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The general stock markets' day-to-day
price action utterly dominates individual stock sectors, including
commodities stocks. So anything traders can do to better understand the
forces driving the stock markets as a whole leads to better stock entries and
exits universally. With this truth in mind, many speculators and investors
wonder whether commodities-like seasonality also exists in the general stock
markets.
I've certainly pondered this question
myself over the years, and I'm not alone. Inevitably whenever I write an
essay on commodities seasonality, traders write in asking about general-stock
seasonality. And after advancing our gold and gold-stock seasonality research in the
last couple weeks, I've seen plenty of new inquiries. So in light of the
ongoing demand for answers, I figured I'd see what tales the data has to
tell.
But a big caveat is in order up
front. There is a major reason why I haven't done any research work on
general-stock seasonality over the past decade. Since early 2000, the stock
markets have been mired in a mighty secular bear. The price behavior in such
a beast is wildly different in character from the parallel secular bulls in
commodities. While secular bulls lend themselves to seasonality studies,
secular stock bears simply don't.
And this chart shows why. The US
stock markets as represented by their flagship S&P 500 stock index (SPX)
are rendered on top of the gold price over this past decade or so. While gold
has been rising on balance over this entire span, making it very suitable for
seasonality analysis, the stock markets haven't been similarly falling.
Despite popular misconceptions, a secular stock bear is really a long
sideways grind.
Gold has soared 638% at best since
its bull's humble beginnings in early 2001. Amazingly, it has never had a
down calendar year throughout this entire secular bull! With annual gains
ranging from 5% to 31%, this metal's upward ascent has been remarkably
consistent. Sure, gold still experiences healthy bull-market corrections from
time to time just like any other bull. But it gradually ascends on balance,
making it perfect for seasonality studies.
Now if a secular stock bear
gradually declined over much of its entire span, it would probably exhibit
marked seasonality. But that's not how secular stock bears behave.
They are really a gigantic sideways grind, a series of smaller cyclical
bears and cyclical bulls parading through with no net gains. The cyclical
bears tend to cut stock prices in half, then the cyclical bulls
subsequently double them again (taking the SPX right back to its
starting point). The end result is a massive consolidation.
These secular stock bears tend to
last for 17 years, half the duration of a Long Valuation Wave. They happen because
stocks get wildly overvalued at the end of the preceding 17-year secular
bull, they are bid up to ridiculously-high prices relative to their
underlying corporate earnings. After being so rampantly overvalued, stock
prices then grind sideways for the better part of two decades until earnings
have had enough time to grow into the high stock prices.
This gradually drives valuations
down, and once they are low enough the secular bear gives up its ghost. Then
the next Long Valuation Wave can begin, a complete secular-bull-secular-bear
cycle that tends to run a third of a century. Seasonality doesn't work
so well in secular stock bears' long sideways grinds because the net result
is flat stock prices. Today the SPX isn't much lower than it was in late
2000.
The mid-secular-bear cyclical bears
that cut the SPX in half, and the subsequent mid-secular-bear cyclical bulls
that doubled it, largely kept this flagship index trapped between 750 and
1500. The overarching trend isn't down, it's just flat. And naturally seasonals mirror their underlying data's secular trend.
In bull markets they tend to rise throughout a calendar year, and in flatlined markets they tend to reflect this lack of
progress.
This is why I haven't done
stock-bear-seasonality research to this point. Sure, I'm interested too. But seasonals in a flat market almost have to be flat too,
which would likely limit their utility to traders. And I suspected that the
parade of large cyclical bears and cyclical bulls we've seen since 2000 would
largely cancel each other out. But you never know for sure until you run the
numbers, so I gave it a shot.
To keep all our seasonality research
comparable, I used the same methodology described in my gold work. Every calendar year is
individually indexed, which ensures percentage changes are perfectly
comparable despite changing baseline SPX levels. A 30-point daily SPX rally
off of 1500 is much less impressive than those same 30 points around 750.
It's percentages we need to capture for seasonality.
To accomplish this, the SPX's close
on the first trading day of each calendar year is recast at 100. And then all
day-to-day percentage changes are indexed off this base. No matter where the
SPX is absolutely, high near resistance or low near support in its secular
trading range, a 5% rally still takes its index up to 105. Then all these
annual indexes are averaged together, and the result is this
somewhat-surprising chart.
As I expected in a sideways-grinding
secular bear, the SPX's seasonals were flat.
