CHAPTER 26

Seasonal Analysis

The freeze may come in winter, but the seasonal rally comes in fall.

—Jack D. Schwager

The Concept of Seasonal Trading

Various markets exhibit seasonal tendencies. Sometimes these seasonal patterns can be attributed to obvious fundamental causes, such as harvest selling or buying in front of potential freeze danger periods for some agricultural markets. Financial markets can also exhibit seasonal patterns tied to fundamental causes (e.g., Treasury refundings, year-end book squaring). Sometimes, however, seasonal patterns will not be associated with any apparent fundamental factors.

The concept of utilizing seasonal patterns in making trading decisions is based on the assumption that seasonal influences will cause biases in the movements of market prices. Of course, such correlations will be far from perfect. It is hardly uncommon for markets to move opposite to their normal seasonal trends. The key question is whether, on balance, there is enough positive correlation between future price movements and past seasonal patterns for such information to be useful. Because (as will be detailed later) apparent seasonal patterns would be expected to appear even in random series, it is difficult to determine to what extent seasonal price patterns reflect true biases as opposed to random occurrences. Hence, there is an unavoidable degree of subjectivity in deciding how much weight to give past seasonal patterns. A reasonable approach is to use seasonal ...

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