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Investors hate uncertainty and whenever possible they try to spot trends or patterns in the market to determine when and how to position their portfolio. While there is no such thing as a foolproof recurring pattern in the stock market, certain trends do often occur based on the time of the year. These averages are not a rule beyond the reach of overall market conditions, but patterns exists and can be taken advantage of when choosing to buy, sell or hold stocks.

Seasonal market trends are rooted in yearly tax schedules, pension and bonus payments, quarterly earning releases, index-rebalancing periods, “window dressing” by fund managers and general psychological effects of weather and holidays. Adjusting your investing strategies based on cyclical market trends which repeat at certain times each year can be combined with traditional investment methods to manage risk and maximize returns on stock trades.

As we reach the end of the fiscal year, we will take you through a few of the common market trends you can expect for the holidays and into the new year. Take advantage of seasonal market trends to make smart investment decisions today

5 Seasonal Trends to Watch for in the 4th Quarter Stock Market

Trading stocks based on seasonal trends is most effective when used alongside other traditional investment strategies because seasonal averages can be used as a gauge for when to enter or exit stocks. Remember, these trends are averages not a rule.

On average, the year starts out slowly before the markets pick up through the first half of the year. In fall there is usually a bearish market pull-back, before another bullish rush to the end of the year.

1. Bear Markets in September and October

September is usually the worst month for stock markets as experienced traders sell stocks that appreciated during the first half of the year. By October, conservative investors turn to managing their profits and year-end bookkeeping thus trade volumes drop off significantly. As a result, October tends to see some very bearish stock collapses.

2. The November Pre-Holiday Rally

In November there is usually a market rally as stocks rise due to general optimism before the winter holidays. Investors often plan to enter the market as it begins its rise in November and exit the market when prices are their highest the following May. *The rise in November is not to be confused with “The Santa Claus Rally ” in December.

Note: The Santa Claus Rally refers to a common rise in stock prices during the last week (or two) of the year due to general positive attitudes and preparation for the “January Effect” (see below).

3. Fund Manager “Window Dressing”

At the end of the calendar year, many hedge fund or mutual fund managers and other investment organizations must report their stock holdings to their clients. “Window Dressing ” is the practice of liquidating all the stocks which underperformed in the previous quarter or year and replacing them with successful stocks in an attempt to impress clients and improve fund books before the end of the year.

This often has the effect of pushing weak stocks into worse positions and inflating successful stocks during the buy and sell transactions of last few weeks of the year. Unfortunately for other market participants, the window dressing period changes stock prices in total disregard to fundamentals or valuation.

4. The Year Comes to an End December Portfolio Rebalancing

Beside fund managers, many other investors are interested in rebalancing their investment portfolio before the beginning of the year. Profits and losses affect taxes differently. In order to claim capital losses a knowledgeable stock trade may sell poorly performing stocks early in December before their prices are likely to decline further due to end of year liquidation by most other investors.

5. Preparing for the New Year and The “January Effect”

At the beginning of January, investors will reexamine their portfolios and return to equity markets with a vengeance, pushing up prices of many small cap and value stocks due to high demand. Savvy investors who want to purchase positions before the January rally can buy stock at the end of December. There are no guarantees that prices will in fact rise but it is an opportunity to purchase stocks at their lowest .

Note: Some investors will avoid buying mutual fund stocks in December to minimize tax burdens. Although the funds value may have declined at the end of the quarter, they are still required to pay taxes on the annual distribution. Essentially, a new investor will be taxed on gains made by the fund throughout the year, so consider re-positioning into these funds after the new year.

Seasonal Portfolio Management

Timing investments based on seasonal market trends is based on anticipating short-term price patterns and taking strategic positions at the top or bottom of the market. These market trends are relatively easy to take advantage of, such as purchasing low in October and December or capitalizing on the November rally. Every investor should be informed about seasonal trends and patterns in the markets so that they can make informed trades and investments.

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