Wednesday, January 12, 2011

Understanding Seasonality: Understanding Markets (Part II)

For the better part of the modern era, seasonality has played an important role in the world’s financial markets. Price gains and profit-taking at the end of the calendar year on Wall Street has become so predictable that the phenomenon has been coined the “Santa Claus Rally”. The reasons for this year-end run up are largely unknown. Some point to tax law revisions, others to mutual fund proliferation and their year-end portfolio shuffling. But whatever the reason, for the past four decades stock market gains from November 20th to the end of January have been an astounding 23% annualized (Halpern). And the seasonal impact does not stop there – fully 95.7% of stock market profits in the last 50 years have occurred in the seasonally strong period of November to April (Halpern). In something as free and fluid as an equity market, such seasonal bias is extraordinary. It is not, however, rare.

Currency traders have long understood the seasonal nature of their markets. The summer season – and particularly the month of July – seems to be a dependable time on foreign exchange markets. Consider the Canadian dollar, which has stumbled during July in ten of the last 12 years. Meanwhile the Japanese Yen has experienced a no less seasonal reversal of fortunes, rallying in July ten out of the last 12 years. Unfortunately for New Zealanders, they more resemble Canadians than the Japanese – their New Zealand dollar has fallen in nine of the last 12 recorded Julys. The NBA would appreciate that kind of consistency, where the average pro has failed to connect on better than 75% of free throw attempts since 1960 (New York Times).