Seasonal patterns in stock indices

As stock indices are a compilation of a group of companies, often the leading companies in a particular economy, they can be representative of economies at large. As such, indices can move in seasonal patterns, moving with regular economic announcements.

Obviously politics, company announcements and once-off economic releases can impact this and obscure broader patterns in the market, however, these patterns do tend to persist year-on-year. And, like any pattern, this is something of which the astute trader can take advantage.

Once example was illustrated in the book ‘The Behaviour of Prices on Wall Street’ by Art Merrill, which demonstrated the existence of preholiday behaviour in the Dow Jones, concluding that there was a high probability of the index having higher closing prices before major US holidays.

Another example is the S&P 500 index – from 1980 to today, the market has usually rallied from late January until early June. From June until late August the market tends to trade sideways, before falling from late August until late October. From late October the market has a steeper climb until the end of the year.

However, these patterns may not occur every year – in February 2009 the S&P 500 index fell dramatically, even though the seasonal bias indicated that the market should be climbing higher.