You can feel it in each day’s trading movement.
Whether it’s a great earnings report from Palantir that builds confidence and gets investors in the buying mood or a big revenue miss from Alphabet that makes them think about selling stocks in favor of holding cash while things smooth out.
Investors are nervous, and the calendar is about to ratchet their nerves even higher.
But knowing what’s coming over the next four weeks can get you ready to take advantage of this short-term seasonal swing ahead of a prosperous March.
I’ll show you how.
Most investors have heard of it, few understand it and even fewer know how to use it to their advantage.
I’m going to put you in the “even fewer” category today by showing you how to use seasonality to improve your portfolio’s returns.
Stock market seasonality refers to the tendency of the stock market to experience predictable patterns of price changes at certain times of the year. These patterns can be influenced by various factors such as tax considerations, the beginning or end of financial quarters, holiday spending, or harvests in agricultural sectors.
But at the heart of seasonality is investor behavior.
Sell in May and Go Away, one of the most popular seasonality trends that investors try to use… it doesn’t work. July tends to post one of the strongest monthly returns for stocks. That means that if you’re sitting on the sidelines you’re losing money.
January effect… Don’t get me started.
No, the real seasonality that helps investors lies in digging deep into the returns to find true trends, not easy sayings that rhyme. Then, you’ve got to answer the question “Why does this trend exist?”.
Only when you have both of those components do you have a reliable seasonality trend that you can use to increase your portfolio’s effectiveness.
Let’s look at this from the macro view of monthly seasonality.
The month of February is one of the four months of the year that the S&P 500 averages negative returns over the last 20 years.
Note that I said the last 20 years. Most if not all the seasonality studies pushed on investors show the numbers back to the 1950s, there’s a flaw with that. The modern era market is vastly different that 30, 40 and 50 years ago let alone 80.
Put simply, investing is different.
Today, investors have more tools at their disposal, they react to daily market headlines and events and are constantly monitoring how their investments are doing. Buy and hold, while it still exists, is not the buy and hold of the 1980’s. For that reason, you must base your view of seasonality on a comparable time window.
Returning to February performance, on average, the S&P’s drop isn’t terrible, losing only 0.2% from the beginning of the month to the end, but February does rank as the third most volatile month of the year.
The month is consumed by earnings reports. Those reports drive stocks in both directions with wild swings as investors revalue companies based on their quarterly performance. It’s one of four times a year when the fundamentals matter for stocks, the rest of the time investors trade based on price trends.
This means that the month is driven by volatility with no direction, a combination that investors despise. Which leads us to its crescendo moment.
This is more of an anomaly than it is a trend, but the fact that we’ve seen Week 9 perform as one of the worst weeks of the year over the last 20.
Anomaly or not, it’s something to take note of as offers an actionable moment for nimble investors.
Week Nine often falls on the last week of February, this year the week starts on February 24. On average, this week sees the S&P 500 fall by 0.8%. That may not seem like a lot, but we’re talking about averages here.
The magnitude of several of Week 9 Performances are huge, making it an outlier that most investors want to avoid, but there’s a huge silver lining.
Remember, the best time to buy is when everyone is selling, or when volatility hits a crescendo. That’s exactly what happens with Week 9. Historically, the VIX shows a tendency to spike during Week 9, indicating a surge of fear that often accompanies short-term market bottoms.
With its average monthly return of 2.2%, March is tied for the best month of the year to hold stocks. November and October are the second and third best and they follow another of the year’s worst weekly performances… Week 39. We’ll talk about that later this year.
Knowing that February holds volatility, little direction, one of the years lowest monthly returns and a volatility event at the end of the month with Week 9 means that you should take time to plan this month.
While February’s seasonal volatility and decline is something that may shake investor’s confidence, knowing the drivers of the market’s moves and the approaching volatility spike should help any investors prepare and thrive through what can be an opportunity to position your portfolio for larger gains.