Do not make seasonality timing more difficult that it has to be. If there’s one seasonality chart you should use for market timing, it would be the VIX seasonality chart as published by our trading buddies over at EquityClock.
Everything that is happening in the market has to do with seasonality and we are looking for the VIX to top out any day now and it probably already has. The VIX then trends lower for the rest of the year as we enter the Best 6 Months of the Year for trading (November – April).
Since 1950, the Standard & Poor’s 500 index has gained 7.1 percent, on average, from November through April versus 1.4 percent from May through October. That’s a big difference and it’s even bigger when it comes to individual stocks.
Now that we are on the cusp of going into the best 6 months of the year, it’s time to shift our psychological bias to the bullish side. Most people have trouble shifting to the positive/bullish bias side. Most people have no trouble shifting to the negative/bearish side. The reason has to do with how the brain is wired and the fight or flight response. We are wired to have a bias towards negativity because fear and a flight response helped assure survival over thousands of years.
What do I mean by shifting your psychological bias to the bullish side?
During the best 6 months of the year, the glass is half full. Interest rates are rising because the economy is getting stronger and the Fed is being cautious and getting the pace of rate hikes just right.
Most people can’t do it. They are too much tied to ego and they want to be solid, say the same thing, hold their ground, be stubborn, and be the only guy in the room to get it right. In profitable trading and adjusting your psychological biases to match the seasonality patterns of the stock market, there is no room for egomaniacs.
You’ll make lots of enemies shifting your psychology to align with the best 6 months and worst 6 months of the year for the stock market. People will call you a turncoat. They will attack you and say that you flipped on your core beliefs about the economy. In reality, none of these criticisms are true. Instead, you are really a superior trader and will find you are a happier person using this strategy too.
Using this strategy, you are a more well rounded individual. You embrace both your inner bear and inner bull. You deny yourself access to neither. For half of your trading career, you are bullish. For the other half of your trading career, you are bearish. You have allowed yourself a broader range of experiences and critical thinking. Instead of denying yourself access to your inner bear because you want to make money on the long side year round, embrace that bear. Become a bear. Become a bull. Do both. Why not? Why must you be so one-dimensional? Do not let society and Wall Street package your mind up into two categories, either a perma bull or a perma bear. Everyone is always trying to limit you, imprison you into stereotypical categories. Break the mold. Become neither a perma bull nor a perma bear. Be a quantum particle with both positive (bull) spin, and negative (bear) spin, at the same time. Let your mind be free to explore both bull and bear phases. By shifting your psychological bias to be in-sync with the timing of the seasonality of the stock market, you are actually a healthier person and a much better trader.
During the worst 6 months of the year, Powell is a real SOB who could bring down the entire stock market because he’s raising rates too fast. During the best 6 months of the year, Powell is a Republican, who was appointed by President Trump, who is working to make the Republican party look as good as he can and therefore is not going to raise rates too fast and crash the economy. This doesn’t mean that we don’t track what the Fed is doing and that we don’t watch home builder stocks. We still have in the back of our minds the fear that Powell could go too far too fast; however, the bigger thought in our mind is that the Fed is hiking rates because the economy is finally getting stronger after nearly 10 years of blah growth.
Here’s another example so you can learn how to shift your psychological bias to match the stock market seasonality cycle. During the worst 6 months of the year, China is a horrible monster that’s in the process of swallowing us whole! OMG they’ve stolen everything from us and have taken all of our manufacturing jobs! The U.S. economy is doomed. During the best 6 months of the year, the Trump Administration for the first time is dealing with the China issue that has stagnated our economic growth for decades and some deal, any deal, with China is going to be better for our economy than what we’ve had for the last 20 years!
During the worst 6 months of the year, the emerging markets slow down is horrible and is going to pull down our market eventually. During the best 6 months of the year, emerging markets currencies are getting so cheap with the rising US dollar, we sure can buy a lot of their stuff now and the self-adjusting mechanism of currency devaluation as an economy slows will lift emerging markets eventually so let’s start looking for bargains in emerging market economies! I bet soon that we can find some crazy, once in a decade deals on emerging market stocks!
During the worst 6 months of the year, bonds were the place to be because trade wars, interest rate hikes, and crashing emerging markets were going to make our markets plunge at any time! During the best 6 months of the year, stocks are the place to be before the S&P 500 takes the next leg higher.
During the worst 6 months of the year, DemoNcrats and their socialist buddies are going to crash markets with their violent protests and hateful mob speech. During the best 6 months of the year, Democrats are sore losers and are just jealous about what Trump has done to improve the economy, who cares what those losers do, let’s make money!
You get the idea. It takes practice to learn how to shift your psychological bias with the seasonality patterns of the stock market. But I promise, it gets easier as each year goes by. You’ll find yourself hearing something really bearish during the best 6 months of the year and you’ll be like, oh, that’s a good theme to explore during the next worst 6 months of the year cycle, I can’t wait to get more into that! By embracing both your inner bear and inner bull, you’ll find that you are more in-sync with the market and your trading will improve.
I came up with this method of seasonality psychology years ago. I get called crazy because some people think it basically mirrors being bi-polar. I wouldn’t argue with that point. Maybe I am crazy but if it takes a little crazy to improve my trading profits, order me an XL size straight jacket!