Seasonal tendencies were first noticed in the grain markets, and corn is used as an example in the chart below. Corn prices have a tendency to peak in June and then fall sharply into September. This pattern does not unfold precisely in every year, but it does work more than 60% of the time. Five completed cycles are shown in the chart below and corn fell over the summer months in four of those five years.
Many traders believe that seasonal cycles should be visible in agricultural markets since planting and harvest times are dictated by the calendar. In corn, the most visible seasonal trend is the decline of prices from the summer into the fall harvest period. Crop conditions are generally uncertain until July when farmers begin to get a clear idea of how the corn is growing. As uncertainty over the yield decreases, prices tend to drop. This drop continues as the grain starts coming to market after harvest. When the crop is finally harvested, prices start moving higher as the supply is used up.
While there is a logical reason behind this cycle in the grain markets, there is no obvious reason why seasonal tendencies should exist in the stock market. But the seasonal chart of SPDR S&P 500 ETF (SPY) shows that the same type of cycle does exist in stocks. From the chart, we can see that there is a high in May and a low in September. This chart illustrates that the Wall Street saying “sell in May and go away” can be used as a profitable rule.
Seasonal charts are a useful trading tool. We can use this type of a seasonal chart to create a roadmap of what the market action could look line in the future. The weekly chart of SPY is shown below. The seasonal trend has been overlaid on price to make the comparison easier to see. Weekly data also offers more detail than the monthly charts used above.
The seasonal patterns in SPY points to a summer sell off. Other, more traditional technical indicators, like stochastics and MACD on the monthly chart, confirm the bearish outlook for SPY.
Traders can take advantage of the seasonal tendencies to establish short positions in stocks. For those looking at potential long trades, the seasonal charts are bullish for gold. This trade sounds especially appealing if there is any more bad news out of Europe. While the debt crisis has been put on hold for at least a week there, chances are high that Europe will once again be in the news and eventually the crisis will spread. If this happens, short stocks/long gold should prove to be a good trade.