Seasonality occurs when, in a historical series (any historical series, from the external temperature to the financial markets), there are regular changes in the same period.
Just as in nature there is a seasonality in the temperature cycle, which rises during the summer and lowers in the winter, even on the financial markets we can find a certain regularity in the price trend.
Through the seasonality, calculated on the historical series of stock exchanges, commodities and currencies, we can know in advance if, in a given period, it is more probable to expect a rise or a fall.
How to calculate seasonality
Calculating the seasonality of a historical series is quite simple. In this example we will calculate the annual seasonality of the German DAX index
1. We must recover the trends of the DAX index, from 1 January to 31 December, of the past years (in this example we will use 10 years of data), of which we will calculate the average (chart 1)
2. Calculating the average of all the individual years, we obtain the seasonal graph (chart 2)
From the seasonal graph of the DAX, we can obtain valid information about the "habits" of this market. We can see, in fact, how:
1. the DAX tends to be bullish in the first part of the year, from week 5 to week 22, from early February to late May;
2. The DAX tends to be bearish from the end of May (week 22 of the year) until the end of August (week 34), that's where the famous saying "Sell in May and go away".
3. The DAX returns to be bullish in the final period of the year, confirming the existence of what investors call "Santa Claus Rally".