Chapter 5
Political, Seasonal and Time Cycles –Riding the Tides of Market Wave Movements

It is not known – or at least I do not know - why stock market behavior, as well as the behavior of other investment markets, appear to often develop along cyclical paths. Some analysts attribute patterns of investor behavior to influences exerted by inter-planetary juxtaposition, and/or to the influence of phases of the moon. Since I can, myself, make no claim whatsoever to prescience in regard to the explanation of why the cyclical patterns we observe do take place, we will have to settle for some observations as to “what is”, if not why, and for some suggestions as to how investors might identify and make use of time and seasonally oriented stock market behavior.

CALENDAR BASED CYCLES IN THE STOCK MARKET

Related to time cycles, if not technically a cyclical phenomenon, there are certain days of the month, months of the year, and holiday related seasonal patterns that seem to be particularly related to the performance of the stock market. Inasmuch as these relationships are neither precise nor perfect in their correlation with the movement of the stock market, trading on the basis of cyclical patterns alone is not necessarily the best of strategies. However, the use of seasonal and time cycle patterns to confirm trading decisions based on other indicators or to determine the likely general mood and risk levels of the stock market may, on the other hand, prove to be a fine application of the principle of synergy.

Days of the month:

The stock market has had a definite tendency to achieve its greatest gains during the last and next to last trading days of each month and the first two to four trading days of subsequent months, the exact combinations varying somewhat over the years. In fact, gains in stocks during the favorable four to five day turn of month trading period have more or less equaled gains in stocks during all the rest of monthly trading days combined.

Pre-holiday pattern:

Stocks have tended to show above average strength over the days immediately preceding stock holidays and for three days following such holidays. There are definite bullish biases to periods of favorable monthly seasonality which include the days at the turn of months and pre-holiday trading sessions. Upside biases to holidays, of late, have, however, generally excluded the days surrounding Good Friday, Independence Day and President’s Day. Pre and post-holiday positive influences are most consistent during holidays that fall within the strongest months of the year, November – January.

The best and worst months of the year:

There does not seem to be much of a contest in this regard. The three month, November through January period, has definitely been the strongest three month period of the year for the stock market – not necessarily during each and every year, but certainly so on balance. For example, this period, November – February, produced nicely rising prices during 1995 – 1996, 1996-1997, 1997 – 1998, 1998 – 1999, 1999 – 2000. Its performance did drop off along with stock prices in general during the nasty bear market period thereafter, before returning to winning ways between November 2003 – February of 2004.

July, September and October have tended, on balance, to be the weakest months for stocks. October has had a history of being the month most likely to see market turnarounds, a good month in which to plan or to execute the accumulation of shares in preparation for the more favorable year end period which includes the months of November, December and January.

 October has marked turnarounds in major bear markets or significant intermediate market declines during years such as 1946, 1957, 1962, 1966, 1974, 1978, 1979, 1987, 1989, 1990, 1998 and 2002, the last of which finally reversed the most severe bear market in decades. It goes without saying, of course, that October was also the month of the fabled stock market crash of 1929...