The market has a very long history of making most of its gains in the favorable winter season between October and May, while if there is to be a substantial correction it most often takes place in the unfavorable season of May to October.
The pattern is so consistent that academic studies (and actual portfolios) show that a strategy of investing only for the favorable season and standing aside in cash for the unfavorable season, outperforms the market over the long-term while taking roughly only 50% of market risk.
Like any strategy, particularly including buy and hold, it does not work out every year within the long-term. Sometimes the decline in the unfavorable season is only minor, and sometimes the market makes further gains in the unfavorable season.
But over the long-term it does work out quite dramatically, doubling the market’s long-term performance by avoiding serious corrections, and most of the down-legs in bear markets.
In addition, when it doesn’t work out for several straight years, it almost always comes back quite dramatically, making up for its absence. (Otherwise, it would not have its history of so dramatically outperforming the market over the long term).
Since this market has gone for an unusual length of time, since 2011, without even a normal 10% correction, seasonality has lost its importance the last several years, pretty much ridiculed by short-sighted analysis.
That is understandable, since in each of the last three years, the market has had only minor summer pullbacks and standing aside for them was non-productive.
However, can we depend on 2015 being as benign?
We are in a situation where the economy is slowing after the Fed has allowed a QE stimulus program to expire.
The last time that happened was in 2011.
Here is a reminder of what happened in 2011 when the economy was showing signs of slowing. The S&P 500 plunged 21% from May to October, even though at that time investors were also confident the Fed had its back via the ‘Bernanke Put’, and would not allow the market to decline.
However, the Fed did allow it, and did not come to the rescue with another round of QE until the S&P 500 was down 21%, on the edge of entering a bear market.
It’s interesting that in 2011 the market was also down in February and March.
That time, it recovered in April to a new high on May 1 before collapsing.
Is that the best we can hope for this time, with the economy slowing again and the Fed not talking about stimulus, but after ending its last QE program last fall, now talking about perhaps taking another step away from stimulus by beginning to raise interest rates?
Something to think about.
Meanwhile, we will just continue to follow our indicators and their signals.
To read my latest newspaper column click here: Sorry, But This Is Not 1997 For the Market
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Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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