SPY - A broader look at seasonality in the stock market

Hello all,
Since we are now officially well into the seasonal topping zone for 2014 (Sell in May and walk away) I thought I might take some time and review how seasonality has effected stocks over the past few years and review the general idea of selling as we head into mid-year and only buying back when we head into year end.

First off we must understand that this cliche was first established within the commodity space and has to do more with cyclical supply and demand issues more than anything else. Builders generally buy their needed raw materials heading into the summer building season. Similarly, gasoline retailers generally buy their needed supplies ahead of the summer driving season. Regardless of industry, it would seem the general tendency of money flows is for demand to wain as we make the transition out of the winter/spring and then resume once again as we head out of the fall and into the winter. Interestingly, the severity of this past winter may have exacerbated those seasonal tendencies as many projects that would have been worked on through a mild winter simply were not possible this past one.

Second, we must understand that just because these are general tendencies of asset flows doesn't mean if we abide by them blindly we are going to make a capital gain by following their raw directional bias. Many years, taking this approach ended up coming out 'scratch' on the trade which understandably leads to skepticism. But every once in a while (in this case 25%) it leads to a rather substantial net gain. In reality, the market could care less what the actual price levels are, we are simply talking about raw supply and demand influences.

Big takeaway: Our goal as investors is simply to appreciate the concept of having the proverbial 'wind' at our backs vs. in our faces. Often these seasonal shifts represent the end of trades (take profit windows) not the beginning of new ones. Indeed, It is far better to look at seasonal windows as potential trade setup confirmations rather then outright trade triggers themselves. To actually justify taking a new trade (and risking our hard earned money) I need to see layers of technical evidence (ie volume , momentum and price action) supporting the idea. As one can see from the chart, the only time shorting through this seasonal topping window translated into a substantial gain was when those layers of bearish technical evidence existed. One should also be able to see that at present the needed technically bearish evidence simply does not exist. It shall be interesting to see how this year's seasonal trade develops. As of today, my hunch is we are not quite done moving higher but that we will be given a buying opportunity this fall at or very near current levels. In other words, its going to be a bumpy next six months...

Cheers all and I hope my simple analysis is of benefit...

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