Seasonality and Global Markets
Editors: You are welcome to quote from this article, or use
it in its entirety, in your publication or on your website, as long as the
credit at the end of the article is also included. Readers are also welcome to
e-mail, or print and snail-mail it to friends.
It is now also available as an automatic RSS feed, assuring that future articles will be sent to you automatically if you subscribe to the
automatic feed (it's free). You can subscribe to our RSS feed at: http://www.streetsmartreport.com/RSS or copy the URL to your feed reader.
BEING STREET SMART
by Sy Harding
Seasonality and
Global Markets! May
27, 2011.
When investors think of the stock market’s annual seasonality, as expressed by
the adage ‘Sell in May and Go Away’, they usually relate it to the U.S. market.
But in fact the historical pattern of stock markets making most of their gains
in the winter months, and experiencing most of their bear market declines and
corrections in the unfavorable summer months, is also common in global markets.
Since investors have become much more comfortable with investing in global
markets in recent years, in fact have poured money into emerging markets at a
record pace, recognition that the seasonal pattern is global is potentially of
considerable importance, especially this year.
A 27-page academic study conducted at the Rotterdam School of Management in the
Netherlands and published in the American
Economic Review in 2002, concluded,
“Surprisingly we found this inherited wisdom of Sell in May to be true in 36 of
37 developed and emerging markets. Evidence shows that in the United Kingdom the
seasonal effect has been noticeable since 1694. . . . A trading strategy based
on this anomaly would be highly profitable in many countries. The average annual
risk-adjusted outperformance ranges between 1.5% and 8.9%, 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.”
Stock markets outside of the U.S. seem to be significantly in the lead on the
downside in this unfavorable season. For instance, the S&P 500 is only 2% below
its recent top on April 29, the last trading day of April (potentially in
keeping with the ‘Sell in May and Go Away’ rule to sell on May 1).
However, in the rest of the world quite serious stock market corrections are
underway. The important markets of China (the world’s 2nd largest
economy), Japan (the world’s 3rd largest economy), Hong Kong, India,
Brazil, and Russia are already down an average of 12% from their recent peaks,
and have broken down through key support levels, including their long-term
200-day moving averages. Other important markets, including Mexico, Canada,
Britain, France, and South Korea have already broken down through key
intermediate-term support levels, including their 20-week moving averages.
That global markets are so far ahead of the U.S. market on the downside leads me
to believe they will become oversold first and perhaps be the first to bottom
and turn back up when the time to buy arrives again.
Meanwhile, the studies of seasonality point out that a seasonal investor
outperforms the market over the long-term (occasional years when it does not
work notwithstanding), while being at risk in the market only six months each
year, and moving to cash for the other six months.
They do not take into consideration the additional gains the seasonal investor
can make in the unfavorable season in areas other than cash.
To name a few; bonds, gold, and currencies often move independent of the
direction of the stock market, and can rally when the stock market is in a
decline. And all are easy enough for investors to take advantage of via mutual
funds, and even more efficiently via ETFs (exchange-traded-funds).
If seasonal investors are fluent in market analysis, particularly technical
analysis, which can help define when an unfavorable season will not just be a
‘dead zone’ but will probably see a substantial correction, significant gains
can be made from the downside even faster than from the previous rally period.
That’s because when the market goes down it tends to go down much faster than it
went up, often losing a year of previous gains in a matter of a few months.
And holdings are available to harness the power of such market declines,
including ‘inverse’ mutual funds and ‘inverse’ ETFs, which are designed to move
opposite to a particular market or market sector.
In my opinion then, the U.S. market has some catching up to do on the downside,
while selected global markets, considerably ahead of the U.S. market on the
downside, are liable to bottom first and provide the earliest buying
opportunities.
In the interest of full disclosure, I and my subscribers have some recent new
positions in a bond ETF, a currency ETF, and selected inverse ETFs against the
U.S. market.
Sy Harding is
president of Asset Management Research Corp, and editor of
www.StreetSmartReport.com,
and the
free market blog,
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 Subscribe to RSS Feed
Copyright © 2011
Asset Management Research Corp. -- ALL RIGHTS RESERVED.
