Using Seasonal and Cyclical Stock Market Patterns – AAII Journal 06-01-13

Salient to Investors:

Jeffrey Hirsch at the Stock Trader’s Almanac writes:

Three main seasonal and cyclical patterns have stood the test of time: the 4-year Presidential Election/Stock Market Cycle, the Best 6 Months Switching Strategy and January’s basket of indicators and trading strategies. Caveat. History never repeats itself exactly.

1. The 4-year Presidential Election/Stock Market Cycle:

  • Wars, recessions and bear markets tend to start or occur in the first half of the presidential term, and prosperous times and bull markets in the second half.
  • The third year in the presidential term has the best performance – there have been no Dow losses in pre-election years since 1939.
  • Presidents tend to take their more painful initiatives in the first half of their term and prime the pump in the second half.
  • Most bear markets began in post-presidential years – 1929, 1937, 1957, 1969, 1973, 1977 and 1981 – as also major wars – the Civil War (1861), WWI (1917), WWII (1941) and Vietnam (1965). Only in 1925, 1989, 1993 and 1997 were Americans blessed with peace and prosperity in the post-election year.
  • Practically all bear markets began and ended in the two years after presidential elections.
  • From the midterm low to the pre-election year high, the Dow has gained nearly 50% on average since 1914.

2. The Best 6 Months strategy is basically the flip side of the old “sell in May and go away” adage.

  • Institutional investors’ efforts to boost their returns help drive the market higher in Q4, as does holiday shopping and year-end bonus money.
  • September is the worst month of the year on average as back-to-school, back-to-work and end-of-Q3 portfolio window dressing causes stocks to sell off.

3. The January Effect

  • In late October, small stocks wake up and in mid-December take off and hold their lead through the beginning of May.
  •  NYSE stocks selling at their lows on December 15 will usually outperform the market by February 15 in the following year.
  • The Santa Claus Rally is the propensity for the S&P 500 to rally during the last 5 trading days of December and the first 2 of January by an average of 1.5% since 1950.
  • The January Barometer has registered only 7 major errors since 1950 for an 88.9% accuracy ratio – of the 7, Vietnam affected 1966 and 1968.
  • Every down January in the S&P 500 since 1938 has preceded a new or extended bear market, a 10% correction, or a flat year. The last 40 up First 5 Days produced a 13.6% average full year gain, and were followed by full-year gains 34 times.

Since 1950, all 3 indicators have been positive 27 times and full-year gains followed 25 times. All three indicators are positive in 2013.

Read the full article at http://www.aaii.com/journal/article/using-seasonal-and-cyclical-stock-market-patterns

Click hereto receive free and immediate email alerts of the latest forecasts.

Using Seasonal and Cyclical Stock Market Patterns