seasonality in the marketplace

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Seasonality In The Marketplace

Different Seasons Mean Different Trading

Seasonal shifts in market action are an underlying cause of market direction that many traders fail to recognize. I know that I for one took a long time before I began to rely on things like the Traders Almanac and other sources of information that shed light on the subject. There are times on an annual, monthly and daily basis that are noted for low or high volume, buying or selling, expansion or decline and other factors that can influence the outcome of your trades. In an earlier piece I called “When Not To Trade” I detailed this same cycle but on a daily basis, outlining when and why different times of the day were better or worse for trading. In this piece I will detail some, but most certainly not all, of the longer term week to week, month to month and annual seasonal factors affecting the markets. These include the change of seasons, summer break, xmas break, fall/winter market seasons and the ever important earnings season.

Changing season can affect market direction and your trading.

The point of this article is not to discourage you from trading at any one time or another. It is to encourage you to be aware of WHEN you are trading in terms of the calendar, earnings and market year. This awareness is crucial for making sound trading decisions and can have a big impact on not only what you trade but the expiry and direction of your trade. Not to mention that being in touch with the calendar cycles is a great way to stay in tune with the market in a way that leads to intuitive trading.

The Change Of Seasons – The changing of the seasons can have a big impact on market expectations and overall price direction. Some seasons are known to be more or less active in terms of the consumer, construction, manufacturing and other fundamental drivers of the economy. As the seasons change so do the expectations of the market and by extension what the market is trading and how. Over the winter construction is low because of the weather but manufacturing can continue. In the fall and early winter the consumer is out in force for back to school, seasonal and holiday shopping. In the spring jobs creation picks up as summer service and other seasonal jobs become open. Keeping abreast of this is one foundation for longer term fundamental analysis and a big help in choosing trades.

Earnings Season Is A Season – Earnings season is a market season the same as those in the weather. Although there really isn’t an actual “season”, earnings are released all the time nearly every day, there is a period accepted as one and market as important by the market. This season loosely coincides with the calendar seasons and begins each time with the release of earnings from Alcoa. Alcoa, as the worlds leading producer of aluminum and aluminum products, is seen as a leading indicator of the market and therefore important as such. Earnings are like a report card for the market and have a very strong impact on future expectations. What really makes the season is the concentration of earnings reports. Between the time Alcoa reports and about 6 weeks later 95% of S&P 500 companies and near 100% of Dow Jones companies report earnings.

Fall And Winter Market Seasons – Now, keeping in mind the change of the calendar seasons and the seasonality of earnings, we can move on to the fall and winter market seasons. These are the two, roughly 4 months long, times of the year when the market is what I like to call “In session”. This season exists from September to May, divided by the summer and punctuated by the seasonal mid-winter holiday (Christmas, Kwanza, Hanukah, Winter Night etc). What marks this time is that is when 100% of the market, discounting those on the sidelines, is present and engaged. This is when the real market movements take place, the real trends and the real money. Other times of the year can be severely hampered by lack of presence in the market, not just lack of volume. There may not be a lot of trading volume during the fall/winter seasons but you can be assured that the market is present.

The Holiday Seasons – For this part I am going to include the summer break and the mid winter holiday together. The summer break is usually about a month long, typically in August, and ends with the start of school in the fall. The mid-winter break is about the same length but usually a little shorter. It begins mid to late December and runs until the first week of January. It really depends on what days Christmas and New Years fall on. What is important to remember about these two seasons is that there is incredibly low market volume and participation. Traders have left for vacation ranging from day traders to institutional investors. Any moves in the market are likely to be very light, without conviction and trapped within near to short term support and resistance. These times are often become market consolidations as previously placed orders and speculative position are filled and flushed out of the market.

Seasonality and Its Effects on Crop Markets (Risk Management Series)

By: Mark Welch, Mark L. Waller, Stephen H. Amosson, and William I. Tierney, Jr*

* Assistant Professor and Extension Economist – Grain Marketing, Associate Department Head and Extension Program Leader for Agricultural Economics Department, Professor and Extension Economist – Management, The Texas A&M University System; Foreign Agriculture Service, U.S. Department of Agriculture

Seasonality and Its Causes

Seasonality is the phenomenon that causes crop prices (including cash, futures, basis, option volatility, intramarket, intermarket, and inter-commodity spreads) to behave in a relatively predictable manner, year in and year out. Generally speaking, there are two major components to crop seasonality: 1) the harvest lows, followed by 2) the post-harvest rally. Sometimes seasonality is a strong element of the pattern of crop consumption (domestic usage as well as exports).

The dominant (but not the only) factor driving seasonality is the on-off nature of crop harvest. Most of the principal field crops grown in the U.S. have a single harvest season. Consequently, the total supply of the crop becomes available to the marketplace in a relatively short period of time. It is this sudden increase in supply that provides the most dramatic evidence of seasonality—the harvest lows.

