how the stock market works

Sell in May, Go Away?

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You may be asking yourself, “Where is the stock market heading?” Especially now that the market has rebounded from its lows in 2008 and has been rising ever since. Some people will tell you that it is impossible to time the markets, but I disagree. There are some very interesting market phenomena that occur at various times in the year. I call them my stock market indicators and seasonal trends. If you decide to buy and sell at these times you will generally be taking that action with numerous other investors who are doing the same thing. And if you are a smart trend trader then you know that you shouldn’t try to swim against the tide. It’s better to go with the flow. Here are some seasonal trends that I have seen to hold up time and time again.

Sell in May, Go Away

What Happens?
The stock market generally sees declines in the time period between May and October.

What Causes it?
The stock market crashes of 1929, 1987 and 2008 occurred between May and October.
The months between the U.S. Memorial Day holiday in May and Labor Day at the beginning of September, are typically seen as vacation time and there is generally less market activity between these dates. An article by the Huffington Post details more about this seasonal market trend.

How Can I Profit?
If you are not interested in selling and getting hit with capital gains taxes, you can go with an ETF that profits from short positions. The Motley Fool suggested the UltraShort QQQ ETF which is based on the Nasdaq or the ProShares Short Dow 30 to make money when the markets fall.

The Santa Clause Rally

What Happens?
The stock market generally sees a rally in the final weeks of December.

What Causes it?
This stock market trend is primarily caused by fund managers and investors trading for beneficial tax purposes. Some claim that it is because of a general optimism that occurs at the end of the year and investors spending their Christmas bonuses on stocks. There is a lot of activity in the market. It could also be a precursor to the January Effect. Investors want to take advantage of this market seasonality and so they will buy in December instead of waiting for January, especially since purchases in a tax-deferred account can reduce their overall tax liability. Fund managers have the incentive to cover shorts, or buy back shares that they previously sold, if they experienced losses.

How Can I Profit?
Buy additional shares of stocks that are already in your portfolio or that you have been following and researching in the beginning of December.

The January Effect

What Happens?
The stock market generally sees a rally in the first weeks of January.

What Causes it?
New Year’s resolutions, fund managers shopping spree. Individual investors churning. There is also a general optimism in the air at the start of the new year. The January Effect has not been as prominent in recent years. This is primarily because the markets have already adjusted for the anticipated increase back in December.

How Can I Profit?
Hold on to the purchases you made in January and sell anything you wanted to get rid of while the price is high.

See more seasonal stock market trends at Investopedia. Does your investment strategy include timing the markets? Or do you think that it is a futile task?

Disclaimer: I do not hold positions in any of the afore-mentioned ETFs.

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