Vic's worst months have always been during the summer. In the good old days, when he traveled each summer to Soros’s palatial estate in the Hamptons, invariably at the Saturday party there would be 10 other hedge fund managers controlling trillions of dollars among them. All would be making huge profits and all would have opposite positions to Vic. And all would be planning to double up at the Monday opening. What a way to spend a weekend in the country.
As a result, Vic began to bifurcate all his prediction programs into summer patterns and non-summer patterns. But even that's was not enough. Last summer, when the market swooned from 1100 to 850 in just six weeks, one of the worst continuous drops ever, Vic fought it a good part of the way down. As Soros used to say, just one or two days more like that and they would have had to carry Vic out. This summer, Vic therefore took the extreme measure of planning a trip to the African bush. No cell phones, and all positions closed out before the trip.
Vic continues to ponder the summer problem, though. Recently it struck him that during the summer, the easy ways of making money go into hibernation. There just aren’t enough players around to allow wise guys and those with fixed systems to take their regular energy quotient out of the market and still pay for all those enormous fixed costs. Reversals give way to trends, and systems like buying the opening range breakout stop working.
This apparent seasonality seems inconsistent with the theory that people act rationally to take advantage of all known regularities in decision-making regarding uncertain future events. What causes this seasonal tendency?
Spec Philip J. McDonnell comments that a cynical observer might attribute the tendency for markets to uptick at the end of a significant calendar period to professionals having a built-in bias to push prices higher. Money managers, in particular, benefit if asset values are tweaked higher because management fees based on assets values will be larger. Margin accounts will have more buying power. The financial statements (an end of period snapshot really) of trading firms and market makers will be stronger and support larger loans from their bank.
“I also believe there is a real seasonal effect going on here,” McDonnell says. “Many payments are due on the 1st of the month. Thus the period 2-5 days prior to the end of the month can show a seasonal weakness. Years ago I did a workout which showed a strong NYSE weakness exactly 5 days before the end of month. That was when the settlement period was 5 days so you would get your money on the last day of the month. There are also inflows into funds on the first of the month. Strength in the final day may simply reflect anticipation of this. Money managers may try to reduce cash in anticipation of even more cash coming tomorrow."