Chris Rowe

WARNING: Big Correction Ahead

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Whether invested during all 12 months of the year or not, there's no doubt that the large money managers who control most of the cash in the stock market (and therefore control the direction of the market) are well-aware of the seasonality of the market. And if the people who control the direction of the market are aware of these patterns, you should be, too.

The most successful investors don't stay in the stock market at all times. Instead, they are in only when the probabilities are most in their favor. By following seasonal trends, a variation of technical analysis, you prepare for what you are more likely to see from the market during any given time period.

Not only that, but by understanding the seasonal patterns, you can use the market action to help predict what the market will do in the future. The "Stock Trader's Almanac," a stock market guide created by Yale and Jeffrey A. Hirsch, tells us all about the seasonal trends and indications they give us.  

So let's talk about known seasonal patterns and stock market cycles, and the extremely important ways this will affect the market, and your accounts, this year.

Understanding Market Patterns

We know which days of the month are more likely to have the most strength. More often than not, the last few days of the month, the first few days of the month, and even a few days mid-month are the strongest. 

This is due to funds that make monthly contributions in the beginning of the month. And, more recently, we've seen mid-month strength due to 401(k) contributions on or around "payday" (the 15th). 

The market tends to have a bit more strength at the end of the month due to those trying to front-run the "strength investors" identified at the beginning of the month.

I find that the larger the time period, the more reliable the pattern can be. Obviously, the seasonal patterns don't work like clockwork. These periods of strength or weakness are identified over 40- to 60-year periods. But understanding WHY the patterns exist will help you understand how to use them as indicators. 

Basically, when the market shows weakness during certain times (of the year, for example) when the market is typically strong usually means there's trouble ahead.