Seasonality helps with stock selection

Everybody has probably heard about the end-of-year rally phenomenon by now. It affects the majority of stocks during the same time period, namely in the final weeks of the year. However, many people are unaware that individual stocks display unique seasonal patterns of their own. Is it possible to profitably exploit these?

Look at the following seasonal chart in this context. It shows the seasonal chart pattern of the stock price of Novo Nordisk, a Danish health care company.

The seasonal chart illustrates the average price pattern the stock exhibits in the course of a year. The horizontal axis shows the time of the year, the vertical axis shows the average price performance over the past 15 years.

Novo Nordisk, seasonal chart pattern over the past 15 years

Novo Nordisk exhibits a unique seasonal price pattern. / Source: Seasonax Web App

As you can see, Novo Nordisk is subject to a particularly strong seasonal uptrend between the end of January and the beginning of March – the time period highlighted in blue on the chart. Thereafter, a slightly upwardly skewed sideways trend ensures that lasts until October, followed by an autumn rally. The phrase highlighted in blue is particularly interesting, as large gains are generated in a very short period of time. This rally phase is a unique feature of Novo Nordisk – most other stocks do not display similar seasonal strength during this time period.

Following right on the heels of Novo Nordisk: Adidas!

Can individual seasonal patterns be observed in other stocks as well? The next seasonal chart shows the typical seasonal pattern exhibited by Adidas, the well-known German sports equipment manufacturer.

Adidas, seasonal chart pattern over the past 15 years

The stock price of Adidas typically rises in the spring and at the end of the year. / Source: Seasonax Web App

As you can see, Adidas also surges strongly in the spring – the time period highlighted in blue on the chart. If you look at it closely though, you will notice that Adidas starts to move up just as a pause in the seasonal rally of Novo Nordisk is beginning!

Doesn’t this suggest that it would make sense to move out of Novo Nordisk in early March and replace it with Adidas? In this way, you can systematically improve your odds of generating profits, buttressed by statistical evidence. Later, when the period of seasonal strength for Adidas ends, you move on to the next stock selected by this method, then the next one, and so forth.

I am strongly convinced that seasonal trends in individual securities still offer plenty of unexploited outperformance potential.