Market Seasonality: November to April a Good Period


Like many market adages, the phrase "Sell in May and go away"
carries with it an uncanny historical bias to substantiate it.
Typically, conjecture doesn't mature into adage without this being
the case, but market seasonality still remains one of the more
impressive market trends in terms of its magnitude and longevity.

We've discussed seasonality many times over the years and as we
enter another of those seasonal periods,November - April, we want to
revisit the subject today.Years ago I began using the reference
tool, Stock Trader's Almanac,published by Yale Hirsch, and for years
this has been a fantastic source of entertainment and information on
the stock market.

The premise of their "Market Seasonality" study is essentially that,
historically speaking, the market performs far better during the
November through April time period than it does from May through
October. On its own, that isn't a particularly profound statement or
a particularly bold assertion, but when we examine the magnitude
with which this effect has been chronicled over the years it becomes
a very significant underpinning indeed. Consider this,If you were to
buy the Dow Jones on May 1st and sell it on October 31st each year
since 1950, you would have been in the red for the past 5 years! As
a matter of fact, as you will see below, based on hypothetical
portfolios starting at $10,000 based on the price of the Dow Jones
Industrials starting in 1950 the average annual compounded return
for the seasonally strong periods (November through April) is more
than twice the total return for the seasonally weak period (May
through October).

The Six-Month Switching Strategy mentioned above for the Dow Jones
that begins in 1950 and now shows 56 years of history (57 years for
the seasonally weak period). On a compounded basis, a theoretical
$10,000 initial investment in 1950 is actually up only $331
during the May 1-October 31 period using data thru Oct. 31, 2006;
that is an annualized compounded rate of return of roughly 0.06%. On
the other hand, in looking at the seasonally strong period between
November 1- April 30 each year, an identical $10,000 initial
investment grew to $534,595 at an average annual rate of 7.55%
on a 6-month compounding basis.

There's no question that the November to April period has provided
substantially better returns. Whether you average it out, annualize
it, compound it, or complicate it further; there is clearly a wide
spread between an average 6- month return of 7.55% and 0.06%. Taking
this a step further, the strong six- months of the year have
actually kept pace with the average annual compounding return of the
Dow overall since 1950. The Dow began 1950 at 200.13 and closed
October 2006 at 12,080.73, an average annual compounded return of
about 7.5%. The seasonally strong six- months of the Dow have
essentially the same historical return, and have done so
while having been invested only 50% of the time; leaving the other
50% of the year to be invested in risk-free vehicles to enhance
returns further.

Along the way there have been down periods in the seasonally strong
stretch and up periods in the seasonally down period, but what we
are referring to is simply a historical bias. As a matter of fact,
this most recent six month weak period ending October 31st was up
6.2% with more than half of this return came during the month
of October. Consequently, the last months rally in the Dow has
carried the index to new highs on the Point & Figure chart at
12,150, which is above the top of the ten week trading band. As
well, the weekly momentum of the Dow has been positive for the past
14 weeks. This suggests that we could see a near-term consolidation
in the Dow heading into the seasonally strong six months. While on a
longer term basis, we remain in a column of X's with respect to our
main coach suggesting an environment that is conducive to long plays
for capital appreciation. Market seasonality is not the end all, be
all, for market risk management but the bias is clear and begs your
attention.


Market Seasonality Notes:

1· Most investment professionals would quickly identify the most
recent Bear Market to include, at a minimum, the years 2000-2002.
Those who only invested during the seasonally strong periods of
those years however, actually escaped with profits!

2· Over the last six years the Dow is up 23% cumulatively during the
seasonally strong stretch, and down 8% during the seasonally weak
period.

3· During the May to October periods there are 23 out of 57 years
that finished down in this study, while there were only 12 down
years out of the other six months – and only 1 in the last 20 years.

4· There have been only two times when the November 1st to April
30th
period has lost more than 10% (1969 and 1973, while the S&P also
lost more than 10% in 2000) but with respect to the May to October
time period there have been ten losing efforts that were costly to
the tune of 10% or greater; or five times as many.

5· There have been ten times in the past 25 years that the periods
from November to April have posted a double digit return while five
out of the ten times this strong period returned more than 20%.

Again, this study is not the end-all for risk management, but the
study is very interesting and does expose a bias that many investors
are not aware of. It is no coincidence that we often see the market
bullish percents find bottoms in the September-October time period,
and ready for reversals near the beginning of the seasonally
strong run. Today, however, we see a different picture as the NYSE
Bullish Percent remains in a column of X's after having reversed up
back at the end of June. As for our short term indicators all four
of them are currently positive, albeit at very high levels, which
has been the case for some time now. We have not only seen the Dow
Jones move into overbought territory, our short term indicators are
showing the a broad range of stocks are overbought on a near term
basis as well; therefore, a strategy when initiating new positions
in this market would be to scale into positions here and add to the
positions as they begin to pullback or consolidate. Historical data
like the Six-Month Switching Strategy for the DJIA suggests that we
are entering the seasonally strong period for the market, but as we
know there is no holy grail in this business, so be sure to adhere
to your risk management principles by maintaining adequate stop loss
points, and choosing new positions with advantageous reward-to-risk
situations.

Good Luck Market Traders