Saturday, August 30, 2008

Times of the Year

As we reach Labor Day and the end of the summer vacation season, it occurred to me that it might be an appropriate time to examine some of the influences of the calendar on stock and option trading. While it may be surprising to some, time of year can actually have an influence on market behavior. I don't mean to suggest that the season should control our trading; I only mean that it doesn't hurt to pay attention to the calendar as we trade. For example, many investors are aware of the phenomenon of tax selling in early December, for example. That often is a good time to unload dogs and gain the benefit of a tax loss for the year. Often, following the tax loss selling there is what has become known as the "Santa Claus" rally leading into Christmas and the beginning of the New Year.

Another calendar related circumstance is the practice of "window dressing" in which many mutual funds and portfolio managers have engaged over the years. Funds generally report performance quarterly to their shareholders and, in order to make themselves look good, may sell the losers before the report is compiled and add some winners so that it looks like the fund is in great shape. Sometimes, stocks that are not readily recognized may be dropped and more well known names added to the portfolio so the investor can see what fine companies are held by the fund. This window dressing can lead to relatively heavy trading in some issues and is completed before the quarterly reports go to press.

Since many of the large players vacation at the Hampton's or in the south of France or some other wonderful place during the summer, that season can be marked by some low volume and, therefore, high volatility trading. It seems to me that the few weeks leading up to Labor Day are particularly prone to that type of activity.

Certain months of the year also seem to have a general tendency (though definitely not always) to experience dips or reduced volatility. Those are the months following earnings reports. Most U.S. companies report earnings on a quarterly basis and those reports are frequently released in the months following the end of a quarter. As the release of earnings reports approaches, excitement can build and many trades may be made in anticipation of the report. Depending upon market conditions and investor anticipation, we may see price begin to run up as the earnings date approaches. Once the earnings are announced, there is no longer anything to anticipate so there may be a fall off in investor interest and in prices in general. Since the quarters end in March, June, September, and December, many earnings are announced in April, July, October, and January. The months that follow those reports are months when the excitement has passed so we want to be aware of the possibility of reduced interest and market excitement in May, August, November, and February.

As with most things in the markets, there are no hard and fast rules as to what to do in those months. It is simply a factor about which an investor should have some awareness.

by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved

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Anonymous said...

While the article is comprehensive it looks like it contradicts what I know from personal observation and seasonality presentations that September-October are dangerous and usualy bearish months whereas November to Feb ar the most hbulish.

Bill Kraft, said...

Well, Anonymous, I didn't mean the whole period from November through February and of course, it's nothing we could rely upon, only something to consider. You are definitely right that October has had some really bad times. Thanks for your comments.
Bill Kraft

Anonymous said...

After reading your book and posts from a couple of months ago I understand that there is no holy grail for trading.
But as I read you've made multimillionaire starting with just $ 50,000. I have to ask whether to do so has made use of options or just buy stocks?

Thank you for your passion for the trading !!!

Bill Kraft, said...

Thanks for writing, Dario, and thank you for buying my book. I have been fortunate with a variety of investments including stock purchases and option trades. As my net worth grew, I also have invested in bonds and real estate. Initially, I began with option trading and as my portfolio became larger, added stocks. Hope that answers your question.
Bill Kraft