FYI | Dec 19 2023
The seasonal outlook for 2024.
For everything there is a season, and a time for every matter under heaven. [1]
It's that time of year when we are inundated with forecasts from market strategists and economists. But relying solely on one source of information can be problematic – it puts all your eggs in one epistemic basket. It's important to be pluralistic and seek out information from a variety of diverse and independent sources. [2]
As a technical analyst, I am less than enamoured with the conventional “fundamental” model of the financial universe. Behavioural finance and neuroscience show us that humans are far from being perfectly rational. We are emotional creatures, and emotions can catalyse trading behaviour. [3] Any explanation of financial markets that ignores or downplays the role of human psychology is deficient, possibly even misleading. [4] [5]
It’s time to acknowledge the significance of seasonality, which many financial academics and practitioners view as nothing more than a statistical coincidence. “Correlation is nothing without causation”, they pontificate! At long last, science appears to be catching up with what technical analysts have been telling us for more than a century. [6] As one recent scientific article concludes, the changing seasons may be a “fundamental source of variability in how people think, feel, and behave.” [7] If human psychology matters, then we should be open to the idea that seasonality in financial markets is a genuine phenomenon.
It is with deference to Homo Temporus, I produce two seasonal blueprints for the Australian share market for 2024. [8] Exhibit 1 shows these data series. The first is the all-years model which is simply the average of past years, while the second is the solunar model, which averages all the years that have a similar lunar configuration to 2024. It is this later model that is my preferred metric for mapping seasonal influences, for it captures not just the solar aspect but also the lunar aspect. [9]
What can we expect from this "simple" seasonal forecast? [10] Well, the Australian share market is likely to finish the year higher, as it has done two-thirds of the time since 1937. The solunar model suggests it could be an above-average year, but I am not so interested in the destination as the journey itself. On that front, the all-years and solunar models closely mimic each other except for two notable exceptions. The solunar model suggests the typical mid-March bottom will occur in early April. It also suggests that September and October this year will defy the typical malaise they usually experience.
In the interest of full disclosure, I must admit that seasonality is just one tool in my analytical toolkit, which I use to interpret the market's behaviour.
Daniel Goulding is a technical analyst with over 20 years of experience. He is the publisher of The Goulding Letter on Substack, and previously The Sextant Market Letter. His Twitter handle is @CopernicusASX. In the past, he worked as an Authorised Representative of the Townsville branch of RBS Morgans, and later Grow Your Wealth Financial Services Townsville.
Footnotes
[1] Ecclesiastes 3:1-8 (New Revised Standard Version).
[2] James Surowiecki, The wisdom of crowds (New York: Anchor, 2005).
[3] See, for example, John Goodell et al., Emotions and stock market anomalies: A systematic review, Journal of Behavioral and Experimental Finance 37, (2023), https://doi.org/10.1016/j.jbef.2022.100722.
[4] “We aren’t rational actors with a few quirks in our behavior— instead, our brains are collections of quirks. We’re not a system with bugs; we’re a system of bugs. Working together, under certain conditions, these quirks often produce behavior that an economist would call “rational.” But under other conditions, they produce behaviors that an economist would consider wildly irrational.” Andrew Lo, Adaptive Markets: Financial Evolution at the Speed of Thought (Princeton: Princeton University Press, 2019), 186-187.
[5] “Indeed, many psychological scientists now assume that emotions are, for better or worse, the dominant driver of most meaningful decisions in life”. Jennifer Lerner et al., Emotion and Decision Making, Annual Review of Psychology 66, (2015), 801.
[6] See, for example, Richard Wyckoff, William D. Gann: An operator whose science and ability place him in the front rank, Ticker and Investment Digest 5, No. 2, December 1909, 54.
[7] Ian Hohm et al., Homo temporus: Seasonal Cycles as a Fundamental Source of Variation in Human Psychology, Perspectives on Psychological Science, (2023). https://doi.org/10.1177/17456916231178695.
[8] A rigorous approach to seasonality requires charts that display the exact daily price progression whilst filtering out calendrical irregularities such as holidays.
[9] Variations in geomagnetism seem to affect market returns. Anna Krivelyova & Cesare Robotti, Playing the Field: Geomagnetic Storms and the Stock Market, Federal Reserve Bank of Atlanta Working Paper No. 2003-5b (2003). Stephen Puetz, The Unified Cycle Theory: How cycles dominate the structure of the universe and influence life on Earth (Denver: Outskirts Press, 2009).
[10] A historical average benchmark forecast outperforms a variety of popular economic variables from the literature. David Rapach & Guofu Zhou, Forecasting Stock returns, Handbook of Economic Forecasting 2, (2013), 328-383.
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