Investing in the 4 Seasons of Pain and Gain
Investing in Just About Anything Is a Seasonal Sport
“Big money is made in the stock market by being on the right side of the major moves. The idea is to get in harmony with the market. It’s suicidal to fight trends. They have a higher probability of continuing than not.” -Martin Zweig
Sure there are all kinds of investing. You could be a value investor like Warren Buffett. He buys great cash flowing companies for cheap prices and bets on the long term trend of continued corporate and economic growth.
You could be a short seller that makes money when the stock market is trending down. Or, you could be the kind of investor that buys the short-term dips and rides them up when the trend changes.
You could even do crazy things like short the VIX and pray a big crash doesn’t light you up like a Christmas tree.
You might be a real estate investor that buys for the long term and rides the inflation of prices and rents, or maybe you’re a house flipper that buys low, fixes up and sells high.
It doesn’t really matter what you’re putting money to work in, the old rule still applies: “The trend is your friend, until the end.”
All good investors are looking for trends and riding the waves. It might be trends in asset prices or larger macro economic trends, but they are trends nonetheless.
Especially, for speculators and traders seeking momentum, trends are their masters.
Good Traders Are like Surfers
“The techniques I developed for studying turbulence, like weather, also apply to the stock market.” -Benoit Mandelbrot
Good traders do research and look at the surf report telling them there might be waves on a particular day. They paddle out and patiently wait in the lineup, scanning the horizon for any swells that might be coming their way.
When the swells do come, they don’t take just anything. They want to pick the best wave. The wave that will be the biggest, cleanest, and allow them to get barreled out of their minds.
Good traders and investors don’t just put their money into anything. It’s got to meet a rigid set of standards. And just like the waves at your favorite break are seasonal, so are the best investing opportunities. They come and go in seasons.
Spring: The Big Thaw
“I believe, in the stock market — that’s one of my fields — that most people are irrational. And to be irrational, you can be irrational in so many different ways that, practically, the result is indeterminate.” -Paul Samuelson
In the spring, things are just starting to come out of winter. If you were to look at a chart of real estate sales, stock or crypto prices, you would see things going more or less, SIDEWAYS.
There wouldn’t be any big swings up or down. There won’t be a whole lot of volume in buying or selling. Nobody is sure if the prices are going to move up or crash down again. Investors are a little gun shy here.
Traders are not trying to pick the bottom or get the asset for the cheapest possible price. They want to buy something at the “right” price and that is the price that will begin to move in the direction they want.
People who focus on trying to pick bottoms will think something is “too expensive” and will thus never buy it. This causes them to miss out on great opportunities.
Good investors avoid operating in the spring. The market is still too cold and everyone is undecided. There are few good setups and mostly a lot of choppy noise.
The Bulls are still locked up in their pens, and the Bears are wandering the streets looking for scraps. It is a desolate landscape.
Summer: Running with the Bulls
“The data strongly suggest that very good years in the U.S. stock market are followed by more good years.” -Barry Ritholtz
This is where the big boys come out to play in the sun.
If you were to look at a chart here, you would see it moving up nicely. The money is flowing in. The market is warming up and people are getting excited.
The chart would be in a clear UPTREND.
Volatility is low. Prices are not moving wildly up and down, mostly just…up. It almost looks like a staircase to heaven.
Volume is picking up as the money comes in. People watch the news or talk to friends and get excited about investing money.
The Bulls are on the loose and the Bears are running scared.
Eventually it becomes a feeding frenzy. The excitement builds into euphoria. All the “experts” come out of the woodwork, many of which first started investing this very summer.
People are taking out loans to invest, mortgaging their house, investing their student loans or even their kid’s college tuition into the markets. They might even be investing their last $100 in the hopes of hitting it big.
As the dog days of summer drag on and it turns into Indian summer, the price starts to go from warm to HOT.
The general consensus is that it will never end. Or at least that “I will be long out of the market before it does!” But it’s hard to exit a market that’s making so much money isn’t it? Especially if all you’ve ever known, is the warm summer sun.
It’s really moving up now. If you were to look at a chart, it would look PARABOLIC.
The Bulls are now rampaging through the streets, goring and trampling any Bears they see into submission. Any attempted shorts get liquidated and any Bear is killed on sight.
This is when skilled traders know, summer might be coming to an end and fall is probably around the corner.
But smart traders have been storing away money for the coming winter. They’ve been taking profits and selling into the madness, or they’ve tightened their Stops and made sure to reduce their risk. They’ve made game plans of where to get out of the market and how…just in case.
Good investors know that season’s change and change is the only constant.
Fall: The Market Cools
“When the weather changes, nobody believes the laws of physics have changed. Similarly, I don’t believe that when the stock market goes into terrible gyrations its rules have changed.” -Benoit Mandelbrot
Things are starting to cool off a little.
