SAN FRANCISCO MarketWatch -- Mark Twain famously observed that October is one of the most dangerous months to speculate in stocks. The others, he added, "are July, January, September, April, November, May, March, June, December, August, and February. Maybe the humorist was using a different calendar. There's ample evidence that the stock market's performance is tied to the time of year and even the days of a month. Seasonal patterns persist not just in the U.

Investing Based on Seasonal Trends

For instance, the quarter is coming to a close and the market's worst six-month stretch is on the horizon. Those calendar effects have influenced stocks before, and you can expect they will again. Stocks, as they always do, follow money flows and fluctuate in ways that echo the past. What's behind this seasonality? Human nature, said Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac, a weathervane for the market's calendar-based moves.

If you recognize these patterns, you can increase the odds of matching or even outperforming the market with considerably less risk. One of the most visible calendar patterns is the so-called Halloween effect, also known as the "Sell in May" indicator, which holds that stocks typically are weaker during summer than winter. Another pattern appears in the final trading days of the month and the first trading days of the new month.

A subset of that is the "first day of the month trade" -- buying and selling a market index on the first trading day of the month and not going back in until the first day of the next month. Other market biases surface as well: Stocks tend to be stronger during the middle of the month, particularly over the five trading days before St.

Patrick's Day, March Stocks also tend to rise in the two or three trading days before a market holiday, such as July Fourth or Christmas. To be sure, many skeptics dismiss calendar effects as random events, giving them about as much predictive credit as astrology. Naysayers have even more reason to disbelieve after the past couple of years. You'd have compounded the injury by selling then and sitting out until November as stocks recovered. Accordingly, use these indicators as a market guide, not a GPS.

You have to look at them in the context of what else is going on in the market. Moreover, individual investors tend to lack the discipline such trading strategies demand. If you do attempt seasonally driven trades, venture just a small portion of your money.

And be wary of "experts" peddling timing systems that purport to outperform the market year-in and year-out. The merit is to come close to the market's return while incurring below-average risk.

May, June and August typically have been lackluster, with September especially treacherous, according to the Stock Trader's Almanac. In fact, for the past 20 years or so, dreaded October also has been a generally winning month for the markets, suggesting that traders may be trying to front-run the traditional year-end buildup. Traders start to focus on bonuses, holidays, vacations, he said, adding that "There are a lot of tailwinds behind the market.

The pattern continues into January and through the spring, with the first month's performance tending to be a barometer for the rest of the year. The Halloween effect's notoriety should have eliminated it as an opportunity long ago, or in the words of Yogi Berra: But it has persisted in the U. In this strategy, you buy on the last trading day of the month and sell after the first three or four days of the next month.

Why has this approach succeeded? Again, you're following the money. Money managers are "window-dressing" portfolios at the end of the month to improve returns, while pension funds and automatic retirement plans are also contributing to buying demand.

The best illustration of this indicator's power comes from "The Seasonality Timing System," backed by research from veteran market strategist Norm Fosback, editor of Fosback's Fund Forecaster newsletter. In an interview, he added: According to Hulbert's research, a portfolio that switched between the Wilshire Index and day T-Bills on the seasonality system's signals gained 4.

Importantly, you took only one-third of the market's risk. That makes sense in a declining market, when missing the worst days would have been to your benefit. What about a bull run?

On a risk-adjusted basis, that puts the timing system ahead of buying and holding, Hulbert said. You wouldn't have beaten the market, but you would have earned a return pretty close to the market's average.

And you'd have captured this performance without suffering through the market's unpredictable swings. If the turn of the month effect is due to month-end paycheck, pension contributions and other sources, what accounts for the bullish sessions leading into market holidays? Fosback attributes this to the unwillingness of short-sellers to leave positions exposed to market-changing events over holidays.

Fosback added that the seasonality system seems more valuable nowadays for smaller stocks, and suggested that investors starting out might consider a small-cap ETF that tracks the Russell Index RUT, A subset of the turn of the month effect is the "first day of the month" trade, where you're in the market for one full day each month and in cash for the remainder of the month.

Not so in bull markets. From the first trading day of until Dec. Buy and hold, meanwhile, would have delivered a yearly gain of So be careful when utilizing this or any other trade and pay attention to broader market trends and technical analysis.

Still, the odds are in the first-day trade's favor. Jonathan Burton is a MarketWatch editor and columnist based in San Francisco. Follow him on Twitter MKTWBurton. By using this site you agree to the Terms of Service , Privacy Policy , and Cookie Policy.

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Bulletin Winnebago's stock on track to open at 3-mo. Until New York Markets Open Market Snapshot Analyst Ratings. Home Investing Stocks Weekend Investor Get email alerts. By Jonathan Burton Asst. Halloween effect "Sell in May and go away" is a time-worn market adage, referring to the period from May through October that has been the weakest for U. Turn of the month indicator In this strategy, you buy on the last trading day of the month and sell after the first three or four days of the next month.

Fosback created the system in the mids, based on data going back to First day of the month trade A subset of the turn of the month effect is the "first day of the month" trade, where you're in the market for one full day each month and in cash for the remainder of the month.

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