What Seasonal Patterns Exist in Markets - Part 4

This lesson explores advanced seasonal patterns beyond the basic monthly or quarterly cycles. We analyze specific intra-month and intra-week phenomena, examining their statistical significance and tradable implications for experienced day traders. These patterns often arise from institutional behaviors, fund rebalancing, and algorithmic operations. Understanding these micro-seasonal tendencies provides an edge, particularly in high-frequency trading environments.

Intra-Month Seasonalities: The Turn-of-the-Month Effect

The "Turn-of-the-Month" (ToM) effect describes a persistent market tendency for equities to perform strongly during the last few trading days of a month and the first few trading days of the next month. This phenomenon spans approximately eight trading days: the last four days of the current month and the first four days of the subsequent month. Research from institutions like the Federal Reserve Bank of St. Louis and academic papers consistently document this anomaly.

Consider the S&P 500 (ES) futures contract. Historical data from 1990 to 2023 shows the average daily return during the ToM period significantly outperforms the average daily return outside this window. For instance, the average daily return for ES during ToM periods stands at approximately 0.18%, while non-ToM days average closer to 0.02%. This 9x difference in average daily return is statistically significant.

This effect likely stems from several institutional factors. Pension funds, mutual funds, and other large asset managers often receive new capital inflows at the beginning of the month. They deploy this capital into the market, creating consistent buying pressure. Additionally, portfolio rebalancing often occurs at month-end, leading to adjustments in holdings. Algorithmic trading systems are well-aware of these patterns and frequently front-run or amplify these flows, creating self-fulfilling prophecies.

Trading the ToM Effect:

A common strategy involves taking a long position in a broad market index ETF like SPY or ES futures during the ToM window.

Example Trade: Long SPY for ToM Effect

• Date: End of August 2023, anticipating September's ToM.
• Entry: August 25, 2023 (last Friday of the month, 4 trading days before month-end). SPY closes at $440.00.
• Position Size: 1000 shares of SPY.
• Stop Loss: $438.00 (a 0.45% drop from entry).
• Target: $444.00 (a 0.91% gain from entry).
• R:R Ratio: 2:1 ($4.00 profit potential / $2.00 risk).
• Entry Logic: The ToM effect suggests upward pressure. We enter on the close of the 4th trading day before month-end, anticipating the start of the buying wave.
• Exit Logic: We plan to exit on the close of the 4th trading day of the new month (September 6, 2023).

Trade Outcome:

• SPY opens higher on August 28. It continues to trend upwards, reaching $443.50 by September 5, 2023.
• On September 6, SPY opens at $443.80 and reaches $444.20 before closing at $443.90.
• Result: The target of $444.00 is hit, yielding a profit of $4.00 per share, or $4,000 on 1000 shares.

When it Works: The ToM effect generally works best in bull markets or neutral markets with an upward bias. The underlying institutional buying pressure finds less resistance. When it Fails: This pattern can fail during periods of extreme market stress, significant geopolitical events, or unexpected economic data releases that override typical fund flows. For example, during the initial COVID-19 crash in March 2020, the ToM effect was completely negated by panic selling. A strong bearish trend can also overwhelm this upward bias. Always use a stop loss.

Intra-Week Seasonalities: The Monday Effect and Friday Close

Intra-week patterns, though less pronounced than ToM, offer subtle edges for day traders. The "Monday Effect" and the "Friday Close" are two such phenomena.

The Monday Effect (or Monday Anomaly) suggests that Mondays, on average, exhibit lower returns than other weekdays, sometimes even negative returns. Historically, Mondays have been the worst-performing day of the week for equities. Data from 1950 to 2023 shows the average Monday return for the S&P 500 is approximately -0.05%, while the average Tuesday return is +0.10%, Wednesday +0.15%, Thursday +0.08%, and Friday +0.06%. This anomaly has diminished in recent decades but still occasionally surfaces.

Theories for the Monday Effect include:

1. Weekend News: Negative news often accumulates over the weekend, leading to selling pressure on Monday morning.
2. Psychological Factors: Traders and investors may return to work with a more pessimistic outlook after the weekend.
3. Short Selling: Some argue that short sellers cover positions on Friday, then re-establish them on Monday, increasing selling pressure.

Conversely, the Friday Close often sees a slight upward bias, particularly in the last hour of trading. This "weekend effect" suggests investors prefer to hold long positions over the weekend, or short sellers cover positions to avoid overnight risk. This often creates a small buying surge into the close.

Trading Intra-Week Patterns:

These patterns are generally less robust for standalone trades but can inform intraday bias or position sizing.

• Monday Bias: On Mondays, experienced traders might reduce long exposure or favor short setups, especially early in the session. For example, a 1-min or 5-min chart showing a weak open on ES after a strong Friday close could signal a short opportunity, targeting a move to the prior day's low or a key support level.
• Friday Close Bias: Conversely, on Fridays, particularly in the final 60-90 minutes, traders might look for long entries on pullbacks in strong names like AAPL or TSLA, anticipating a slight rally into the close.

Example: Short NQ on Monday Open

• Date: Monday, October 2, 2023.
• Market Context: NQ (Nasdaq 100 futures) closed strong on Friday, September 29, at 15300. Macroeconomic data released over the weekend was slightly negative.
• Timeframe: 5-min chart.
• Entry: NQ opens at 15280. After the first 15 minutes, it forms a bearish candle breaking below the opening range. Enter short at 15275.
• Position Size: 2 NQ contracts.
• Stop Loss: 15290 (15 points above entry, just above the opening range high).
• Target: 15245 (30 points below entry, targeting a prior intraday support level from Friday).
• R:R Ratio: 2:1 (30 points profit / 15 points risk).
• Entry Logic: Combining the historical Monday weakness with a bearish intraday price action signal (opening range breakdown) on the 5-min chart.
• Exit Logic: Target hit or stop loss hit. Alternatively, if NQ shows strength after 10:30 AM ET, consider exiting earlier, as the Monday weakness often dissipates by mid-morning.

Trade Outcome:

• NQ continues to drift lower after entry. It reaches 15240 by 9:45 AM ET.
• Result: The target of 15245 is hit, yielding a profit of 30 points per contract, or $600 (2 contracts * $20/point * 30 points).

When it Works: The Monday Effect is more pronounced when negative news accumulates over the weekend or during periods of general market uncertainty. The Friday close effect works best in stable or slightly bullish environments. When it Fails: Strong positive news over the weekend can negate Monday weakness. Major economic releases on Monday morning can override any historical bias. Similarly, a significant market-moving event on a Friday afternoon can cause a sharp sell-off into the close, negating the Friday bounce.

Commodity Seasonalities: Energy and Agriculture

Seasonal patterns are particularly prominent in commodity markets due to their direct link to production cycles, weather, and demand fluctuations.

Crude Oil (CL) - Driving Season and Winter Demand: Crude oil exhibits clear seasonal tendencies. Demand typically peaks during the "driving season" in the Northern Hemisphere, which runs from late May to early September. This period often sees increased gasoline consumption, leading to higher crude oil prices. Conversely, refinery maintenance in the spring and fall can temporarily depress demand. Winter demand for heating oil also creates a seasonal bump, typically from November to February.

Example: Long CL for Driving Season

• Date: May 15, 2023.
• Market Context: CL futures (July contract) trading at $70.00. Invent