Seasonality in the Australian Share Market
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February.
Investors who have been around the markets for a while will have noticed that in certain months the market tends to perform better than in others (even if Mark Twain didn’t). With help from the chart below we will explore how the Australian market performs month by month over the course of an average year. The chart shows the mean annual performance of the Standard and Poor’s ASX 200 index since its inception in 2000. It is the Australian market’s benchmark index made up of the top 200 largest, most liquid stocks listed on the ASX. (Click on the chart to view it in high resolution).
There are events scheduled to occur at the same time every year which affect fund flows into and out of the market. The most important being company results announcements, corresponding dividends, and tax time. It’s not surprising therefore, that the market should exhibit seasonal variations. Let’s look at how the market performs each month and discuss likely reasons…
January – Summer holidays
Most of Australia is on holiday from the start of the new year until after Australia Day, 26th January. As a consequence, January experiences the lowest market volumes of the year and a market searching for direction. Reporting season is in February so active market participants will be positioning themselves in anticipation of expected company results.
February – Reporting season
February marks reporting season when the companies having a reporting period ending 31st December announce their results. It is usually a positive month overall but the market tends to roll over towards the end of month as stocks start to trade ex-dividend.
March – Ex-dividend trading
As March progresses more companies are trading ex-dividend and as that value is removed from share prices the market moves lower. The second half of the month sees dividends starting to be paid and cash put back to work in the market. The index reverses direction and trends higher into the end of the month.
April – Dividends paid
In April as more dividends are paid the market continues to rally. The market moves its focus to the big three banks ANZ, National Australia Bank, and Westpac, who report their March 31st half year results around the end of the month and trade ex-dividend about a week later. Active traders cycle out of the banks that have already given up their dividend into the big three. As a result, they (the big three) tend to rally into their results. Combined these banks make up approximately 18% of the index so when they move together, as they do at this time, it has a significant influence on the market.
May – Big 3 banks trade ex-dividend, Sell in May and go away
Sentiment in May is usually negative, hence the regularity with which “Sell in May and go away’ is repeated in the financial media. The big three banks start trading ex-dividend and can overshoot to the downside, falling by more than the amount of the dividend contributing to the negative seasonal trend.
June – Tax loss selling
The tax year ends on June 30th and investors clean out their portfolios with tax in mind. Stocks that have seen falls over the course of the year are likely to be sold down further to realise losses to offset against capital gains. This can result in potential bargains for vigilant investors.
July – New Financial Year, Come back on St Swithin’s day
The market usually performs more positively in second half of the year with July presenting opportunities to enter positions at a seasonal low. Hence ‘Come back on St Swithin’s day’, 15th July. It is also ‘confession season’, the time when some companies announce that their results to be released in August will be significantly different to current expectations. July tends to finish on a positive note as market participants position themselves in readiness for August reporting season and upcoming dividends.
August – Reporting season
The majority of Australian listed companies have a financial year ending 30th June and report together in August. Consequently, August tends to be a positive month with the market rallying through to the end.
September – Ex-dividend trading
September tends to be a choppy, slightly negative month. Dividend paying companies are trading ex-dividend taking the index lower. Investors are often nervous in September and October due to this period being when the market has crashed in the past.
October – Dividends paid
Despite it’s reputation October is usually a positive month. Dividends are being paid and the cash put back to work in shares. It is also the run up to the big three banks full year results around the end of the month and subsequent ex-dividend trading about a week later. Just as occurs in April there is a rotation into them from the other banks pushing them and the index higher.
November – Big 3 banks trade ex-dividend
Perhaps the seasonal saying for November should be ‘Sell and come back in November’ as it is characterised by a sharp decline before rebounding higher later in the month. November sees the big three banks trading ex-dividend after their full year results.
December – Santa rally
December often sees a sentiment driven rally into year end as we look forward to the holidays. It is a time when fund managers clean up their portfolios in readiness for end of calendar year reporting. There is also some positioning in anticipation of the next reporting season which starts only five weeks after the end of December.
Then the cycle begins again…
A word of caution…
Stock market seasonality can be a valuable aid to making market timing decisions. However, seasonality should not be used as a trading strategy by itself. There are other influences on the market that can potentially override any seasonal trends causing the market to vary significantly from its ‘normal’ seasonal behaviour.