In the previous chapter, we scratched the surface on what is called a top-down approach. This entails identifying opportunities in the overall stock market as either represented by the trends made in the Standard & Poor's (S&P) 500, the Russell 2000, the Nasdaq 100, or the Dow Jones Industrial Average, breaking it down into the subsectors, and then looking at the individual stocks and these companies' competitors listed in those subsectors.
If you ever wondered what stocks perform during which months or wanted to know why Wall Street professionals switch money around, which is referred to as “asset reallocation” or sector rotation, then this chapter may answer those questions. In the following pages, I will show you how to start planning what stocks to buy and when to start looking at trading opportunities in each of the top sectors in the S&P 500—as well as specific commodity and currency markets—by using seasonal analysis. Included will be the charts and graphs of the seasonal trends, plus a performance table showing the percentage of returns for each of the top 10 sectors in the S&P 500 during their respective seasonally strong periods.
So what is seasonal analysis? From a technician's point of view, it is the study of past price action averaged over the course of time. This gives us an idea of what the price trend is during the year from a historic price perspective.
Creating your own seasonal analysis is not complicated. To create it, you simply ...