When analysts examine stocks, traditional forms of due diligence dominate: fundamental Analysis, technical chart analysis, macroeconomic analysis, and even sentiment analysis.
If you are an investment management firm looking to get an edge on your competition, it makes sense to conduct discounted cash flow analysis and extensive research. After all, you have extensive resources at your disposal – top notch analysts – to crunch the numbers on lots of companies.
As a retail trader, you probably don’t have the time to build out the complex spreadsheets needed to hone in on precise company valuations, so coming up with your own unique twist of chart indicators may be the best bet. After all, you can easily spot resistance and support levels, spot triggers that signal buy and sell signals with free stock rating software.
Some analysts will even rely on sentiment analysis to figure out when stocks are overvalued or undervalued according to extremes in sentiment. For example, when the volatility index skyrockets, history shows it is often correlated with a temporary market low.
Billionaire investors, such as Ray Dalio and Jim Rogers, are well known to examine macroeconomic factors to make big decisions on which way markets will move over the coming months and years.
But what if you have used some combination of fundamental, technical, sentiment, and macroeconomic analysis without success? Is there any other analysis you should be considering?
Seasonality analysis is an increasingly popular form of market analysis because it isn’t a subset of the other forms of analysis. The way Seasonality analysis works is that at certain times of the year some stocks have a tendency to rise or fall with fairly predictable patterns.
A company that serves tax clientele may rally in anticipation of higher revenues around tax season and fall when the seasonal spike has ended. A company building swimming pools may rise in anticipation of spring and summer demand from customers but winter will generally be a slow season and share prices often reflect these seasonal swings.
To figure out the seasonality of stocks by yourself is quite the challenge. You would need to analyze each stock at each time of the year and how it moves historically over the coming weeks and months, and constantly update your spreadsheets for thousands of stocks each day. Obviously, it quickly becomes impossible!
But there are ways to spot and screen seasonality with relative ease. For example, a company like Masonite International [DOOR] has a history of falling on average approximately 6.0% over the weeks from the middle of October to the middle of November in six of the prior seven years.
Obviously, there is no guarantee that any company repeats its seasonal chart pattern behavior on any given year. But some stocks, like AMD, have a history of falling with high predictability by large amounts at a certain time of year. Still others rise more often than not at the same time of year. So, if you are looking to move the odds in your favor, when you see a stock has a history of moving nine years out of ten or nineteen years out of twenty in one direction, it is certainly worth paying attention to the seasonality trend.
After all, would you really want to buy a stock that has a history of falling by a large percentage amount over the next month or two? The reason seasonality is so valuable is that if you were to view a technical chart, the share price of a stock may be in an uptrend, but a big risk may be on the horizon. Where other forms of analysis are valuable in their own ways, seasonality is valuable at knowing when the risk of a big drop or a big rise in share price may historically have taken place, and may translate to future share prices too.
|Jack Davis is a writer at Financhill, a website dedicated to providing free stock ratings and seasonality analysis.|