Seasonally on average, the general stock markets are likely to end a calendar
year right where they started. But there was far-more volatility
within this flatlined seasonality than I expected.
Within today's secular stock bear, there are definite seasonal rallies and
slumps. Amazingly, traders can probably use this knowledge!
Between 2000 and 2011, on average the
SPX suffered a rough January and February. This tended to drive the stock
markets to a major seasonal low by early March. Provocatively, this is near
when gold tends to carve a major seasonal low as well. Since Januaries and
Februaries in the stock markets over the past decade have been very different
depending on whether we happened to be in a cyclical bear or cyclical bull at
the time, it's hard to generalize a reason from this catch-all average.
Regardless, the SPX starts surging in
March in its first major seasonal rally of the year. Between early March and
early May, the SPX tends to power an impressive 4.9% higher on average. This
is actually its biggest seasonal rally of the year! I suspect the psychology
of spring is a factor. After a dark cold winter, we all start feeling more
optimistic as spring dawns. More daylight and warmer temperatures provide a
wonderful psychological boost, and when traders feel good for any reason at
all they are more likely to buy stocks.
But once May rolls around, the
general stock markets tend to spend that month topping. The old stock-market
adage "sell in May and go away" is firmly rooted in historical
seasonal tendencies. It has certainly proven to be wise advice within today's
secular stock bear, as after May the SPX tends to sell off sharply in June
before drifting even lower into early August. This is the summer doldrums, a
time when interest in speculating and investing wanes as many traders'
focuses shift to enjoying the sunny vacation season.
These same summer doldrums weigh on
many commodities prices, including gold's. The summer is the
seasonally-weakest time of the year for all kinds of financial assets. Low
volume and lack of interest lead to lackluster price action most of the time.
So if you have fresh capital you haven't yet deployed by the dawn of the
market summer (Memorial Day), you are probably better off parking in cash
until autumn.
Interestingly the stock markets keep
drifting lower on average into the market autumn, which starts right
after Labor Day. September has tended to be a rough month for the SPX in this
secular bear, leading to a second seasonal-support approach in early October.
This surprised me, as I've long considered September a bullish time for
stocks seasonally as traders start refocusing on the markets again after the
summer distractions vanish.
But so far in this secular stock bear
seasonally, the true bottom is actually a bit farther into autumn in early
October. Once again the SPX tends to be down about 4% year-to-date then on
average. But instead of plunging even deeper in October as that month's
fearsome reputation portends in many traders' minds, the stock markets start
rocketing higher in their second big seasonal rally. This catapults the SPX
4.4% higher on average by the end of December.
So within the context of today's
secular stock bear, the best times of the year to add new stock positions are
at the SPX's major seasonal lows in early March and early October. The SPX
tends to rally 4% to 5% higher over the coming two or three months from those
seasonal-support approaches. And some popular sectors including commodities
stocks and tech stocks tend to leverage and amplify underlying SPX gains, so
their average returns usually double or triple the SPX's baseline.
Such gains are well worth pursuing.
Seasonally the best times of the year
to sell stocks and realize profits is in early May and late December right as
these big seasonal rallies peak. The May selling point makes perfect sense
with the dawn of summer, but the late December one surprises me. Once again
it is probably sentiment-related. After enjoying the festiveness and optimism
of the holidays, traders face the bleakest months of winter which dampen
spirits. Income-cycle factors probably play a major role as well in this
early-year slump.
The end of a calendar year is often
the first time when many people know for sure just how much surplus income
they earned that year. Only then have all that year's expenses been recorded,
and all its income has been earned including any bonuses. This is likely a
major factor in December's strong stock seasonality, surplus capital is put
to work. But once that is done, we face a whole new year of great unknowns.
On top of this, many people have to
start saving aggressively early in a new year to pay off the past year's
income taxes due. Others have holiday debts to pay down. All this spending
pressure, in addition to the psychological ebb of winter, likely contributes
to the weak SPX seasonality in January and February. This is contrary to many
popular assertions that January tends to be a strong month for the stock
markets.
So after resisting building the
complex spreadsheet underlying these charts for many years, I'm glad I
finally did it. So thanks if you are one of the people asking about this! The
early year isn't as good seasonally as we've been led to expect, though the
spring rally is awesome. And the autumn rally isn't likely to start in early
September, but a month later in early October. And the summer doldrums are a
sentiment wasteland for stocks just like they are for commodities. All this
is very valuable knowledge to have!
