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May officially marks the beginning of the “seasonally weak” half of the year, which lasts through October. We are all familiar with the saying "sell in May and go away," which conjectures that we would do just as well to sell all of our holdings as we would be invested in the market during the months of May through October. Typically, conjecture doesn’t mature into adage without basis in reality and market seasonality is just such an example as it has shown an impressive trend in terms of magnitude, consistency, and longevity.
Although the last couple of months have certainly not felt like it, the end of the day’s trading today (4/30/20) also brought with it the end of the seasonally “strong” period, which began with the close of the market on October 31, 2019. Over this period, the Dow Jones Industrial Average (DJIA) returned -9.98%, making it one of the worst “strong” periods on record.
Years ago, Nasdaq Dorsey Wright began using the Stock Trader's Almanac, a reference tool published by Yale Hirsch. Ever since then, the Almanac has been a fantastic source of information on the stock market (if you would like a copy, you can visit www.stocktradersalmanac.com). The premise of the "Market Seasonality" study is that historically speaking, the market performs far better during the November through April time period than it does from May through October. On its own, that isn't a particularly profound statement, however, when we examine the magnitude of this effect over the years, its significance becomes clear. Consider this: if you had invested $10,000 in the Dow Jones on May 1st and sold it on October 31st each year since 1950, your cumulative return would be only about $1,700. Meanwhile, the same $10,000, invested only during the seasonally strong six months of the year, would now be worth around $970,000! Put another way, almost all of the growth of the Dow Jones Index since 1950 has effectively during "good" six months of the year.
In the graph at the bottom of this section, we have reproduced the US Market Seasonality strategy that was first published in the Stock Trader's Almanac beginning in 1950 based upon the Dow Jones Industrial Average. The green line reflects the May 1st through October 31st period, while the red line shows November 1st through April 30th. You will note that a theoretical $10,000 initial investment in 1950 is barely on the positive side when invested only from May 1st through October 31st. On the other hand, an identical $10,000 initial investment grew to more than $970,000 with an average annualized return of 7.02% if invested only from November 1st through April 30th each year.
There's no question that the November through April period has provided substantially better returns. Whether you average it out, annualize it, compound it, or complicate it further; there is clearly a wide spread between the average six-month returns during these contrasting seasonal periods.
Market Seasonality Notes:
- Since April 30th, 2000, the Dow Jones Industrial Average has gained over 125%. However, the Index is up just over 1.62% when we isolate the seasonally weak periods.
- 2019 (November 2019 – April 2020) was the worst seasonally strong period since 2008 and the fourth worst on record.
- During the seasonally weak May to October periods, 27 out of the 70 years examined finished down, while there were only 15 years during which the seasonally strong period produced a negative return.
- There have been only three years when the "good six months" have lost more than 10% (1969, 1973 and 2008), while the "bad six months" have seen losses of 10% or more 11 times. The most recent “good six months” missed joining the list of double digit losers by just a couple of basis points.
- There have been 15 instances since 1980 where the "good six months" have posted a double-digit return, with five of those returning more than 20%.
- Interestingly enough, following the times when the "bad six months" did produce double-digit losses (11 total since 1950), the "good six-month" period afterward lost more than 1% only once (2008) and on four occasions, actually posted double-digit positive returns (1962, 1966, 1971 & 1974)
- Beginning in November 2009, the Dow experienced a streak of four consecutive positive double-digit efforts during the strong six-month periods, the second-longest such streak in history. The first began in 1994 where the Dow finished the seasonally strong period with double-digit gains for five consecutive periods.
As the last few months have illustrated as we have experienced one of the most volatile periods in history during the seasonally strong period, market seasonality is a historic trend, it is far from a guarantee. This year's seasonally “strong” period was obviously no match for the volatility brought on by the Coronavirus pandemic, with the DJIA losing just a shade under 10% from November 1, 2019, through April 30, 2020. Obviously, this study is not a sophisticated tool for risk management nor can it tell us how any given six months will go, but it is interesting and does expose long-term biases within the market that many investors are not aware of.
As we head into the seasonally weak period the technical outlook for the market is something of a mixed bag. The major indices sit well above the lows they reached in March and the bullish percent for the New York Stock Exchange (NYSE) currently sits in a column of Xs at 70%, however, US equities currently sit in third place in the DALI asset class rankings. With the market already on uneasy footing, the transition into the seasonally weak period is just one more reason to remain vigilant with regard to the positioning of your portfolio. Nasdaq Dorsey Wright will produce a report over the coming days that outlines a few positioning strategies that may help advisors in that endeavor. For more information contact us directly.
Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.
Unless otherwise stated, the performance information included in this article does not include dividends or all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.
Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.
Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon to be successful or outperform any index, asset, or strategy.