Good riddance October and September, hello November. And not a moment to soon I might add. To say that the financial markets experienced “a bit of trauma” in the past several months could be categorized as “a bit of an understatement.” Some like to use sports related phrases in describing the markets (“it's not over until it's over,” “it's fourth and long,” and more so of late, “boy does our team stink”). But unlike a sporting event, the market never ends. So at no point can you really say “well our side has lost and the game is over.” As a result there is always a need to be “a bit forward thinking.” And that’s fine because at long last we have entered the month of November. Why does this matter? This requires a bit of explanation.
November to May
To answer this question we must examine a portion of the works of Yale Hirsch, legendary market analyst and the founder of the Stock Market Almanac. In the course of his studies he discovered that the six months comprised of November through April saw a vast outperformance for the stock market compared to the six months comprised of May through October. In my upcoming book, “Seasonal Stock Market Trends” (Wiley, January 2009), I devote an entire chapter to this and other related phenomena. With everyone so focused on the “here and now” it might be instructive to take a step back and consider the “bigger picture."
In a nutshell, Yale Hirsch pretty much nailed it with his original study. The only real modification I’ve made to his original finding was to add the first three trading days of May to the bullish period (OK, it’s not exactly a breakthrough revelation, but hey, it’s something). In any event, the relative performance displayed in Charts 1 and 2 pretty much tell the tale.
Chart 1 displays the growth of $1,000 invested in the Dow Jones Industrial Average between the close of trading October 31st and the close of trading of the third trading day of the following May since October 31st, 1949.
Chart 1 – Growth of $1,000 invested in Dow Industrials November 1 through third trading day of following May 1949 to present
click here for larger view
As you can see in Chart 1, a November to May rise is by no means a “sure thing.” In fact, last time around the Dow lost -6.9% between October 31, 2007 and 5/5/2008. Still, it would be pretty unrealistic to think that it would be. What is important, however, is the fairly obvious long-term tendency for this time period to show a gain. We will put some numbers to this in a moment but first, to really make the point, please look at the results displayed in Chart 2, which show the growth – or rather the destruction of $1,000 invested in the Dow Jones Industrial Average between the close of trading on the third trading day of May through the last trading day of October each year since 1950. As you can see the results are not pretty.
Chart 2 - Growth of $1,000 invested in Dow Industrials from fourth trading day of May through the end of October 1949 to present
click here for larger view
At the far right-hand side of Chart 2 you can see that during the latest unfavorable six months – i.e., between 5/5/208 and 10/31/2008 - the Dow lost -28.1%.
To better appreciate the stark difference in performance between these favorable and unfavorable periods, let's look at a few comparative numbers.
- The average daily gain during the November to May period was +0.000619%.
- The average daily gain during all other trading days was (-0.000016%).
- The annualized rate of return during this bullish 6-month period was +16.9%.
- The annualized rate of return during all other trading days was just (-0.4%).
- 1,000 invested only during the November to May bullish period from 10/31/1949 through 10/31/2008 grew to $80,825.
- 1,000 invested during all days the November to May bullish period shrank to $609during the same time.
- The Dow posted a gain during 47 of the 59 completed November to May periods, 80% of the time.
- The Dow posted a gain during only 33 of the 59 completed May through October -periods, or 56% of the time.
- The November to May period outperformed the subsequent May through October uperiod 46 out of 59 times, or 78% of the time.
Summary
At this point there is little room to argue that the performance of the stock market during the November-into-May period each year has vastly outperformed the May-through-October period over the past 58 years. The real question – and unfortunately the one we cannot answer – is, “what happens from here?” As I mentioned, there are no guarantees. The best that one can do is to put the odds as far in their favor as possible and hope for the best. However, consider the following:
- The Dow has just experienced a decline in excess of -40%,
- We have now exited the “unfavorable” period and re-entered the “favorable” November to May period,
- The Dow has advanced 80% of the time during the “favorable” period.
Given this combination of factors, its might be wise to consider giving the bullish case the benefit of the doubt in the months ahead.
As always, time will tell.
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Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
