Stock Market Seasonality – The Good and the Bad!

By: Sy_Harding

Why should you care about what I might say about the market’s seasonality?

My research firm, Asset Management Research Corp., has been engaged in extensive research on the market’s seasonality for more than two decades. In 1999 I wrote a book Riding the Bear – How to Prosper in the Coming Bear Market.

At a time when the popular book, and belief, was ‘Dow 36,000’, I predicted the worst bear market since the 1930’s was just around the corner. The strategy I recommended to “prosper in the coming bear market” was a strategy based on the market’s seasonality. There was no “lost decade” for those who followed the strategy. It made gains throughout the severe 2000-2002 bear market, and has significantly out-performed the market over the last 11 years.

So what is the current situation with seasonality?

The market’s normal seasonal pattern of experiencing most of its gains each year in its favorable winter seasons and suffering most of its corrections in its unfavorable summer seasons was overwhelmed last year by the massive $trillions of stimulus and extra liquidity poured into the system to rescue it from total collapse. There was no correction in the unfavorable season last year. In fact there was an impressive continuing rally.

However, the normal pattern has returned this year. The market experienced a correction in February, which historically is the weakest month within the favorable season. It then rallied back in March and April to a new high for the year. It then topped out on April 23, just five trading days before the historical Sell in May and Go Away seasonal maxim of selling on May 1. The S&P 500 then experienced a correction of 16% to its low on July 2.

The next normal seasonal effect was a rally in July, which is historically the strongest month within the unfavorable season.

If seasonality is to continue, investors need to be aware that with July ending this week, the next pattern is that we are entering the three-month period of August, September, and October, which over the long-term tends to be the weakest period of the year.

Of the individual months, August tends to be a month when the trend reverses. September tends to have the most consistent declines. October tends to be the most volatile (for instance has seen the most crashes and mini-crashes), but also most often sees the upside reversal into the next favorable season (by which time investors are so disgusted with the decline that they want nothing to do with the market).

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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