Stock Market Monitor

is the Stock Market Seasonality a myth after all? December 24, 2009

Being Street Smart

Sy Harding

is the Stock Market Seasonality a myth after all? December 24, 2009.

What happened to the seasonal patterns of the market this year?

For many years I have touted the consistency and power of the seasonality of the stock market, the market trend to make the most of their earnings between November and April, and to experience the majority of its corrections, in the market losses and accidents between May and October

In my 1999 book Riding the Bear. – How to thrive in the coming bear market, even introduced my seasonal strategy as a means of further benefits for the strong bull market of 1990, then go to thrive also in serious bear market than I expected. My strategy improved seasonal normal seasonal pattern in the market using a technical momentum indicator to better time entries and exits of the fall in the spring.

In the next ten years, a period that experienced two bear markets most serious since the 1929 crisis, my STS produced a compounded increase of 132% compared with the S & P 500 lost a 13% in one of the worst periods of one year the market for ten centuries. However, during the ten years of my strategy was only one season per year, last year. Even so, fell only 3.6% in one year bear market in which the S & P 500 lost 36%.

However, seasonality was not presented this year. The market suffered a small accident in December to March the floor, which was in the middle of the season favor. It began an explosive rally from the low of March, which helped a strategy to recover half of the season. However, the market continued concentration throughout the summer and autumn season usually unfavorable season when an investor is out of business. So it’s been a strange year for seasonality. Although re-entry in October, my STS strategy is 4.4% for the year, after being down 3.6% last year.

This seasonality has disappeared? Was it perhaps just a myth to begin with? No

no.

My own books have documented the phenomenon that dates back to 1950, finding that a strategy of the season have more than doubled a buy and hold strategy, despite occasional years when no results found the market. An academic study by Ben Jacobsen, New Zealand Institute for Advanced Study, published in the American Economic Review in 2002, concludes: “Surprisingly we find this inherited wisdom of Sell in May and go to be true, in 36 of 37 markets developed and emerging markets. The evidence shows that in the UK the effect has been noticeable since 1694. “

An academic study in 2008 dedicated exclusively to the U.S. market, published in The Financial Review, said that “all sectors of U.S. stock market, and 48 out of 49 industries, perform better in winter than in summer in our sample of 1926-2006.”

The study noted that “a marketing strategy based on this anomaly would be highly profitable in many countries. The range of risk-adjusted outperformance of 1.5% and 8.9%, depending on the country concerned. The effect is robust over time, economically significant, is unlikely to be caused by data mining, and not related to excessive risk taking. “

Academic studies used month-end dates, and six months on, six-month periods seasonal, since its purpose was only to determine whether the market has a constant seasonal pattern, and finally concluded that it does.

But obviously the market does not begin or end in a rally the same day each year.

My strategy STS uses a technical momentum indicator to better define the outputs and readmissions, and in doing so its seasons vary from year to year between 4 and 7 months. In doing so, almost doubles the excellent basic performance of the season is revealed in academic studies.

What happened to the seasonality of the market this year?

It is interesting that 2003 was similar, in fact, identical in many ways to be creepy.

In 2003 Washington had launched what was then a record of large economic stimulus package to pull the economy out of recession in 2001, a recession that was aggravated by the attacks of 9 / 11 terrorists. As with this year, interest rates had been reduced to extreme levels, and huge amounts of excess liquidity in the financial system flooded.

Y, identical to what happened this year, in early 2003 the stock market was no doubt that stimulus efforts will work, and decreased as the season is usually favorable, with low to early March.

also identical to that of this year, launched in 2003 after a low in early March an impressive rally that lasted through the summer, usually unfavorable market season.

So in answer to the question of what happened to the seasonality of this year, it is clear that in these exceptional years, when the financial system flooded with large amounts of excess liquidity to rescue the economy, the excess liquidity also overwhelms the normal seasonal pattern market for the year.

It will be interesting to see if the similarities to 2003 continue, and once in November, 2003 arrived, the onset of the favorable market next year, the rally accelerated, and did not end until March the following year.

Meanwhile, in 2003, the seasonality was not gone forever. He turned and serves well as a strategy from 2004 to 2008, including through another severe bear market. Nor his poor performance in 2003 will affect your long-term performance.

And the seasonality has not disappeared forever this time.

That probably means that we expect the market to have problems at some time during the summer or fall of next year.

Sy Smith is editor of www.StreetSmartReport.com, and the daily market blog, www.streetsmartpost.com.