Being Street Smart
The Market's
Seasonality
Is Not Afraid Of Bears
By Sy Harding, editor
Street Smart Report Online
Twice
a year, in the spring and again in the fall, I remind Bull &
Bear readers of my column of what subscribers to my newsletter
already know; about the market's remarkable history of seasonality,
how the market tends to make most of its gains between November
and April each year, and to suffer most of its declines between
May and October. With the market putting in a big rally from
its low last September to a high in March, and now down for the
last six months in a row, this year is a classic example.
The phenomenon is not
new. It's been around for at least 50 years. Old-timers coined
the phrase "Sell in May and go away" to cover the situation,
and many seem to have followed such a strategy for decades, as
evidenced by the way trading volume always dries up significantly
in the summer months.
Newer investors have
become more aware of seasonality in recent years, but are still
skeptical, as in how could something so simple possibly work
so well as an investment strategy. In this age of computers,
with an overwhelming amount of economic and market data that
can be analyzed, investing in the stock market just has to be
more complicated than simply using a kitchen calendar.
And yet, our research,
that of The Stock Traders Almanac (which discovered the
market's surprising seasonality in 1986), and of Ned Davis Research
Inc., shows that over the last 35 years the simple strategy of
entering the market on the first day of November, and exiting
on the first day of May each year, would have more than doubled
the total return of the S&P 500 for the period.
Almost as important,
that outsize gain would have been made with 50% of market risk,
since an investor would be out of the market, safely in cash,
for six months out of each year.
That's especially impressive
when you realize that the majority of professional money-managers
and mutual funds are unable to even match the performance of
the S&P 500 over the long-term, let alone double its performance.
And probably representative of non-professionals, the National
Association of Investment Clubs reports that even in the powerful
bull market investment club members scored an average annual
return of only 12.4% (including dividends) for the ten years
from 1988 through 1998, while the average annual return of the
S&P 500 was fully 50% better at 19.2%.
As the last few years
have again demonstrated, seasonality seems to work just as well
in bear markets, and does so with only two trades a year, in
and then back out of an index mutual fund.
Since the market obviously
doesn't begin to rally exactly on November 1, and begin to decline
exactly on May 1, each year, in Riding the Bear I suggested
applying some judgment to the situation. That is, if a rally
seemed to have already begun a couple of weeks before the arrival
of the calendar date, it would usually work to enter then rather
than wait for the calendar date. Or if a market correction was
underway when the calendar date arrived, it was just common sense
to wait until it ended before entering.
The consistency of seasonality can also be seen over the last five years, which included several years of a seemingly one-way bull market, and the subsequent seemingly one-way bear market.
For instance, in the bull market even when the S&P 500 soared 28% in 1998 and another 21% in 1999, following such a seasonal investing strategy produced a better gain of 42% in 1998 and 27% in 1999 (with 50% of market risk).
In the other direction, in the bear market the S&P 500 lost 12% last year, while investing in the S&P 500 based on a seasonal timing strategy produced a gain of 4%. So far this year, the S&P 500 has lost 25% since the April 9 exit of our seasonal strategy, while an investor following seasonality has been sitting in cash, at least earning a small amount of interest instead.
Looking at the overall five-year period, the S&P 500 produced a compounded total return of 64% over the last five years on a buy and hold basis, while following the seasonal strategy produced a compounded gain of 114%. With the S&P 500 having lost 24% since April, while seasonal investors have been in cash, the difference will be even more pronounced when this year ends and is factored into the last five-year period.
Another advantage of seasonal timing is that there seems to be no need to agonize over surrounding conditions, or whether we're in a bull or bear market, as history shows it worked with similar consistency through all types of market and economic conditions.
So, even as the current six-month market plunge has investors throwing in the towel and expecting it may never end, it's probably more important to pay attention to the market's remarkable seasonality. It's not infallible but sure seems to consistently beat any of the alternatives.
Editor's Note: Sy Harding is president of Asset Management Research Corp., 169 Daniel Webster Hwy, Suite 11, Meredith, NH 03253, publisher of The Street Smart Report, 1 year, 17 issues, $250 (now in its 15th year of exceptional market research for professionals and serious investors) and The Street Smart Report Online at www.StreetSmartReport.com, 1 year, $225. Mr. Harding has consistently ranked in the Top Ten Timers by Timer Digest for years. In 1999, he authored the book, Riding the Bear How to Prosper in the Coming Bear Market, $12.95 (the Dow topped out just 9 months later). In Riding The Bear, Mr. Harding explains not only bear markets, but how bull and bear markets get started and end; how public investors can break their pattern of only becoming interested in bull markets in their final stage, get killed, and then are too scared when the next bull market begins. He explains in plain English how the market reacts, how cycles work, and how to take advantage of them to hold onto your bull market profits and actually increase them during a bear market. Harding also explains the Seasonal Timing System in detail. This highly recommended book is FREE as a bonus with a subscription to Sy Harding's Street Smart Report.
