The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails

Mysterious Repetitions

The curious fact about seasonal stock market patterns is that it is a systematic effect without a definitive cause. No one really knows why the market does certain things in certain months. Even Donald Keim, who discovered the January Effect in 1983, ended his research paper without a definitive explanation for the phenomenon.

The most plausible reasons for seasonality appear to be psychological and structural. Because everyone is conditioned to expect the patterns, some say they continually occur. Structural events—like the end of mutual fund fiscal years—clearly play a role. Those events cause widespread stock trading, anticipated by other investors who position accordingly. The reaction to the event helps solidify the perception that the seasonal effect exists. This is even evident at certain times of the month. Many traders look for short-term opportunities at the beginning and ends of months on the theory that the market can lift higher because many people are investing in mutual funds or retirement accounts.

Repetition creates psychological realities. Media and technology play supporting roles. Not a month passes without some journalist, blogger, trader, or market strategist, talking about seasonal patterns. The Stock Trader’s Almanac is largely responsible for establishing seasonality as a major market force. Published since 1966, the Stock Trader’s Almanac is Wall Street’s equivalent of Benjamin Franklin’s Poor Richard’s Almanac: a compendium of facts, ...