Potential best-performing stocks for December: A seasonality analysis

Stock trading involves multiple analysis methods to evaluate trends and make informed decisions. Traders and investors often rely on technical, fundamental, and derivative analyses to guide their choices. However, another often underrated form of analysis that can be particularly useful is seasonality analysis, especially for predicting potential best-performing stocks for December.

Seasonality analysis uses historical patterns to predict how a stock or market will perform in a given timeframe, usually based on the time of year—a relevant technique now as we approach the year's final month. Profit Pulse explores the concept of seasonality analysis, how it works, and how to apply it to assess Nifty50 stocks to identify potential best-performing stocks for December.

Why seasonality analysis

Before we discuss how to apply seasonality analysis to identify potential best-performing stocks for December, let’s analyse the current market environment. The Nifty50 has experienced a sharp reversal recently, moving from 23,300 points on 21 November to 24,300 points on 25 November, supported by the 200-day exponential moving average (200DEMA) and suggesting strong bullish momentum.

The 200-day Exponential Moving Average is a key technical indicator used by chartists to assess the long-term trend of a stock. When an asset's price is above the 200DEMA, it suggests a bullish trend, indicating that the asset has been on an upward trajectory for a prolonged period. Conversely, when the price is below the 200DEMA, it may signal a bearish trend. This makes the 200DEMA an essential tool for determining market cycles.

A seasonality analysis can help assess which stocks might outperform in December, considering both broader market trends and historical seasonal patterns.

Seasonality analysis studies how certain assets—stocks, commodities, indices, etc.—perform during specific months or seasons. The logic behind this analysis is simple: historical trends and patterns often repeat themselves and analysts can identify trends that occur consistently during certain months by looking at past performance data for a particular stock.

Traders use seasonality analysis to forecast the likelihood of specific outcomes in the future based on the performance trends from past years.

For example, December is traditionally considered a strong month for many global markets due to end-of-year rallies, the holiday season’s impact on consumer spending, and institutional portfolio adjustments. However, some stocks might be better positioned to benefit from this than others. Seasonality analysis can help pinpoint potential best-performing stocks for December.

How seasonality analysis works

Seasonality analysis typically works by evaluating the historical performance of a stock for each month since its listing date (or since 1996, for which data is available). These are the key elements to focus on when analysing stock performance through seasonality:

1. Monthly average performance

This refers to a stock’s average return in a particular month over a long period. If a stock has historically shown an average return of +5% in December, it could be a strong candidate for a positive performance in December, assuming other conditions remain favourable. (Note: India’s benchmark Nifty50 and Sensex indices have slumped since climbing to a record high in September.)

2. Positive ratio

The positive ratio measures how often a stock has ended a month with higher returns. A higher positive ratio indicates that a stock has consistently performed well during a particular month. For example, if a stock has a 70% positive ratio for December, it suggests that in seven out of 10 years, the stock closed higher in the final month of the year.

A high monthly average return and a high positive ratio make a stock an attractive candidate for seasonality-based investing. Stocks that exhibit both high returns and high success ratios for a certain month are more likely to perform well in that month in the following years as well, making them good prospects for trading.

Applying seasonality analysis to Nifty50 stocks

Applying seasonality analysis to the Nifty50 index helps identify potential best-performing stocks for December. The stocklist below has been sorted based on the best average performance for December.

Seasonality analysis isn’t foolproof

Like any other form of analysis, seasonality analysis is not foolproof. Past performance does not guarantee future results. While historical trends can provide valuable insights, they should not be relied upon solely.

The broader market trend plays a crucial role. If the market is experiencing a downturn or significant volatility, even historically strong December performers may not follow their usual pattern.

For December, seasonality analysis offers a unique lens through which traders can assess potential top-performing stocks. Investors can enhance their decision-making process by focusing on stocks that have historically outperformed in December and combining this with an understanding of the current market trends.

As always, seasonality analysis should be used alongside other forms of analysis—technical, fundamental, and market sentiment—to create a well-rounded trading strategy.

Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Brijesh Bhatia has over 18 years of experience in India’s financial markets as a trader and technical analyst. He has worked with the likes of UTI, Asit C. Mehta, and Edelweiss Securities. Presently he is an analyst at Definedge.

Disclosure: The writer and his dependents do not hold the stocks discussed here. However, clients of Definedge may or may not own these securities.