One More Reason Stocks Could Go Higher From Here
Stock-Markets / Stocks Bull Market Nov 18, 2013 - 03:44 PM GMTBy: DailyWealth
Brett Eversole writes: After 28% gains so far this year, U.S. stocks are on pace for their best year since 1997.
But like the rest of the world, this probably has you worried.
Most investors see high prices as a bad thing. They believe higher prices mean higher risk. And they expect a crash to come any day to fix the problem.
Of course, this is all wrong...
Higher prices don't always mean higher risk. And as I'll show today, based on history, the stock market should do very well over the next six months. Let me explain...
You've probably heard the expression "sell in May and go away." It's a catchy phrase that describes a true anomaly in the U.S. stock market.
You see, based on history, the U.S. stock market has powerful seasonal trends. By seasonal, I mean that the same things tend to happen over and over at the same time of year.
"Sell in May and go away" tells us that the weakest six-month period for U.S. stocks begins in May and ends six months later in October.
I know this might sound like snake oil, but it's really true. I crunched the numbers myself.
It turns out that since 1950, the average annualized six-month gain on stocks is 8.7%. However, the average annualized six-month gain starting in May is 70% less... just 2.6%.
I bring this up today for a simple reason... If the trend is to "sell in May and go away," then the absolute best six-month period for stocks starts right now, in November.
The table below gives all of the details...
As you can see, buying in November leads to a 14.8% average annualized six-month gain... 70% more than the all-periods return of 8.7%.
This strategy has also worked well recently. Over the last five years, buying in November led to an average annualized six-month gain of 19%... the highest of any six-month period... and double the average annualized return for all six-month periods.
Of course, while this strategy has worked well historically, there is no guarantee it'll work today. You should never make investment decisions based solely on seasonal data like this.
But I expect stocks to continue higher regardless of seasonality. The stock market is still relatively cheap, trading at just 14.6 times next year's earnings estimates. And the largest and strongest companies remain the cheapest...
The 20 largest U.S. stocks trade for just 13.4 times next year's earnings... 8% cheaper than the already-cheap overall market.
In short, I believe stocks have plenty of more room to run. And the fact that we're now entering the historically strongest time of year has me even more interested.
There are plenty of reasons to be scared today. There are plenty of reasons not to invest. But most of these fears have been around for years. And if they've kept you on the sidelines, you've missed out on a lot of gains.
History says now is a great time to own stocks. I suggest you consider doing just that today.
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The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.
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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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