The Probability of Seasonal Pattern Recurrence

SEASONAL INSIGHTS STOCKS
Nov 06, 2019

As you can undoubtedly imagine, I am convinced of the validity of seasonal patterns.

The fact that stocks, commodities or currencies exhibit seasonal trends is backed by exhaustive statistical studies.

Moreover, there are sound fundamental explanations for many individual seasonal price patterns. These include inter alia window dressing and the optimistic mood prevailing around Christmas time which fosters the Santa Claus rally in stocks.

However, I am also realistic. I know that seasonality – just as any other tried and true systematic trading approach – merely provides empirical evidence. For example, last year the Santa Claus rally failed to materialize. Ultimately investing in the stock market rests on probabilities, which leave room for exceptions.

I am all the more pleased when a stock follows its seasonal trends very closely. I present one such stock to you below.

 

Kemet Moves in Line with its Seasonal Pattern

Take a look at the seasonal pattern of Kemet Corp. (NYSE: KEM) outlined in blue in the chart below. It was calculated based on the average returns the stock has delivered over the past ten years. The horizontal axis denotes the time of the year, the vertical axis the level of the seasonal index.

The stock's moves in the current year to date are charted in red.

Kemet, seasonal pattern (blue) since 2009 vs. 2019 price pattern (red) Kemet's recent rally is perfectly in line with its seasonal trend  Source: Seasonax

As the chart illustrates, the stock has moved in line with its seasonal pattern at many junctures this year. There was a peak in mid May, a rally from late May to late June, a decline thereafter, and then another rally starting at the beginning of October. A very close, albeit not perfect, match.

As an aside, the reason why I came across this particular stock was that friends of mine actually purchased it on 01 October solely based on its seasonal pattern. As you can see, seasonality can work quite well.

 

Take Advantage of the Seasonality of Individual Stocks

Many investors consider seasonality exclusively in the context of commodities or the broad stock market. However, individual stocks exhibit seasonal patterns as well.

In fact, the seasonality of individual stocks is particularly interesting for investors. It offers a very broad range of choices and therefore provides diversification. In addition, it can help you with the precise timing of entry and exit points and the flexible adjustment of the extent of your exposure.

If you want to learn what the seasonal patterns of your favorite stocks look like, you can find out with a few mouse clicks at www.app.seasonax.com. If you are an institutional investor, use the Seasonax app at Bloomberg or Thomson-Reuters Eikon.