“The financial world encourages investments in the November through April period more so than in the May through October period.” according to Elizabeth Thompson’s article Gone away for the Summer? It’s Time to Come Back.
Many of you are familiar with the statement:
“Sell in May and go away”
Mrs. Thompson goes on to say that January is the month that employees sign up for 401(k) plans while IRA’s have an April deadline which requires investors to place more money in their stock related retirement funds. This type of setup brings an influx of money to the table during the beginning of each year and naturally pushed prices higher before the flat summer months when they typically correct.
September is historically one of the worst performing months in American stock market history but it can also present an ideal opportunity to place positions on stocks that are showing excellent relative strength. Typically, these stocks go on to be market leaders and breakout after Halloween and into the New Year. Some say that the market has a very distinct seasonal pattern, one that was popularized as the “Halloween Indicator”, directly relating to the quote above.
November through February are some of the best performing months according to the Stock Trader’s Almanac but if you wait to place positions at the end of this time period, you may be buying extended leaders.
Another historical study suggests that the market will continue to trade the way it has traded for the first five months of the year. If this scenario holds true in 2007, we should trade higher to close the year.
With Labor Day upon us, many across the US will be greeted with the end of the summer and the final days of vacation for most major institutional traders, managers and players.
I now leave you with some data from the Stock Trader’s Almanac:
If an investor invested $10,000 in the DJIA on November 1 and sold on April 30 every year from 1950 to 2004, they would have earned $492,060. If this same investor did the opposite and had bought on May 1 and sold on October 31 from 1950 to 2004, a $318 loss would have resulted. That is an amazing stat, one that is difficult to fathom. This trend extends outside of the American stock market as an article from December 2002 of the American Economic Review says that such a statistical pattern existed in the U.K. stock market as far back as 1694 and still exists today.
Enjoy the long Labor Day holiday!
Hi Chris,
I have a question concerning the movement (loss) in the market yesterday.
Why is it that yesterday – with all the fear of the credit crunch talk in addition to other factors that sent the markets down are totally ignored this morning and allow for a strong opening? Why don’t we see a follow through of that negative news/movement onto the next day? It seems as if Wall Street has a tendency to sweep the news under the rug from the previous day and act as if it never did hear it or happen. Is there an explanation from a psychological perspective as to why this is occurring? Is Wall Street that desperate to keep this market up and trying to prevent the natural progression of fallout that should be happening at this point if the Fed hadn’t intervened?
Thanks,
Steven Mac
That stat is amazing. I knew that this period has always been worse for the market, but had no idea it actually would be negative. I generally don’t put much stock in that type of analysis, but that is quite staggering.