Market Overview

Collecting The Most Gains By Capitalizing On Seasonal Market Trends

Share:

As Christmas day draws closer, signs of the holiday spirit are beginning to show. However, even as people plan their holidays, the financial markets remain alive and running, albeit at a slower rate. Understanding seasonality in the market can help you to identify the perfect timing to buy or sell a given financial instrument and make returns way above the market average. This is why, even during holidays, investors and traders keep a close watch of the markets. They want to avoid missing the chance to benefit from short-term changes in trends by capitalizing on seasonality in market.

Among the leading seasonality trends that traders take advantage of is the end of December sell off. During this time of the year, most investors cash in on stocks whose price has fallen throughout the year, making a fresh start for the next. Other investors are motivated to sell off stocks whose value has been declining in that year in order to book a tax loss and claim capital losses. Understanding this dynamic and identifying those stocks whose prices are falling due to massive sell-off and buying them at a discount can help traders make smart buying and selling decisions .

Immediately following the end-of-year sell off, the capital market opens the year with high demand from investors and traders alike. “This high demand is fueled by more capital, which is now being reallocated to new stocks or bonds for a fresh start of the year after closing the previous year,” notes an analyst from 24Option. With more dry powder in their hands, investors and traders rush to buy value stocks at the beginning of the year and increase their uptake of the small cap stocks, thus driving their prices up. Wise traders or investors who bought the value stocks at the end of December the previous year can sell them to the buyers in January with lucrative margins.

Closely related to the December and January seasonality in the financial market is the turn of the month effect on stock prices. The turn of the month phenomenon is the trend of stock prices rising at the beginning of the month and falling near the middle of the month. As the month kicks off, new money is injected into mutual funds, pension funds, and insurance companies. This boosts the liquidity level of these funds allowing them to allocate more cash into purchasing more financial assets in the market. With more money pursuing the same number of assets, prices tend to rise at early in the month. However, as the month proceeds, prices stabilize as the funds’ dry powder begins to run out.

To benefit from the turn of the month, you need to wait until the middle of the month to make your stock purchases then sell them later at the beginning of the following month. In the current case, buying stocks towards the middle of December will help you get bigger discounts since the turn of the month effect is amplified by the end of December effect which lowers stock prices. The stocks you choose and buy should be scheduled for sale in January at the beginning of the month. At that time, you will again have double advantage from the turn of the month effect whereby fund managers have more dry power and they are chasing more stocks to buy; while at the same time the January effect of reallocation of funds to new stocks pushes up prices within the market. if well calculated and well executed, you will therefore end up benefiting from buying the stocks at highly discounted prices in December and selling them at a higher premium in January.

Posted-In: marketacrossEducation Markets

 

Related Articles

View Comments and Join the Discussion!