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Following harvest lows, the supply of the commodity is reduced by inevitable (but not always steady) domestic consumption and export demand. In order for the market to ensure that some portion of the year’s crop will be available for use later in the marketing year, forward price bids at harvest generally are higher than harvest prices. In most years, prices follow an upward trend, staying on-track with the pattern of forward price bids initially laid down at harvest. Therefore, a corollary to the harvest low is the post-harvest rally.

Seasonality vs. Cycles

In most cases, seasonality is restricted to one production cycle (the period of time that passes between one production event and the next). For most of the principal field crops produced in the U.S., seasonality occurs over a 12 month period (stretching over all four seasons—hence the term seasonality).

Seasonality should be distinguished from other cycles. Seasonality is related to the calendar, such as months or seasons, and is usually based on changes in supply and demand. Cycles can last any length of time (from minutes to decades). While there is ample statistical evidence (and a sound theoretical explanation) for seasonality in crop markets, there is only limited evidence that other types of cycles affect the markets for most of the principal U.S. field crops.

Unlike price cycles, which may have a basis of explanation in technical analysis, the few fundamental crop cycles that have been identified are widely believed to be triggered by external events that have an unusual impact on the market. Often referred to as market shocks (and often associated with droughts), these events of unusual impact trigger production, demand, and even policy reactions. The effects of market shocks gradually dampen over time and do not continue indefinitely.

Some economists argue that because these crop cycles lack continuity (are not self-perpetuating), they are not true cycles. There is far more support for the concept of cyclical influences in livestock markets (particularly cattle and hogs) than in crop markets.

Many other factors besides seasonal fluctuations in supply and demand affect crop prices. Price trends are the result of gradual one-directional changes in supply and demand that occur over a period of time. These trends can have a powerful influence on market prices and can significantly alter seasonal patterns (Fig. 1). Consequently, trends and other inconsistencies can cause prices to deviate substantially from those that would be expected based on the crop’s seasonal pattern.

Normal vs. Conditioned Seasonals

The normal seasonal pattern that prevails can be estimated as the average of all years or the average of the majority of years deemed to be free of unusual market shocks. Or, a conditioned seasonal could be constructed using data from years in which a specific condition is applied. Sometimes referred to as analog modeling, it is a technique commonly used in forecasting other things besides commodity prices. For example, meteorologists often look for distinctive and anomalous weather phenomena. If a particular unusual weather event is present in the current period (such as the occurrence of an El Niño or a major volcanic eruption), then meteorologists look at past years when these events occurred to see if certain weather patterns necessarily followed the event in question. For example, do strong La Niña events strongly correlate with drought in North America?

In commodity analysis, it is common to separate grain seasonals into two groups: 1) short crop years—years in which yields fell significantly below the trend because of drought, freezes, floods, lack of growing degrees, blight, etc.; and 2) normal years— all years other than short crop years.

A 1995 study of optimal corn marketing strategies (Wisner, Baldwin and O’Brien) found that the best marketing strategy in years following short crops was a futures hedge on 100 percent of the expected production in the fourth week of February, covered by a $.20 out-of-the money call on new crop futures that was offset in the first week of July. Conversely, in years that did not follow a short crop, the best marketing strategy was to purchase $.20 out-of-the- money puts on new crop futures on 80 percent of expected production in the third week of May, hedge with futures the remaining 20 percent in the first week of July, and offset the puts in the second week of September.

Another criterion commonly used to discriminate between years is to examine years when another major fundamental supply/demand factor changed. For example, crop prices may have a distinctive pattern in years in which two events occurred—both total beginning supplies and ending stocks increased. The logic of this type of seasonal is this: “Did prices behave differently in years in which the market had to struggle with a persistent, yearlong over supply of the crop (over supply relative to the final quantity consumed)?”

It is sometimes useful to construct a conditioned seasonal, picking the appropriate years based not on a particular supply/demand fundamental but on an unusual price phenomenon. For example, if the December corn futures contract set a new life-of-contract low in July (a month in which the contract normally is setting its high), is that a reliable predictor that the contract will trade lower in the succeeding months?

One example of a seasonal of this type is provided in Figure 2. It examines the pattern of wheat prices in years when the January price was close to or below the preceding July price (something which occurred in 1989, 1990, 1996, 2009, and 2020). Clearly, this phenomenon is associated with even weaker prices in the February-May period.

Another method of checking for seasonal patterns is the seasonal high-low table (see Schwager, 1984). This method simply requires identification of the season of interest and recording the months in which the highs and lows occurred over a number of years. Table 1 provides an example of a high-low table for the December corn contract. The calendar year contract highs tend to cluster in late spring to early summer with contract lows more dispersed, but generally in the second half of the year.

Timing and Magnitude of Price Changes

There are two purposes of seasonal analysis: 1) to correctly identify the timing of a season’s high and low; and 2) to estimate the magnitude of the difference between the high and low price. Sometimes market analysts rely on timing to identify the seasonal lows (which may be more consistent than the highs) and then rely on magnitude to predict the high. For example, a particular crop’s seasonal low may have occurred in October-November 80 percent of the time. The seasonal high was 12 to 15 percent above the seasonal low 75 percent of the time. Based on this analysis, one would expect the seasonal low to come at harvest (in October or November) and the high to be 12 to 15 percent above the low.

