic releases such as FOMC, and even the more regular reports such as the NFP are all used as timestamps throughout the year by which traders position themselves for the most optimal gains. 

It helps to create a tide of over and under valuations paired with the necessary distribution of capital from investors and pension funds. 

 How to use seasonal trading?

The first detail of seasonality starts here, and it’s not just for the Indices. We will cover Cryptocurrencies also (the data provided below spans over 70 years of S&P500 month-on-month % returns).

January, a new start to the year, and the institutions have fresh funds at their disposal to invest. Often put to work straight away by buying stocks and offers a 70-year average return of 0.97%. 

This is followed by a couple of slightly less rewarding months in February and March. Before a new quarter begins with April. Then once again a portion of new funds are open to being invested. Plus the earnings seasons that set to define the trend for the coming year. Making this the year’s top-performing month gaining 1.56%.

This bring us to what is often seen as the end of the first season, within the trading year.  Gains are often seen leading into the back of the year (more on this later) and continue through until April. So profit-taking in May and June especially, is often a common theme.  The saying ‘Sell in May and go away”. May just be seen as a throw-away quote. But the numbers behind this depict an element of truth to this saying.

Sell in May and go away, come back on St Ledgers Day”. Refers back to London’s financial district when aristocrats, bankers, and merchants would sell their stocks and goods in May. Escape the heat of the City (when we used to have reliable summers in England). Then return in time for the renowned annual St. Ledger’s Day Stakes horse race in mid-September.

“Sell in May and go away, come back on St Ledgers Day” refers back to London’s financial district when aristocrats, bankers, and merchants would sell their stocks and goods in May, escape the heat of the City

What Are the Best Months for Seasonal Trading?

Volumes are significantly lower in these months also as May and June combine to gain just 0.23%, August returns a negative 0.16% and September loses an average of 0.62% (much of the losses in the first half of the month).  July is the anomaly with a gain of 0.99% and I will explain why later.  This concludes the second of the ‘seasons’ and although still tradeable it is not as reliable for any buy and holds strategies as the first season.

Once the institutions return into September/October the volumes increase again, October gains 0.62%. And then the Christmas rally kicks off in November with an average Index gain of 1.53% and ends with a 1.39% increase at the end of December.

Which is also the most reliable month in the year for returns. With 53 of the last 70 years being a positive month.  

This concludes the third season of the year and understanding the momentum shifts throughout the year should help you to build on that edge whether you are day trading or swing trading the stock market.  

The key takeaway if nothing else is that near enough the best 4 months of the year for gains are the starting months to each quarter. Where the main bulk of funds work plus earnings releases for that previous quarter fuel speculation. Seasonality at its best.

I promised to look over cryptocurrencies also and although we have much fewer data to work from, (only around 10 years) plus Bitcoin’s wading through and out of its infancy.

We can still see a clear pattern emerging.  This is all the more prevalent in the last couple of years as institutions have started to take cryptocurrencies more seriously. Creating Crypto funds, crypto trading desk. Some of the largest companies are even taking Bitcoin onto their balance sheet in place of US Dollars.  What we see over the year in terms of seasonality is strikingly similar to the S&P 500 above. Although the gains in % terms are a great deal higher due to it still being a relatively new sector to the market.

Related: How to Trade Crypto With Tradeview

January is a steady month for growth. February and March less so and as with the S&P 500. April is the top month at 55% growth on average. May to September tails off for both gains and volumes. With August and September the only two months to register negative returns.  October is the third-best month of the year. Followed by November at 50%, and December then sees a little profit-taking but still gaining 15% on average.  

So it is clear to see that the Cryptocurrency market is starting to correlate with the main markets. And that seasonality, although not a hard and fast rule each year, is an important tool to be used to help build out your trading map for the year.  

Recommended books for Seasonal Trading:

‘Seasonal Stock Market Trends’ by Jay Kaeppel

‘The Guide to Market History and Seasonal Trends’ by Jeffrey Hirsch and J Taylor Brown