Seasonality Patterns In The Stock Market

Every day in these pages I speak of cycles. Thirty years ago, I learned from my mentor Ian Notley that equity prices are materially affected by the laws of nature. Out of respect, I often quote Ecclesiastes 3.

http://www.biblegateway.com/passage/?search=Ecclesiastes+3&version=KJV

http://en.wikipedia.org/wiki/Nature

So I was surprised today when I was asked by a teacher “Could you comment on this for my students and me regarding seasonal investing?”

Immediately I turned to Stock Trader’s Almanac 2009 for suitable quotes about seasonality.

There on the front cover is a quote from William J. O’Neil, Chairman and founder, Investors Business Daily: “Historical price patterns continue to work because human nature doesn’t change, …”

The Almanac editors Jeffery A. Hirsch and Yale Hirsh have published the encyclopedia on seasonality trends since 1968. No one does it better. Here are some quotes from this year’s Almanac:

We discovered that while stocks do indeed fluctuate, they do so in well-defined, often predictable patterns. These patterns result too frequently to be the result of chance or coincidence. How else do we explain since 1950 practically all the gains in the market were made during November through April compared to almost nothing May through October?

October:

• Known as the jinx month because of crashes in 1929, 1987, the 554-point drop in October 27, 1997, back-to-back massacres in 1978 and 1979 and Friday the 13th in 1989.
• Yet “October is a “bear killer” and turned the tide in 11 post-WWII bear markets: 1946, 1957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001 and 2002.
• First October Dow top in 2007, 20-year 1097 Crash anniversary -2.6%.
• Worst six-months of the year ends with October.
• Best DOW, S&P and NASDAQ month last 15 years.
• October is a great time to buy.
• Big October gains five years 1999-2003 after atrocious Septembers.

November:

• #1 S&P month and #3 on Dow since 1950, #2 on NASDAQ since 1971.
• Start of the “Best Six Months” of the year, NASDAQ’s Eight Months and Best Three.
• Day before and after Thanksgiving Day combined, only 11 losses in 56 years.
• Week before Thanksgiving Dow up 15 of last 15.
• Dow down only 3 Novembers last 14 post-election years, S&P down 4.

November, December, and January Year’s Best Three Month Span

A Merrill Lynch study (1968) showed that buying seven industry groups and sectors around September or October and selling in the first few months of 1954-1964 tripled the gains of holding them for 10 years. The Almanac extended this study to create the Sector Index Seasonality Strategy Calendar.

Sector Seasonality: Selected Percentage Plays as listed by the Almanac

BKX Banking - October through June
http://tinyurl.com/28s3gk
XBD Broker-Dealer - October through April
http://tinyurl.com/yk7tnrp
XCI Computer Tech - October through January
http://tinyurl.com/yf3j3cf
CYC Cyclical - October through May
http://tinyurl.com/ygqv6vl
RXH Healthcare Providers - October through January
http://tinyurl.com/yjkm8vv
XLB Materials - October through May
http://tinyurl.com/28s3gk
RMZ Real Estate Investment Trusts - October through July
http://tinyurl.com/yjxzffx
SOX - Semiconductor - October through December
http://tinyurl.com/ylz3qjc
TRAN - Transports - October through May
http://tinyurl.com/2wbj8f

Although it may not be the latest year’s version, many public libraries carry the Stock Trader’s Almanac. For a holiday gift, it’s a good one.

Stock Trader’s Almanac 2009 (Wiley)
http://www.amazon.com/Stock-Traders-Almanac-2009-Investor/dp/0470229020/…

Seasonality patterns in the stock market are not like clockwork. Most cycles are not precise like say a lunar cycle. They are more like Punxsutawney Phil, who may or may not see his shadow on February 2, or a woman’s period, which may be early, late or missing, but clearly cyclical.

http://en.wikipedia.org/wiki/Punxsutawney_Phil
http://en.wikipedia.org/wiki/Menstrual_cycle

There have been stock market timing systems built around cycles, including one of the most popular, which is this week’s Halloween Indicator, better known by the saying “Sell in May and go away” - until Halloween.

http://en.wikipedia.org/wiki/Stock_market_cycles

http://en.wikipedia.org/wiki/Halloween_indicator

Seasonality is an interesting subject, but one that lacks the imprecision most traders require as an important basis of trading real money. The concept is often taken a bit too far. Ian Notley once told his students about the analyst who opined the best time to buy a beer stock was before the summer. Then he held up charts of two beer stocks that had similar price patterns. But, he said, the one was Budweiser and the other Fosters, and while it might be spring in the US, it’s fall in Australia.

In the big picture, though, a student of the market should take the time to understand these concepts. There are often very good reasons why certain industry groups are favored in the market during certain times of the year.

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