You simply cannot find this kind of data for other trading styles such as fibonacci, Gann, or Elliott Wave. Sure, one prominent Elliott Wave theorist may have called the 1987 market crash, but how has his performance been, month by month, since then? I have been looking for month by month data for these type of traders and have found nothing. And I've been intensely studying the stock market for 8 years now.
Anyway, while there is a plethora of data supporting trend following trading, there is another trading style that also has significant data to support it: seasonality.
I am attracted to hard data, not myths, so when I read the book Seasonal Stock Market Trends, by author Jay Kaeppel, I was impressed. There is a lot of raw data in this book, going back more than 100 years, some of which I thought was very statistically significant.
There are a lot of findings presented in the book above, but for this post, I will focus on just one: the month of December.
The data suggest that the month of December, or the period between the American Thanksgiving and New Year's Day, is the sweet spot, if you will, for the stock market, producing more gains during this time than any other month.
To help me demonstrate this point visually, Stockcharts.com has just come out with a new seasonality charting tool. The tool is free to use by anyone and can be found here.
Using this tool, I created the following chart, which shows the percentage of the time the Russell 2000 increased during the month of December between 1994 and the present:
Significantly, the Russell 2000 has increased 90% of the time during the month of December going back 20 years. Why does this powerful pattern tend to emerge year after year? I do not know - I am extremely reluctant to link cause and effect in the stock market.
The next chart shows that the Russell 2000 never closed down during the month of December between the years 1991 and the year 2000:
This season pattern does not appear to be limited to US stocks either. The next chart shows a similar pattern for the UK's stock market:
Finally, individual stocks appear to succumb to this inexplicable seasonal force as well, with shares of Google rising 90% of the time during the month of December for the last 10 years.
As a trend following trader, do I trade off seasonal patterns? No, I don't. Can seasonal tendencies be combined with trend following principles in a systematic and profitable way? Probably yes.
- "You can be very promiscuous in your research, but not in your trading."