Historians of the Future

Every investor makes trading decisions based on what happened in the past – there is no other way. What really interests us is the future though. After all, what happens in the future ultimately determines investment success.

 

When in doubt, you can always try to reach the pasture…  In Human Action, Ludwig von Mises described stock market speculators as akin to “historians of the future”. This is without a doubt the most trenchant definition of speculators anyone has ever come up with. What Mises wanted to convey is that the skills of speculators are of a thymological nature, i.e.,  similar to historians, they have to be aware of the data and have to be able to apply “understanding” in order to be successful in their task. The meaning of understanding in this context is probably best explained by an example: a historian may look at the historical data known about an important historical figure, such as e.g. Quintus Fabius Maximus Verrucosus,  best known by his nickname Cunctator (“the delayer” – this was originally meant to be an insult). One could simply list all the battles the Cunctator avoided, the guerrilla-type tactics he employed to harass Hannibal’s troops, the battles he decided to join, and so on. But a mere listing of these facts would do little to help us grasp his motives, his personality, the pressures he was subject to, his political goals, his influence on posterity, etc. This is where the historian’s real task begins. If he has the ability to impart a proper understanding of the man and his times, he has succeeded as a historian. The job of speculators is very similar: they have to know the data (which necessarily describe the past) and use understanding in order to so to speak paint an image of the market’s future history before their mind’s eye. And while this future-oriented faculty of understanding is a sine qua non for successful speculation (note that “speculation” actually encompasses all types of entrepreneurial activity, no negative connotation is implied by the term), it could not possibly be applied without knowledge of the data and patterns of the past. [PT]

 

But will patterns that worked in the past continue to work in the future?  That is the question I want to examine, namely: to what extent do seasonal patterns change over time? After all, seasonality is only useful and potentially profitable if stable patterns actually exist.

 

Seasonal Trends in the Dow Jones Industrial Average from 1956 to 1982

The first chart shows the seasonal pattern of the Dow Jones Industrial Average (DJIA) from 1956 to 1982. The horizontal axis depicts the time of the year, the vertical axis the average return in the course of a year in the time period under examination.

 

DJIA, seasonal trends, 1956 to 1982 – the DJIA’s typical pattern was characterized by four distinct seasonal trends

 

As the chart illustrates, the DJIA typically moved sideways in the first two months of the year (blue arrow), followed by a rally until May (green arrow). Then the “sell in May and go away” effect set in, i.e., the typical period of weakness over the summer months commenced (red arrow). Subsequently the market tended to move up again in an autumn rally (second green arrow).

These four trends dominated the seasonal pattern of the US stock market from 1956 to 1982.  But what developments could be observed in the seasonal pattern thereafter? Did these four distinct trends remain operative?

 

Seasonal Trends in the Dow Jones Industrial Average from 1983 to 2010

The next chart shows the seasonal pattern that prevailed in the DJIA from 1983 to 2010.

 

DJIA, seasonal trends, 1983 to 2010 – by and large the same four trends continued to be operative.

 

I have marked the four trends again: the sideways move in the first two months (blue arrow), the subsequent rally (green arrow), the summer doldrums (red arrow) and the autumn rally into year-end (second green arrow).  All four seasonal trends continued! Many parallels to the previous chart are evident. By and large, the four distinct seasonal trends persisted.

However, there are differences as well. For instance, while the summer season continued to be unattractive for stock market investments in the 1983 to 2010 time period (red arrow), the DJIA no longer declined, but moved sideways.

The background: In the time period examined in the first chart, the market was generally weak or trending sideways. On average the DJIA only rose only by around three percent annually (see right hand scale). That changed significantly in the time period from 1983 to 2010 examined in the second chart. The average annual gain in the DJIA increased to approximately nine percent.

Generating such a gain  – which was after all three times larger than in the previous era – takes time. There is a larger number of days displaying a positive return, which the seasonal chart reflects as well.

 

Seasonality Can Support Your Investment Process

As readers are surely aware, there is no fool-proof investment method that always works. The two different long term time periods in the DJIA discussed above do show though that seasonal trends can be very persistent. They are therefore a statistically useful tool for investors.

Take advantage of seasonal patterns in your investment process. Visit www.seasonalcharts.com or call up the Seasonax app on your Bloomberg Professional Terminal by typing in “APPS SEASON”, or access it through the App Studio in the menu of Thomson-Reuters Eikon. There you will find precise seasonal charts, event studies and much more.

PS: many seasonal patterns are stable and therefore consistently useful!

 

Charts by Seasonax

 

Image captions by PT where indicated

 

Dimitri Speck specializes in pattern recognition and trading systems development. He is the founder of Seasonax, the company which created the Seasonax app for the Bloomberg and Thomson-Reuters systems. He also publishes the website www.SeasonalCharts.com, which features selected seasonal charts for interested investors free of charge. In his book The Gold Cartel (published by Palgrave Macmillan), Dimitri provides a unique perspective on the history of gold price manipulation, government intervention in markets and the vast credit excesses of recent decades. His ground-breaking work on intraday patterns in gold prices was inter alia used by financial supervisors to gather evidence on the manipulation of the now defunct gold and silver fix method in London. His Stay-C commodities trading strategy won several awards in Europe; it the best-performing quantitative commodities fund ever listed on a German exchange. For detailed information on the Seasonax app click here (n.b., subscriptions through Acting Man qualify for a special discount).

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

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