Why is seasonality important for your investments?
There are many technical indicators and statistical analysis techniques that can be used to model your financial data to arrive at the optimum investment or business decision. While a large range of different technical indicators may prove overwhelming for you to pick the best one for the particular security you are trading, the statistical analysis on the other hand may prove complicated and time-consuming to implement and reason from. In this article, we are going to look at seasonality which is a time-series statistical analysis where the financial data goes through regular and predictable fluctuations recurring every year. Predictable recurring patterns that can be recognized from the analysis of time series data can be considered seasonal.
Seasonality has a large implementation in the trading of Futures and Commodities. Great examples of season commodities are livestock, crops and their futures. As these assets are affected by real time seasonal patterns and harvesting periods, the difference in the supply and demand is reflected into the pattern of their time series historical data. Leveraging on the fact that we know the seasonal price trends in commodities we can develop a pairs trading strategy of highly correlated futures and spot contract of livestock.
Energy Markets are another sector where seasonal patterns can be detected. Crude Oil and Natural gas consumption varies throughout the year with the change of seasons. Being able to identify and be on top of the seasonality patterns of these assets can be of a great benefit to producers, traders and investors who participate in these markets.
Natural gas seasonality chart – Source www.mycloudquant.com
Another example from the equity market would be the travel industry, especially airlines, think American Airlines(AAL), Lufthansa(LHA), Turkish Airlines(THYAO). In seasonally unfavourable periods, we can develop a long/short strategy depending on the period of the year where we expect the prices of airliners to scale back where subsequently we increase our investment allotment when the seasonal predict an increase in price evolution.
S&P500 seasonality chart – Source www.mycloudquant.com
The price of retailers is also affected by seasonality as holiday sales peak over Christmas and fall in January and February. From Ecommerce giants like Alibaba(BABA) and Amazon(AMZN) to fashion retailers like H&M(HM-B) and North Face(VF). Knowing these patterns, we can define our entry and exit points depending on the time of the year and the industry we are looking at. This type of trading strategy is also called the calendar effect. Generally, these strategies recommend that you buy or sell certain securities at a fixed date of every year, and close the position at another fixed date. These strategies have been applied to both equity and commodity futures markets.
The investor has to bear in mind that seasonality is different from cyclicality as they differ in their time horizon. While cyclicality can span over a large period of a few years or even decades, seasonal patterns are contained within a single year. A combination of the knowledge of your company/investment strategy and the markets it is affected by can be leveraged additionally with seasonality. Whether your business or investment strategy is experiencing spikes and slumps depending on the different seasons or sectors affected by yearly seasonal patterns, it will be a great idea to be on top of these trends and be ready to adjust your strategy accordingly.
Explore seasonality patterns of more than 50 assets at www.mycloudquant.com
MCQ Team 2017