Of the two, timing is the more important for speculative purposes, whereas magnitude is often more important for hedging purposes.

Farmers (or other hedgers) may make or lose money in their commodity futures/options accounts, but the ultimate profitability of the agricultural enterprise depends on the net profit of the crops produced (net any futures/ options gains or losses). It follows, therefore, that a farmer should be more interested in selling a crop at a profitable price than selling it at the seasonal high.

References

Wisner, Robert, Baldwin, Dean and O’Brien, Dan. “An Evaluation of Pre-Harvest Corn Futures and Option Marketing Strategies in Selected Iowa and Nebraska Locations.” Department of Agricultural Economics, Iowa State University, 1995.

Schwager, Jack D. A Complete Guide to the Futures Markets. New York: John Wiley and Sons, 1984.

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Seasonality in the Job Market?

Seasonality in the Job Market?

The Blogs of Dave Murphy: Seasonality in the Job Market?

It’s the 4th of July week and I’m camping in an RV park, “on holiday” in a good old fashioned family vacation. I generally schedule my time off to coincide with the vacation and travel schedules of my clients. It’s tough to have meetings, schedule interviews and do business when nobody is around. Just like planting season, tax season and football season, there is a seasonality in the job market that impacts the way employers and potential employees make decisions. Hiring managers and job seekers would be well served to recognize the trends so they can best invest time and money to meet their goals as efficiently as possible.

In addition to PTO schedules the timing of staffing decisions is also driven by an employer’s budgeting cycle. In the Med Tech and BioPharma industries, unless your primary customer is the U.S. government or you work for Medtronic, you probably run on a fiscal year that matches the calendar. In that case we generally see new headcount put in place in January of each year and a significant spike in hiring during the first five months of the calendar year. There are many large medical conferences held in May and June and things begin to slow down, and by July and August they can sometimes grind to a standstill. In the U.S. most employees are back on the job in late August and there is a burst of hiring activity between Labor Day and early December. The second half of December is typically dormant due to the holidays.

Why is this important for employers?

Hiring managers with urgent staffing needs recognize that the supply of qualified candidates who are interested in considering their job is nearing an all-time low. The U.S. unemployment rate is approaching the “transitional” level and in the medical industry in particular it’s extremely difficult to find “A Players” to key openings. Even unemployed candidates are able to be choosy and selective in this job market because they’re more confident they will have multiple offers to consider. We’ve seen a steep rise in the rate of counteroffers being extended and accepted, and candidates who accept job offers and then don’t show up on the start date because they continue to interview with another organization and accept another offer.

All of this means that that hiring managers must consider seasonality in planning for job creation and work force expansions. And even in adapting to unexpected backfills an employer must plan their interview process more thoughtfully in this labor market. You have to be ready and eager to interview qualified, interested candidates before you post a job or ask a recruiter to begin selling your opportunity in the marketplace. If you start too early and can’t move them along through the process at a reasonable pace you will build resentment among candidates and lose them to other, more nimble employers.

Check with the members of your interview team to get agreement on the decision-making process (including the need for consensus) and their travel schedule (work or personal) that will impact their ability to interview candidates. Candidates who are currently employed will generally be more available for calls and interviews between February–June and September–November, just like the interview team. It’s also a good idea to use Facetime or Skype more aggressively in other months to maintain candidate interest.

Why is this important for candidates?

For candidates who are currently employed and not in an “active” job search the issue of job market seasonality is not a significant problem. If you’re not planning to make a job change and are simply being opportunistic you can manage you schedule with or without employers and interview teams. What I generally see, however, is that when a candidate agrees to consider a particular opportunity and enter into an interview process he or she will become more inclined to consider other openings at the same time because they have gone through the process of updating their resume, brushing up on interview tips, and mentally preparing to make a job change. When you have multiple interview processes underway at the same time it’s very important to communicate that information to each of the employers, particularly in peak season, and be transparent about projected interview dates and your travel schedule and availability. You’re not being “pushy” when you tell an employer that you are moving along in another interview process and they may need to expedite their own process.

For active job seekers it’s more important to consider seasonal differences: your research, phone calls and emails should occur during those weeks and months of peak interview times so you can catch hiring managers when they are most available. For instance, if you decide to contact a GM of a business unit only two times because you don’t want to be a pest, make sure it’s during peak season rather than “off season.” In the interest of managing your own expectations, it’s important to understand that most employers post jobs online without considering the timing issues of the interview team, including their own. So you may apply to a posting for which you are highly qualified and get limited response, if any. It doesn’t mean that they are not interested in your qualifications – it may mean that they have not timed their process appropriately.

When a new job comes “open” I will often encourage employers to postpone the initiation of a search for candidates until the timing is right. It seems counter-intuitive in a candidate driven job market, but for best results all members of the hiring process – including the candidate – need to be ready to talk and make decisions in an expedited manner. Of course, there is a distinct difference between a job “opening” and a true business need that requires hiring a talented employee – but that is the subject of a different blog. As always, I encourage your comments and questions.

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