The Research HUB: Seasonality
The Research HUB: Seasonality
What's the deal with year end?
There is always a lot of talk about different “seasonality” in assets. In this article, I want to provide some general thoughts about this.
First Principle:
The first principle in studying seasonality is: KNOW THE WHY. Is it from the weather? Government budget calendar? Supply and demand dynamics? Production cycle?
Here is the seasonality of the total return treasury index:
And for the S&P500
You can see that there isn’t a clear pattern that sticks out. This is because so many of the seasonal dynamics are dependent on variables that are inconsistent in themselves. For example, either tax loss harvesting or waiting until January 1st to turn over portions of a portfolio. However, both actions depend on positive or negative returns in the preceding year.
Second Principle:
The second principle I keep in mind is: Always connect a seasonal effect to fundamentals.
Seasonality has a larger impact on specific assets compared to the others (commodities for example). The main goal is to contextualize the seasonality so that you can see if the potential effect with line up with the current situation.
When I run seasonality studies, it is only one piece of evidence that I weigh against everything else.
Big Picture:
Seasonality can take place in any market or domain. If there are specific factors relating to the structure or inherent mechanics of a system, you most certainly want to align yourself with potential seasonality because it’s another positive force that can help action.
As we move into December, it is typically a time of lower volume due to the holidays. We remain between the cyclical resistance I noted in the macro report (link). For the time being, I don’t expect a large break above 4700 before the end of the year.
If you want to dig into seasonality more, check out some of these papers:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4081000
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1103627
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2171634
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2880257
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=643583
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1076644
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1989593
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3266285
You will begin to see how people’s analysis of seasonality can change or even be biased over time. These are incredibly helpful things to make note of.
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