Why Seasonality is Secondary

Some great trades can come when different sets of data align themselves at the same time. I often look at and write about price, relative strength, Commitment of Traders (COT) report, and seasonality when viewing a sector or asset class. Seasonality can be a great resource for screening and finding the bullish and bearish periods of time based on historical. However, 2014 has been a great example of why we can’t rely solely on seasonality.

A few weeks ago I wrote about the breakout in price for the Internet sector ($FDN) which was happening during a bullish period seasonality. Since then we’ve seen $FDN continue to rise.

However, when we look at the overall U.S. equity market, seasonality hasn’t been as helpful. We came into this year with the 2nd and 3rd quarters being historically the worst quarters in the Presidential Cycle. Over the last three months the S&P 500 ($SPY) is up nearly 6%. Looking at one-year seasonality, May to October hasn’t been the stronger period of trading. But 2014 has seen new all-time highs even during this bearish timeframe.

If all we looked at was the historical seasonality of the market and used that solely as our bearish/bullish bias, then so far this year would leave us scratching our heads in confusion. However, price is what pays and must always be respected. Each week in my Technical Market Outlook post I start with the overall trend of the U.S. equity market and then take a look at breadth and momentum to understand the ‘health’ of the trend. This helps keep us honest and check our emotional bias at the door. While seasonality is currently saying we should have a bearish slant, price is saying something different which makes seasonality a secondary indicator.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.
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  • Taking Stock

    Using seasonality and then applying technical trend indicators to it to stay invested as long as the market remains healthy has produced exceptional returns. Both are useful.