Seasonality

Many things in the world have a tendency to repeat on a regular basis. There are more sunny days in summer than winter or flowers bloom in spring. The sale of ice-cream rises during hot days, or electricity consumption increases during days with the shorter daylight. These phenomenons are called seasonalities, and they not only exist in nature or human activities, but they are also present in the financial markets. They might not be reliable in every cycle, but it is their long term validity, that should attract our attention.

The essence of seasonality in the financial markets is the difference in returns in different periods during the year, month, week or even day. In other words, there are specific periods on the market that can bring an investor a greater appreciation of his investments. There is no universal explanation, that would stand for every seasonal anomaly that we can observe. Each of them is unique in a certain way, and each should be underlined by some reasonable explanation.

The most known seasonality that occurs on a yearly basis can be represented by the quote: „Sell in May and go away“ and is also known as the Haloween effect. This theory presents an idea that the main part of the return in the stock market is performed during six months from November to April. One of the underlying explanation behind this anomaly is the presence of holidays during summer and investors going on vacation. This case has been reviewed in many papers, for example: „The Halloween Indicator: Everywhere and all the time“ (2012) from Ben Jacobsen and Cherry Y. Zhang.

Another seasonality that appears in the market on a monthly basis is known as „Payday Anomaly“(2018). The paper from Aixin Ma and William Robert Pratt confirms the existence of abnormal returns during the first days and 16th day in the month thanks to employees paychecks.

All in all, relying only on seasonalities when building your trading strategy might not be the best idea, but paying attention and implement them with other market indicators and strategies could prove worthy.

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