Since macroeconomics first began, experts have debated whether or not seasonal cycles have any effect on the business cycles. I would rather study human behavior patterns to see how they influence stock prices on a regular basis, writes AJ Monte CMT.
Most people understand cycles in terms of time, especially when it comes to the way we react to the seasonal cycles (i.e. Winter, Spring Summer and Fall).
However, few traders understand how these particular cycles influence the stock market, and even fewer know how to trade these cycles. While my goal has always been to help people maximize their profits through proper risk management strategies, I also believe a good risk management plan should start with a fool proof system for selecting the right stocks, as well as knowing when to buy them.
In 1983, Hollywood came to Wall Street. I was a floor trader at the time and I was lucky enough to be called upon to be an extra in a very well-known movie called “Trading Places.” If you had the pleasure of watching this film you will know the story line involves a homeless street hustler, played by comedian actor Eddie Murphy, and an upper-class commodities broker, played by Dan Aykroyd.
Both of these characters unknowingly get caught up in a bet which ultimately winds up being a big win for the underdogs.
I often refer to this movie as an educational piece because there are a couple of lessons to be learned here.
First lesson is the fact that the heroes in the film made their money by shorting the orange juice market. If you’re unfamiliar with short selling, let me just say, it’s a strategy that allows you to make money when prices are falling.
The second lesson has to do with trading the cycle. Director John Landis actually modified the script to help the viewer get a better understanding for commodities trading, so they introduced the Crop Report. As in real life, floor traders eagerly await news put out by the U.S. Department of Agriculture, and then trade in line with that news, in an effort to make a profit.
As you might imagine, weather patterns have a direct impact on the price of orange juice as well as other commodity markets, such as coffee, sugar, cocoa and soybean futures.
Common sense tells us, if there’s a drought, prices will rise as a result of crop damage. The same would be true if these crops suffered from excessive floods brought about by heavy rain storms. This might seem obvious to many, but what about the not so obvious cycles…such as, consumer buying patterns?
Every year I have a lot of fun with our subscribers, especially when it comes to implementing what I call “The Hershey Play.” What I find most interesting is how The Hershey Company (hsy) tends to rally from October to the end of December.
Why does this happen? Well, a lot of it has to do with consumer buying habits. In general, people buy more chocolate candy during Halloween, Thanksgiving, Christmas and Valentine’s Day than any other time of the year.
So, if the technical buy signals show up on the charts in October, I will look to buy the stock and hold it with a trailing stop for as long as I can through the holidays. Keep in mind, I will not get into a position like this unless, or until, I see a convincing buy signal. While this is not a 100% guarantee I will make a profit, you can see after looking at a long-term chart, the majority of the time the stock goes up during this time period. Rarely will I hold this position past February 14 because most traders will have gotten out before then.
While living in Florida, I also noticed a strong cycle in stocks like Home Depot (HD) and Lowe’s (LOW), as they tend to rally from October to the December.
According to the National Oceanic and Atmospheric Administration, 96% of the major category 3, 4, and 5 hurricanes occur in the 8-week time period between mid-August and mid-October. However, storms have also been known to hit the U.S. as late as December.
As homeowners race to purchase batteries, lanterns, generators and building supplies, the traders are looking to position themselves ahead of the money flow. As we look at the weekly charts for stocks such as these, the evidence clearly shows that prices go up more times than they drop during this time of year.
Watch what people buy: Whether I’m at the park with the family or just shopping with my wife at the mall, I’ve always enjoyed people watching. While I find this to be very entertaining, I will admit I take this activity more seriously than most.
Rather than watching what people are doing, I tend to focus on what people are buying. We are all creatures of habit and if you think about some of the activities you participate in, on a regular basis, just magnify that same behavior by 100,000, because chances are you are not the only person in that behavior cycle.
My number one rule for investing and trading is simple: If you want to make money in the market, steer your money in the direction the money is flowing. This will ensure you are trading in the direction of a trend that can provide an opportunity for you to profit in the market.
Happy Trading.
Visit The Market Guys video library where you will find short educational videos called “Market Shots.” The length of each video ranges between 6 to 8 minutes long. The Market Guys subscriptions here.
