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An Update On Seasonality.

  • Written by Syndicated Publisher 40 Comments40 Comments Comments
    July 30, 2011

    There are a number of seasonal patterns, ranging all the way from the very short-term tendency for a ‘countertrend’ move an hour or so after the market opens each day, to the Four-Year Presidential Cycle, and even to the 17 to 20-year ‘secular bull/secular bear cycle.

    We’re currently in the annual ‘Sell in May and Go Away’ seasonal cycle, which calls for selling May 1 and buying back November 1. Over the long-term it has at least matched the performance of the S&P 500, while taking only 50% of market risk (since it’s out of the market in cash for 6 months each year).

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    Yes, sometimes the market continues to rally in the unfavorable season. So it doesn’t beat the market every year, but does so often over the long-term that the corrections in the unfavorable seasons make up for the few years when the market continues higher in the summer months. This is not theory or opinion, but has been proven in numerous independent academic studies over the years.

    The above chart also shows several shorter-term seasonal patterns.

    The first is the tendency for February to be the most negative month in the market’s favorable season. This year the weakness in February spilled over into March.

    The second is for July to be the most positive month in the unfavorable season. This year it began early, in mid-June, and possibly ended in mid-July.

    Our Market-Timing indicators tell us what to expect going forward, both short-term and intermediate-term.

    But if it were just up to seasonal patterns, here are some others that relate to the rest of the year:

    The next ‘monthly strength period’ is due to begin tomorrow (the last trading day of the month) and to run through Thursday of next week (through the first four days of the following month). It is also an independently proven pattern that was discovered back in the 1970’s by Norman Fosback. I’ve mentioned it often in this blog as one of the weekly patterns we often point out for short-term traders.

    Mark Hulbert has written about it fairly often for MarketWatch, pointing out that it doesn’t work every month but has one the best long-term performance records of any of the strategies he has tracked over the decades. It does require a lot of trades, and before the arrival of ETF’s involved excessive trading commissions that ate into gains.

    Can it work two months in a row? It’s history so far this year is indicated by the blue rectangles.

    As shown, the pattern worked at the beginning of January, February, March and April. But note that those were during the market’s annual favorable season.

    It sure didn’t show up at the beginning of May (when the market topped out on April 29) or at the beginning of June, when instead a previous rally spike also reversed to the downside instead. And note that those were during the market’s annual unfavorable season.

    But then the ‘monthly strength period’ showed up spectacularly at the end of June and first week of July, providing the exciting biggest short-term rally in years. But note that it took place in combination with another pattern, that July tends to be the most positive month within the annual unfavorable season.

    So where does that leave us with the next ‘monthly strength period’ due to begin tomorrow, with the typically positive month of July ending? Its appearance is probably questionable.

    Moving along with other potential seasonal patterns for the rest of the year, we are now entering the three-month period of August, September, and October, which historically tends to be the most negative three month period of the year. That certainly wasn’t true in the last two years. But does that mean that the long history has ended, or mean its overdue, increasing the odds of it happening this year?

    And the final seasonal pattern is that the market makes most of its gains in its favorable season of October through April.

    A Few Short-Term Charts.

    The U.S. market became short-term oversold beneath 50-day moving averages several weeks ago, prompting me to predict a short-term rally that could be quite impressive, as it would also run into the usually positive period around the July 4th holiday and the usually positive end-of-quarter window dressing.

    I was so sure of a rally that I had subscribers take their profits from our downside positions. And it was an impressive rally.

    Does it mean anything that other major global markets that had also become short-term oversold and rallied sharply along with the U.S. market, have resumed their double –digit corrections. Are they leading the way down again?

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    But it’s only the intermediate-term that counts.

    Expect short-term volatility to continue.

    Lots of catalysts for that: The resolution of the debt ceiling crisis one way or the other and the market’s reaction. Tomorrow’s 2nd quarter GDP report. And the following Friday’s employment report for July. All very important, totally unpredictable, and almost sure to result in short-term reactions.

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