Trade wars, US elections, rising interest rates and debt fears. There’s plenty for investors to worry about. Yet many of these market risks are long standing or were well known ahead of time. The market focus on risks may have as much to do with the time of year as the underlying fundamentals.

There are many studies that show there is a seasonality to share market returns. Andrew McCauley at Veritas is one of my favourite quants. His analysis of the Australian share market since 1955 showed the period from May to October underperforms the period from November to April. Interestingly, the same seasonal bias holds for many northern hemisphere market measures, including the US S&P 500 index.

The numbers don’t lie – the bias is real and statistically significant. Explaining why it occurs is a completely different story. Given the effect occurs in both hemispheres, it’s not feasible that it relates to weather patterns or seasons. Tax years also vary from country to country, making it an unlikely cause. And the pattern existed before there was a high degree of international investment, suggesting the activities of one nation or group is not responsible.

Whatever the reason, we are now at the seasonal turning point. A number of factors that are of concern to investors may resolve, or invite a different interpretation. The US midterm elections are a case in point. Investors appear quite comfortable with the change in control of the US House of Representatives, despite the problems that Republicans will now have in prosecuting their stimulus agenda. Instead, the market narrative revolves around the potential for US rates to remain lower for longer. 

This positive interpretation of a lowering of growth prospects could indicate a sentiment shift, and may reflect the move into a more positive period for shares. This has important implications for Australian investors. If US markets resume their upward march, it’s likely local markets will follow. And the Australia 200 index is right in the middle of a decision zone:

If price action is primary evidence, this longer- term chart of the index gives clear guidance on the important levels. For at least three years, the support and resistance levels at 5640 and 6000 have proved important, and with the market sitting about halfway between the two, there is potential for a clear signal of the market direction over the coming days and weeks.

Seasonal effects do not kick in every year, but if sentiment is shifting to positive, we could soon see a test of the 6000 level. A move up through this point would suggest positive momentum into year-end, and a potential test of the post GFC highs around 6375.