This next chart digs deeper into
individual calendar months, indexing them individually throughout this
secular stock bear and then averaging them. This offers additional insights
into intra-month action that aren't readily apparent in the annual seasonals. It also clearly highlights the strongest and
weakest months of the year seasonally for the SPX, which is certainly good to
be aware of.
Seasonally in this secular stock
bear, the SPX's worst months are February, September, January, and
June. They all have seen average declines on the order of 2% or so since
2000. Meanwhile the best months of the year seasonally for general stocks are
March, April, December, and October. Their average rallies over the past
decade of sideways-grinding markets were 1.8%, 1.6%, 1.6%, and 1.0%.
So don't expect too much from stocks
early in a new year, early in the summer, or early in the autumn. Their bear seasonals just aren't favorable then. But the strong
seasonal rallies in the spring and late autumn contain some very impressive
months, so the odds are really in your favor then for being long stocks.
Despite the overall flatness of this secular bear, definite seasonal
tendencies have still emerged.
November is also interesting to
consider since it is where we happen to be today. Note that early November is
a weak month seasonally, seeing a considerable decline in the SPX on average.
But about two-thirds of the way through, the SPX tends to bottom and
rally sharply again. This leads into December's strong seasonal rally. And
the data cutoff for this chart is October 31st, so it doesn't include
November 2011. Yet today's yucky November has mirrored Novembers past. A
bullish omen?
Seasonality in general is
fascinating, and this stock bear seasonality definitely has tradable
tendencies. But realize that seasonality is always relegated to being a secondary
driver at best. It is sentiment, the collective greed and fear of
traders active in the markets, that is the primary
driver of short-term stock-market action. Seasonals
are like prevailing winds, either helping or hindering short-term sentiment
trends.
If the stock markets are very overbought, meaning the SPX has rallied too far too
fast, then they are likely to correct imminently no matter how strong seasonals happen to be. And if the SPX is oversold, it
has fallen too far too fast, it is likely to soon rally even in a seasonally-weak
time. Seasonals are most valuable to traders when
they line up with current sentiment trends, providing a tailwind that
strengthens them.
A great analogy is the effect of
prevailing winds on an airplane. While its engines are its primary driver, the
plane still uses less fuel and gets to its destination quicker if it has a
nice tailwind pushing it along. While the plane can still fight a headwind,
it is less economical and slower. A stock-market rally happening for
sentimental and technical reasons is likely to be bigger and stronger with
seasonal tailwinds than headwinds, although it will still rally either way.
Another important thing to keep in
mind is secular stock bears are certainly not homogenous like secular
commodities bulls. Depending on whether the SPX happens to be in a cyclical
bear or cyclical bull, certain seasonal tendencies are likely to be more
pronounced. During a cyclical bear, the seasonally-weak months have higher
odds of seeing bigger stock-market selloffs. And during a cyclical bull the
strong months are more likely to experience larger rallies. Never ignore the
critical bull-bear cycles!
At Zeal we've been relentlessly
studying the stock markets and commodities for this entire secular bear.
Taking a contrarian approach of buying fear and selling greed, we've enjoyed
great success in a tough decade when the general stock markets languished
flat. Specializing in commodities stocks, our track record has been outstanding.
Since 2001, all 591 stock trades
recommended in our subscription newsletters have averaged awesome annualized
realized gains of +51%! That's tough to beat.
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The bottom line is the stock markets
exhibit definite seasonal tendencies, even within this great
sideways-grinding secular bear. They tend to rally sharply in spring and late
autumn, and then slump in summer and early in a new year. While these seasonals are secondary drivers that can easily be
overridden by divergent sentiment and technicals,
they are still worth considering before buying or selling stocks.
Overbought stock markets will still
correct even in the face of strong seasonals, and oversold ones will still rally even if seasonals are weak. But when overboughtness
lines up with weak seasonals or oversoldness
with strong seasonals, the resulting move is likely
to be larger than it would have been without the seasonal tailwinds. And the
latter is true today, setting us up for a major stock-market rally.
Adam Hamilton,
CPA
Zealllc.com
So how can you
profit from this information? We publish an acclaimed monthly
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that details exactly what we are doing in terms of actual stock and options trading
based on all the lessons we have learned in our market research. Please
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Questions for
Adam? I would be more than happy to address them through my
private consulting business. Please visit www.zealllc.com/adam.htm for
more information.
Thoughts, comments,
or flames? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that I
am not able to respond to comments personally. I will read all messages
though and really appreciate your feedback!
Copyright 2000
- 2006 Zeal Research (www.ZealLLC.com)
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