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How To Exploit Market Seasonality

Monday, November 9, 2015

Sheila Jamison and Rich Jamison

Like October’s stock market ride? Keep your seatbelt fastened! That was in the market’s “weak season” – we’re just beginning the “strong season” now.

We draw two conclusions from the historically trends:

  1. Be in the market all year long
  2. In different market segments for the different seasonal trends.

We’re just entering a new strong season. We need to adjust positions to be prepared for history to repeat itself.

Market Seasonality 101

A quick refresher (you’ve seen it before, but not like in our black and white example coming up a bit later): For the stock market

Nov 1st – Apr 30th = the strong season

May 1st – Oct 31st = the weak season

Nothing in this business is ever guaranteed. Sounds a lot like life, doesn’t it? If history repeats itself however, we’re just into liftoff. And Blackie Sherrod noted,

"History must repeat itself because we pay such little attention to it the first time."

It’s a cute quote. We don’t think he meant it humorously.

What Does This Mean For Me?

Perhaps nothing … unless an $838 thousand gain means more than just about breaking even to you. Get your attention?

Historically

Looking at these periods from May 1st 1950 through the end of last month, we find that the DJIA is up over 18 times as much in the strong season as it is in the weak season. In different terms, the DJIA rose by an average of 0.39% during the weak season compared to 7.54% during the strong one.

As you know, averages can deceive. The same percentage means something different in terms of total dollars depending upon when and how it is used. A 50% gain or loss of $100 always equals $50. But sequentially applied – as in successive periods – changes the absolute value.

For example, if you begin with $100:

and in year 1 you gain 50%, you have $150.

If in year 2 you lose 50%, you have $75, not $100

Yet adding up the plus 50% and minus 50% would suggest the gain or loss is zero,

+50%

- 50%

= 0% (actually, divided by 2, but that doesn’t change anything.)

Your average return is 0% - but you’re out $25!

Now, In New Terms

How does this apply to the 0.39% and 7.54% numbers; the average returns? If you invested $10,000 in the DJIA* on May 1st 1950, took your money out at the end of the last day of October the next year, and then repeated that every year (66 weak seasons) through 2015, you would now have $9,677, not counting any dividends or trading costs. That is, you’re out $323 despite the +0.39% return and 39 of the weak seasons being positive during the 66 total periods included.

What if you did something similar … but investing in the strong seasons instead? Put your $10,000 into the DJIA* from November 1st 1950, take it out at April’s end in 1951 and repeat that process for the 65 strong seasons through 2015’s April close. The 7.54% doesn’t sound overwhelming. However, you’d now have $848,167! Note too that 51 of the 65 strong seasons in our study period were positive.

Haste Makes Waste

There are those who see this as all the market’s gains since 1950 are from the strong season. Hence, sell in May and go away!

That is the overly simplistic, hasty view. There were 39 years in which the weak season still produced gains for the DJIA. They were generally smaller gains, but 7 years saw double digit growth during the weak season. There is money to be captured in both seasons.

Conclusions

  1. Be in the market all through the year
  2. in the seasonally appropriate segments.

Want to know more about what is seasonally appropriate? Give us a ring to talk. We’ll be pleased to discuss it with you and provide some answers.

*It isn’t possible to invest in the index itself. You would need a mutual fund or ETF that mimicked the DJIA or else the 30 stocks that comprise it in appropriate (i.e., price weighted) proportions.

Sources:

Data from Daily Market Report. @ Dorseywright.com. October 30, 2015. 
Daily Market Report. @ Dorseywright.com. November 3, 2015. 
The Stock Trader’s Almanac. @ stocktradersalmanac.com. November, 2015