Commodities

The S&P Has a Seasonal Pattern? Really?

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Don Dawson
Instructor

Yes, most definitely!

…along with all other financial Futures contracts. Seasonality occurs when there is a cyclical event that drives the supply/demand fundamentals consistently during certain times of the year. These events will occur with such high frequency they are called Seasonal Patterns.

With today’s computer technology, research companies can now review historical data and find these consistent recurring times of the year for each Futures market that is traded.  The data is tested back for 15 years and in some cases 35 – 40 years.  In the past traders would actually use a tool called a Cycle Finder that we would lay across Futures charts on paper and try to see if we could anticipate where the next market bottom or top might occur.

When talking about Seasonal patterns many traders think that only physical Commodities like the Agricultural, Metals, Energy or Softs can be cyclical.  While these other markets are very cyclical in nature due to certain times of the year when supply or demand fundamentals (planting, harvesting, mining, driving or heating seasons, etc) create these consistent Seasonal patterns.

Moore Research Center Inc. (MRCI) www.mrci.com, is one of the research companies that does extensive research on these Seasonal patterns and makes them available to their subscribers. They are offering Online Trading Academy students a free two week trial subscription if you are interested in seeing if Seasonal analysis can help your trading.  If you decide to subscribe MRCI is giving a  10% discount to all of our students.  Contact Melissa Moore at melissa@mrci.com for more information.  I would like to thank MRCI for allowing me to use their charts and Seasonal information for this article.

Disclaimer: The following is not a trade recommendation or solicitation to buy or sell any Futures contract.  This should be used for informational purposes only.

The S&P Futures contract is coming into a Seasonal buy pattern.  MRCI has found that over the last 15 years the S&P has closed higher on November 14th than on October 25th.  Their extended analysis shows that 25 of the last 30 years has shown a higher close as well.

The fundamentals supporting this Seasonal pattern are:

As the fiscal year for many mutual funds draws to a close, tax-loss selling dries up and the market has tended to blast higher into the new year, driven also in part on expectations for year-end bonuses that will be invested according to MRCI.

Another reason I am writing about this market now is we also have an Election year in progress.  And as many of you know there is a Seasonal pattern for markets to rally strongly into year end due to the Election.  This could possibly enhance the S&P Seasonal pattern for this year.

When I see a market exhibiting a 93% chance it will go up or down I begin to do more analysis on that market to see if there is a trade for this year.  It is strongly recommended that you never trade Seasonal patterns by entering on the optimal entry or exit date without any analysis of how the market is performing this year.

Anything could disrupt even a perfect 100% Seasonal pattern.  For example, this year the Federal Reserve could make a policy change, Europe might have more bad news, some form of a Financial crisis could occur or a host of anything could happen.  The point is never assume a market will do the same thing unless you check for events that could disrupt your Seasonal pattern this year.  It usually takes something very significant to disrupt this pattern so it will be obvious to find out if there are any prevailing problems on the horizon.

For me I like to look and see if the market is in a current trend already that coincides with the Seasonal pattern.  I would like to have an uptrend for buys or a downtrend for sells.  Next I want to find a Demand (support) level to buy in an uptrend.  Or I would like to find a Supply (resistance) level in a downtrend to sell at.  This way the market is coming into a higher probability turning point and I can adjust my risk accordingly.  Many times there are draw downs before the market actually begins its Seasonal rally or decline.  By using our levels to time our entry we can reduce a lot of these draw downs that many Seasonal traders will have to endure.

Figure 1 is a weekly chart of the December S&P showing a nice Demand (support) level just below current market activity.  Will the Demand level and the Seasonal pattern be enough to hold the market and cause a nice year end rally?

Other financial markets like the Currencies and Interest rates exhibit these same Seasonal tendencies. So the next time you are scanning for a market to trade why not look at one that has a very high probability of moving up or down in the near future.

“A ship is safe in harbor, but that is not what a ship was built for.”  William Shedd

- Don Dawson

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.