While the stock market is in many ways unpredictable, it has been host to trends during it history. Some of these patterns repeat during certain months of the year and offer some explanation for otherwise unusual trading behaviors. Certain trends are welcome while others are feared, and, while there are exceptions, investors can expect, with some degree of certainty, that market characteristics will emerge based on the calendar month.
Investors can attempt to profit from investments at the start of the year as a result of a trend known as the January Effect, which is a theory suggesting that the market values of stocks rise in the first month of the year. This tendency, however, is reserved for small-cap stocks, which are companies with a market capitalization that does not exceed $100 million, according to a 2012 article on the Market Watch website. Indeed, in January, small-cap stocks generate average profits of nearly 8 percent compared with a paltry showing for returns during the rest of the year.
There are essentially two ways to approach the month of May: Hunt for buying opportunities or sell holdings with the rest of the investment community. The adage that market participants generally adhere to leading up to the summer is to "sell in May and go away." Historically, stocks begin a descent between April and September, but the theory has been tested and doesn't always work. Between April and September 2012, the Dow Jones industrial average and S&P 500 indexes advanced 1.7 percent and 3.1 percent, respectively, causing investors who abandoned the markets in May to miss out on those gains, according to a 2012 article on the Market Watch website.
October is one of the worst months for stock market performance on record, second only to September. Nonetheless, nearly half of the stock market's worst trading days occurred in October, according to a 2011 article on the CNN Money website. Included among the most damaging stock market crashes was the notorious meltdown of 1929, when the Dow shed nearly one-quarter of its value over two trading sessions, leading to the decade-long Great Depression.
Stocks generally receive a boost at the end of the year from what's known as the Santa Claus Rally. This buying activity occurs during the holiday season beginning on Thanksgiving and lasting through the end of December, which is how this trend got its name. Based on years of research, the Dow advances nearly 80 percent of the time during Santa Claus Rally periods, according to information gathered by Marco Dion, a J.P. Morgan analyst, cited in a 2011 article on the CBS Money Watch website.
Video of the Day
- Creatas Images/Creatas/Getty Images