Tis the season: a historical look at yearly patterns

For traders with a long-only bias, there are better months of the year to be active from an historical perspective.

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Source: Bloomberg

A twenty-year look at the average gains and losses on a monthly basis shows some interesting standout observations. 1 March is the seasonal beginning of market gains, which runs until 1 May. The seasonal average chart confirms the “sell in May and go away” view.

Everyone remembers October for the crash, whereas often it is one of the better months for index gains. This is only followed by December, which is often referred to as the Santa rally. But a keen observer would see retracement before the rally as an opportunity to enter the market at lower prices.

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The graphic does not infer that every month of every year follows the script; this year October was down for the month following five years of being positive for the month. And inversely, November has been a negative month for the past five years, although currently this month is looking very good for a positive finish. And the averages don’t infer that every stock follows the general index movement. The average is over 20 years and the correlation is there. 

Taking a look at the weekly chart of the Aussie 200 over this year, we can see it has followed the average yearly pattern. The current bullish move now underway could present some significant trading opportunities on any weakness in the early weeks of December. Looking back over the past 10 years, only three negative Decembers have been recorded in 2007, 2008 and 2011 – all years with major events in play. 2011 was the year the S&P downgraded US debt. The best year was 2009 with a 3.9% gain. Last year showed a modest 1.36% gain.

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Working with this hypothesis, traders should be looking at sector strength - this infers the healthcare sector with its current weakness may not be the one to drive the index higher. With the Aussie 200 heavily weighted to the financial and resources sectors, any price breakout to the upside in these areas would be worth taking note of.

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