November – Market Conditions
ByThis year, towards the end of October, the stock market (S&P 500) had risen 60% of the March lows and the technical signals were showing signs of a possible correction.
S&P 500 – Last 3 Years
Although October 28th has over the long-term been a good entry point into the market, it is an average date. Some years the best entry point is earlier and other years later. On a seasonal basis getting into the markets on October 28th has proven to be a prudent strategy to capitalize on the average trend and it still is today.
My position in my email last week was that although October 28th is still a good entry date, there may be value in delaying an entry into the market. As November, December and January have on average been the best three contiguous months of the year, investors should make sure that they do not sit on the sidelines too long. A good seasonal strategy is to start entering the market as of November 2nd and fi nish allocating funds to the market by November 13th.
The mid-November date is consistent with the end of the bottoming process that tends to occur during the first year of the Presidential Cycle. This is Obama’s first year in power and coincidentally the stock market’s performance is very similar in trend, but not magnitude, compared with the average of all first years of the Presidential since 1901. Like the average, this year’s performance had the market bottom in early March and peak in September.
This year, in the unfavourable season the S&P 500 has gained 15%. This compares to last year when the market (S&P 500) lost 40% from May 6th to October 27th. On average the unfavourable season from the beginning of May (May 5) to the end of October (October 27) has produced a loss of 1.1% from 1950 to 2008, versus the other six months which has produced an average gain of 7.6% (S&P 500). An average negative loss does not necessarily mean that every year from the beginning of May to the end of October was negative. The best way to think of this period is that it is more random than the other six months and it has been a poor period to hold the broad market. Despite this, there were some periods from the beginning of May to the end of October that have produced some large gains. What does it mean when the market advances in the unfavourable season? Historically, when the market has had a gain above 10% in the unfavourable period this has portended to a strong period in the following six months from the end of October to the beginning of May.
In the table comparing the returns for the favourable season versus the unfavourable season, the highlighted cells in the unfavourable season are periods of returns greater than 10%. In the last sixtynine years the unfavourable season has produced returns greater than 10% only seven times, compared with the favourable season’s twenty-five times. The story here is not how much better the favourable season is compared to unfavourable season, but the strong returns that tend to happen after a strong performance in the unfavourable season. All of the returns in the subsequent favourable period have been positive and they have produced an average 8.8% gain.
Does this mean that the returns in the next six months will necessarily be positive; no, but do not be surprised to see the market perform well. Essentially, a strong performance in the unfavourable season reflects strong positive investor sentiment. Although investors are “checking” their reality at this time, if the past pattern of positive results in the favourable season hold true, it will not be long until investors help propel the market up over the coming months.