The Bulls are getting tired and the Bears begin to come out of hiding.
If you were looking at a chart, you would possibly see some big moves up and down for the first time in a long time. Volatility comes back and the market starts to move in weird ways.
Instead of a nice, beautiful staircase to heaven, it starts to look more like seismograph during an earthquake or an EKG of someone having a panic attack.
People start to get a little nervous but many are still optimistic about what the future holds. Instead of euphoria, there are a lot of questions in the minds of the average investor. “What is going on?” “Why is it going down?”
It’s not cold yet, but it sure isn’t as warm as it was in the summer. The colors are changing. The leaves gently fall from the trees. The wind has just a little chill in it.
Eventually though, prices start to make lower highs and lower lows. If you were to look at a chart, the 50 day moving average might drop below the 200 day moving average.
The price then pierces it’s 200 day moving average and has trouble recovering. Eventually, the 200 day moving average starts to aim down. Instead of a nice stairway to heaven, it starts to look like a broken elevator to hell.
Winter is coming.
Winter: The Bears Show their Teeth
“I was 5 years old when the stock market crashed; I lost everything.” -Dick Van Dyke
Long before the first snowfall, the skilled traders are gone. Once the momentum ceased, they quietly got off the train with their suitcases full of cash. Like a massive bird migration, they all headed to their winter homes in warmer climates.
For the rest of the population, they can now feel the wind-chill, and it cuts right to the bone. Fear begins to set in and then panic.
Looking at the chart, most of the price action is below the 200 day moving average. The staircase is going down. All the short-term moving averages are sinking below the long term moving averages.
Volume begins to spike on the down days, and the few up days are seen with hardly any buyers.
There is a feeling now that it’s all coming to an end and that maybe it will never come back. (Indeed in the stock market and in the crypto world, there are some assets that really will never come back).
Panic starts to set in. If people didn’t sell in the first frost, they’re selling now!
The Bulls are running scared and the Bears are chasing them down.
Looking at the charts it’s dropping like a rock on huge volume. Prices are making new 52 week lows every day. Investors are now running for the hills trying to get out.
The remaining stragglers and bag holders are shell-shocked.
They are like the deer who’s neck is caught in the bear’s jaws- motionless, staring blankly into the heavens, at the golden staircase that once was. They have now accepted their fate.
It is complete and utter CAPITULATION.
The Bears sink their teeth into the rotting corpse of the market and extract any remaining bits of flesh and sinew from the bones, until it is picked clean.
All that remains of summer at this point is a distant memory of it’s warmth and splendor.
Rebirth
“Stock market corrections, although painful at the time, are actually a very healthy part of the whole mechanism, because there are always speculative excesses that develop, particularly during the long bull market.” -Ron Chernow
The value investors will come out in the tail end of winter and the spring and start collecting scraps of good, quality assets. It is a seasonal cycle after all and the survivors will rise again in the summer.
The traders will wait until summer, when a trend direction has been established and their probability of profit is high. They will ride the waves again.
Like the weather cycle, markets also move in cycles. It’s important to know what the weather will be like once you step outside. It’s also important to know what season the market is in and understand that it will change, sometimes rapidly.
Conclusion
What is your favorite season?
It’s good to know if you are a Bull or a Bear of course. You don’t want to be betting against the market.
Bulls make money when the market goes up and Bears make money when the market is going down. People can make money either way as long as there is a trend.
But you also want to know if you’re an investor or a speculator. A value investor or a trader.
This will also help you know what season you want to be playing in.
Value investors are contrarian by nature and typically avoid the hot summer. It’s hard to find good deals on top quality assets as they are bid way up in price. In the winter and spring, these investors thrive, buying what they want at a massive discount.
Trend traders like the summer. The price is moving with real momentum, volatility is low and trading is almost brainless. They live for these markets, they wait for them and then go big.
Trying to trade in the spring or fall can be difficult unless you are a very short-term scalper.
For most traders, trying to operate in these “off season’s” ends up being “Death by a thousand cuts.” You can take many small (or even large) losses and watch your account get liquidated little by little, until you are left with a meaningless sum.
Even with good risk management, you can end up overtrading. The temptation is there for traders to play outside of summer. The allure of making money all the time is real, and yet it’s false.
Traders can be far more successful in the summer when markets are trending strongly and they can do it with far less work than trying to trade in any other season.
Remember, cash is a position, and in certain seasons, it can be a far more profitable one.
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Disclaimer: This article is for educational purposes only and is not a solicitation to buy or sell securities or an offer of personal financial advice. It is offered with the understanding that the author is not engaged in rendering legal, tax, accounting, investment planning, or other professional services. It is suggested you seek out the help of a financial professional before making any investing or personal financial management decisions. The education contained in this article may not be suitable for everyone — use it at your own risk.
