Dominant Fourth Quarter Patterns
- Posted by DynamicHedge
- on October 21st, 2013
The market has only three things it can do: annoy buyers, torment sellers, or frustrate everyone. Currently, the market is testing sellers and those who have not bought yet.
In any given year if you ask someone how the fourth quarter will play out, they will tell you the end of the year is usually bullish.
We want to get a little bit more specific than that.
So, we pulled the fourth quarter of every year since 2000 to see how the patterns play out. Below is a quarterly chart. The blue shading represents the fourth quarter of each year (October thru December period).
The bars themselves are not insightful. A green bar alone tells nothing of the path the market took on its way to a positive return. This means we need to take a look inside that gigantic quarterly bar.
For that, we use our alpha curves. The chart below is the output after each quarterly bar is unbundled and analyzed. We use all the daily bars which make up the quarterly bar to accomplish this. The algorithms take this data and generate curves based on pattern dominance: that special mix of uniqueness and repeatability. (Note: Month 1 represents October, Month 2 is November, and so on.)
It would appear from market feedback that we’re on the path of Pattern 1. As you can see from the chart, this pattern indicated that the quarterly highs will not be made until the end of the year. The second most dominant pattern was for a selloff in October followed by a recovery rally topping out in early December. The third most dominant pattern was a reversal month in October and choppy recovery. Finally, the fourth most dominant pattern calls for volatile chop and a rare negative fourth quarter performance.
What patterns do you see playing out in the fourth quarter? Is the concept of a rally into year end too obvious, or is it inevitable? If you would prefer to see the statistics table of this setup, click here.
As many people at Stocktoberfest already know, these algorithms are available at www.marketmemory.com. The product is still in Beta, but the adventurous among you are free to signup and give feedback on this amazing product.
Disclaimer: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please click here for a full disclaimer.
DynamicHedge is an equities, futures and derivatives trader based on the West Coast. He runs a long/short opportunistic relative-value strategy within a proprietary trading group. More
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