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Wednesday, November 28, 2007

Seasonals Part II: When Seasonal Tendencies "Work backwards"

We finished up yesterday talking about when the market moves in exactly opposite move of a seasonal pattern. We call this a "contra-seasonal move." And obviously, this doesn't make the investor or trader any money.

But again, the question we have to ask ourselves is why do contra-seasonal moves happen? The happen due to outside forces forcing the market to move opposite to their normal seasonal patterns. With the stock market at the current moment, we are in the middle of a contra-seasonal move. And what is causing this? The sub-prime mess. This crisis is strong enough to make a pattern that is extremely regular, and extremely strong to move in the opposite direction, and there is no telling how long it will last.

There is a bright side. These types of moves do not happen very often. But when they do one must pay attention. It's telling us that the whatever is unfolding in the market at the current time is news-worthy enough to cause the market to abandon all normal patterns. Later, I will talk about how to only buy into a market once it has confirmed that the seasonal pattern is a good one. Therefore, we can usually avoid getting entangled in a contra-seasonal move. For example, this year I was telling everyone that I was awaiting the November rally so I could start buying again. But the November seasonal rally never came. Instead, we had a contra-seasonal move. But since I do not buy until the market would have confirmed that the seasonal move was going to be a good one, I have not lost any money in recent purchases this month.

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