6-Month Unfavorable Seasonality Period Approaches

247Bull.com Editor: Equity markets in the US (and the UK) are likely in the early stages of a new secular (long-term) bull market. Despite anemic economic growth, structurally high unemployment and rising taxes, the outlook for equities remains positive. With interest rates at historic lows investors are being forced to go out on the risk curve in search of yield. Meanwhile, there are plenty of strong and stable blue chip companies that are paying excellent dividends. Companies are also sitting on a great deal of cash which they are using to buy back stock. These low rates also mean that companies have been able to refinance their debt at the lowest levels in decades, and as a result many of their balance sheets are in great shape. Among traditional asset classes bonds continue to be an unattractive place to be with limited upside and plenty of scope for losses, and since early 2011 commodities have also significantly underperformed western stock markets. It’s impossible to know whether seasonality will come into play in 2013, however recent economic data (particularly in the US and China) suggests that a period of economic weakness lies ahead. This “summer swoon” could be met with a ramp up in monetary stimulus, and therefore any correction in US equity markets likely represents a buying opportunity.

Next Wednesday, May 1, begins a six-month period of unfavorable seasonality, of which we are commonly reminded by the saying “Sell in May and go away.”

Research published by Yale Hirsch in the Trader’s Almanac shows that the market year is broken into two six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. From November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher. (See Sy Harding’s book Riding the Bear for details on this subject.) While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds.

Below is a one-year chart showing the last two six-month seasonality periods. It begins on May 1, 2012 and ends on April 24, 2013 (anticipating the end of the six-month period next week. The left half of the chart shows the unfavorable May through October period and the right half shows the favorable November through April period. The green line shows the Dow’s level at the beginning of the favorable period, the red line the Dow’s level at the beginning of the unfavorable period. As you can see, the Dow did finish the unfavorable period lower than where it started, and in the favorable period it finished well above its starting point.

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The prior one-year period is a textbook example of seasonality tendencies.

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Regardless of how the market performs on average, every year is different and presents its own challenges, and there is no guarantee that any given period will conform to the average. Remember that bull and bear market pressures will override seasonal tendencies. The following chart is an example where a bull market completely ignored unfavorable seasonality.

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And with the next chart the bear market ruled.

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Conclusion

Seasonal tendencies will be working against the stock market for the next six months. While this is no guarantee that the bears will have control, they will have the wind at their back.

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Technical analysis is a windsock, not a crystal ball.

Carl Swenlin | president and founder of DecisionPoint.com

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