Stock Market's Seasonal Effect Influences Currency Market

Wall Street is known for its famous sayings.

"Don’t fight the trend." "The trend is your friend." "Don’t catch a falling knife," etc.

However, there’s another one that I want to talk to you about today and it’s the Wall Street saying that says, “Sell in May and go away.”

This phrase comes from the study of seasonal aspects upon the stock market.

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You see, in more years than not, stocks will tend to peak out in early May and not bottom until mid to late September.

Check out this chart below and you’ll visually see what I mean.

“Sell in May and Go Away” Visualized (Story continues below chart.)

Click to enlarge

There are many reasons for these seasonal trends. For instance, many investors are more apt to be tucking away money near the calendar year end as they think about their “tax year” and they’re also doing the same thing once again right before the April 15 tax deadline too.

So you’ll notice that March and April tend to be strong due to the “tax day” effect and November and December tend to be strong stock market months due to year-end tax planning and also for the fact that many consumers spend a lot of their money for the year as Thanksgiving and Christmas, etc. approach.

Therefore, this causes corporate America to generally do quite well during these times which tends to push up the price of their stocks then too.

Therefore, all things being equal, the stock investor knows that he’s got a statistical edge on their side if they invest more around September-October and ride through to next April-May and either take some profits then and reinvest in the following September-October period.

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Now this doesn’t mean that every year is this way or that it’s always that predictable. But if one does this over long periods of time (a 10-30 year investing period), they’ll find that there’s a lot of truth to this.

Well, as you know, stocks influence currency movements a lot. Therefore, as stocks boom from October to around May, the risk-on currencies tend to perform the best (like the Australian, New Zealand and Canadian dollars).

But in the bust times from May through October, the risk-off currencies tend to have the edge. These are currencies like the U.S. dollar and Japanese yen.

So these are things to keep in mind when you’re trading currencies in the forex market. Be mindful of what month you’re trading in and what currencies are likely to have a statistical edge during those times.

And since we’re almost to the end of April and beginning of May soon, we know that stocks are very likely to dip during this period which would cause the dollar and yen to come alive at those times.

We also know that at the same time, some of the best currencies to short when that all happens are the commodity-currencies which tend to be very “stock market sensitive.”

So in putting all of that together…in the upcoming five months or so, if stocks get weighed down as usual, then shorting pairs like AUD/JPY, AUD/USD, NZD/JPY, NZD/USD, CAD/JPY and buying a pair like USD/CAD can have a statistical edge during those times.

Keeping seasonal dynamics in mind can give you another additional edge in your trading that you may not have had before…helping you to stack the cards in your favor. So keep these things like this in mind when you’re trading because the professional traders sure will be watching things like this.

Happy trading!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.