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Printer Friendly View (with text zoom)BEING STREET SMART by Sy Harding IS STOCK MARKET SEASONALITY A MYTH AFTER ALL? December 26, 2009. What happened to the market’s seasonal patterns this year? For many years I have touted the consistency and power of the
stock market’s seasonality, the tendency of the market to make most of its gains
between November and April, and to experience most of its corrections, bear
market losses, and crashes between May and October. In my 1999 book,
Riding
the Bear – How to Prosper in the Coming Bear Market, I even introduced my
Seasonal Timing Strategy as a means of continuing to make profits in the strong
1990’s bull market, and then go on to also prosper in the serious bear market I
was expecting. My seasonal strategy improves on the market’s normal seasonal
pattern by using a technical momentum indicator to better time the entries in
the fall and exits in the spring. Over the next ten years, a period that experienced two of the
most severe bear markets since the 1929 crash, my STS produced a compounded gain
of 132%, compared to the S&P 500 losing 13%, in one of the market’s worst ten
year periods ever. Yet, during the ten years my seasonal strategy had only one
down year, last year. Even then it was down only 3.6% in a bear market year in
which the S&P 500 lost 36%. But seasonality didn’t show up this year. The market suffered
a mini-crash from December to its March low, which was in the middle of its
favorable season. It began an explosive rally off the March low, which helped a
seasonal strategy recover some. But the market continued to rally all through
the summer and fall, usually its unfavorable season when a seasonal investor is
out of the market. So it’s been a strange year for seasonality. In spite of
re-entering in October, my STS strategy is down 4.4% for the year, after being
down 3.6% last year. So has seasonality gone away? Was it perhaps only a myth to
begin with? Not hardly. My own books have documented the phenomenon going back to
1950, finding that a seasonal strategy would have more than doubled a buy and
hold strategy, in spite of occasional years when it did not match the market’s
performance.
An academic
study by Ben Jacobsen, of the New Zealand Institute of Advanced Study, published
in the American Economic Review in 2002 concludes,
“Surprisingly we found this inherited
wisdom of Sell in May and Go Away to be true in 36 of 37 developed and emerging
markets. Evidence shows that in the UK the effect has been noticeable since
1694.” An academic study in 2008 devoted solely to the U.S. market,
published in The Financial Review, found that,
“All U.S. stock market sectors, and 48 out
of 49 industries, perform better during winter than summer in our sampling from
1926-2006.” The study noted that,
“A trading strategy based on this anomaly would be highly profitable in many
countries. The risk-adjusted outperformance ranges between 1.5% and 8.9%
annually depending on the country being considered. The effect is robust over
time, economically significant, unlikely to be caused by data-mining, and not
related to taking excess risk.” Those academic studies used month-end dates, and six-months
in, six-months out seasonal periods, as their purpose was only to determine if
the market has a consistent seasonal pattern, and concluded that it most
definitely does.
But
obviously the market does not begin or end a rally on the same day each year. My STS strategy uses a technical momentum indicator to better
define the exits and re-entries, and by doing so its seasons vary year to year
between 4 and 7 months in length. By doing so it almost doubles the excellent
basic seasonal performance revealed in the academic studies. So what happened to the market’s seasonality this year? It’s interesting that 2003 was a similar year, in fact
identical in so many ways as to be spooky. In 2003 Washington had also launched what was then a record
super-sized economic stimulus package, to pull the economy out of the 2001
recession, a recession that had been exacerbated by the 9/11 terrorist attacks.
As with this year, interest rates had been cut to extreme lows, and massive
amounts of excess liquidity were flooded into the financial system. And, identical to what happened this year, early in 2003 the
stock market had doubts that the stimulus efforts were going to work, and
declined in what is typically its favorable season, to a low in early March. Also identical to this year, in 2003 the market then launched
off that early March low into an impressive rally that continued through the
summer, typically the market’s
unfavorable
season. So in answer to the question of what happened to seasonality
this year, it’s clear that in those rare years when the financial system is
flooded with massive amounts of excess liquidity to rescue the economy, the
excess liquidity also overwhelms the market’s normal seasonal pattern for the
year. It will be interesting to see if the similarities to 2003
continue, since once November, 2003 arrived, the beginning of the market’s next
favorable season, the rally actually accelerated, and didn’t end until March of
the following year. Meanwhile, in 2003 seasonality had not gone away permanently.
It returned and served extremely well as a strategy from 2004 through 2008,
including through another severe bear market. Nor did its underperformance in
2003 affect its long-term performance. And seasonality it has not gone away permanently this time.
That
probably means we should expect
the market to run into problems sometime during the summer or fall months next
year.
Sy
Harding is president of Asset Management Research Corp, publishers of the
financial website www.StreetSmartReport.com; and the free daily market blog at
www.StreetSmartPost.com. These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. Back to the Top Home Forward to a Friend >>>
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