Stock Market and S&P 500 Seasonal Patterns – Best Times of Year to Buy and Sell
See times of the year when the stock market (S&P 500) tends to do well and poorly, based on long-term historical tendencies. These tendencies may aid in making buy or sell decisions.
Typically, we look at price charts chronologically, one day follows the next and each month follows the prior in sequence. Chronological charts show an asset’s price path over time and provide a lot of information to technical traders. Such charts reveal trends and support and resistance areas, for example. Yet, we can also look at an S&P 500 seasonal chart to gain insight into stock market information not readily available on chronological charts.
A seasonal chart of the S&P 500 shows when the index (or S&P futures) tends to move higher and lower, or peak or bottom, at certain points in the year.
Instead of looking at the last 20 years of S&P 500 data in chronological order, what if you took each one year period, January to December, and printed it on a transparent slide. Then, stack all those transparent slides on top of each other. Doing this would highlight any period of the year which tends to be strong or weak. Luckily, we don’t need to do that. We can just take an average of the last 15 or 20 years to reveal whether there is a tendency to rise or fall at different times of the year (also see EURUSD Seasonal Patterns).
Below we look at seasonal patterns for the S&P 500 futures and S&P 500 Index.
Stock Market (S&P 500) Seasonal Patterns
The stock market has seasonal tendencies, and we can see them by looking at the following seasonal chart of S&P 500 futures.
S&P 500 Futures Seasonal Chart- 15 and 37 Year
The chart shows how the price tends to move at different times of the year.
- Since the stock has a long-term upward bias, the seasonal charts reflect this. The S&P 500 rises, on average, year-over-year which is reflected in the chart moving from the lower left to the upper right of the chart.
- The S&P 500 usually moves lower in January, putting in lows near the start of February. The price then starts to rise, although February also isn’t usually a great month, as shown in the chart below.
- By mid-March prices are often rising and often peak in early May.
- The start of May is usually when a weaker phase for the S&P 500 begins. The weak period typically lasts until late August. The only exception is that mid-June to mid-July tends to see some strength, but overall not much progress is made during the summer months. This explains the trading expression “Sell in May and go away.”
- In late-August stocks are often forming bottoms and starting to advance.
- Mid-September to early October is also typically a weaker period.
- It not until we get into October that prices really start to move out of the summer lull. Prices are typically strong through to the end of the year.
The chart below provides a more general guideline of which months tend to be good or poor for the S&P 500 index. As noted above, some pretty big moves start early, in the middle, or late in a month, so the prior chart is more detailed in that regard.
The chart below provides other information though. The number on the top of the column shows how often (%) the price moved higher in that month over the last 20 years. The number at the bottom of the column gives the average percentage rise or decline.
While this chart is a more general version of the chart above, it essentially shows the same data, just in a different way.
The chart highlights that early in the year the S&P 500 is generally weak. It strengthens between March and April, and then weakens from May through to the end of the September, with the exception being July which tends to show some strength. The end of the year, October to December tends to be strong, despite having had some front-page worthy crashes in October.
S&P 500 Seasonality Considerations
Seasonality is not a tool to be used on its own. Combine it with current price analysis to determine entry and exit points.
Seasonality provides us with windows of time where we can watch for trend reversals and feel more confident if we see a corresponding price pattern during the seasonal windows provides above. We may also feel more confident riding a trend that aligns with the seasonal patterns.
Since the S&P 500 is an index it gives us a feel for what stocks as a whole are doing. We can use this information to aid us in trading individual stocks. If taking swing trades, for example, we will likely find the most lucrative opportunities for upside gains between early March and late April (not too late though), and between early October and late December (not too late though, as prices may be nearing a peak). That doesn’t mean there aren’t good opportunities at other times during the year, it just means these periods tend to see more upside.
It is important to keep the current trend of the S&P 500 or a stock in mind. In uptrends, use seasonal low points to buy. In downtrends, use seasonal high points to get short or to sell. Don’t fight the current trend just because the seasonal pattern says the price should go the other way.
There is a long-term historical upward bias in US stock indexes. This is because the index changes over time, only maintaining stocks that are good financial health. Companies that are not well run or that are in a sustained state of poor financial health are dropped from the index.
The upward bias of the index sometimes leads people to believe that if they just hold a poor-performing stock it will eventually recover. This is not always a good idea. The performance of the index over time, which changes, is not indicative of the potential performance of an individual stock. The risks and returns of individual stocks vary wildly.
No matter what the seasonal tendency is, always manage risk. In any given year the price can deviate from the tendency, resulting in large losses if you trust the historical data blindly. Use stop loss orders and control position size to manage risk.
Using seasonality is not a requirement for successful trading, it is simply a tool that swing traders may opt to use if they feel it helps them.
By Cory Mitchell, CMT