Lessons from the Pros


Sell in May Buy in November

Throughout the futures markets there are seasonal patterns that seem to buck the random movement that seems to happen on a month -by-month basis.  These patterns are based on data that has been studied for very long periods of time as well as some fundamental factors that take hold during certain months of the year.  The agricultural markets would fall into the latter category as there are planting and harvesting months that have some impact on how major producers allocate and distribute their inventory.  Keep in mind that these seasonal patterns SHOULD NOT be the sole influence on longer-term or short-term trading decisions.  Instead they can be used as a small piece of an entire strategy that is based on low risk and high probability turning points using supply and demand levels.

In today’s piece I’m going to focus on the seasonal pattern exhibited in the Stock market and some of the major world currencies and will leave the agricultural markets for another day.

In the stock market there’s a well known adage stating that investors should “Sell in May and go away” and return to the market in the month of November. Since May is almost upon us let’s explore this pattern so that we are at least familiar with it and can decide if it can be of use in your particular trading plan.  There have been several studies performed on this theory and for the most part they seem to confirm that over long period’s time (one study looked at 300 years of data) indeed an investor would have garnered  better returns being out of the market during that May through October period. Keep in mind that these findings don’t take into account transaction fees and dividends. What’s more, other than the months of the seasonality there was no supply or demand zones used to time the entries and exits, which I would guess would add to the returns.   To take seasonality a step further the months of September and October have been the worst months for the bulls and November and December the best.

Going back in history you will find two stock market crashes (1929, 1987) in the months of October. In the same month in 1998 The Dow suffered a five hundred plus point drop due to the implosion of one of the biggest hedge funds at the time (Long Term Capital Management).  In the last 15 fifteen years there have been some very steep declines in the September-October timeframe. Recall the Lehman and Bear Stearns bankruptcies in 2008. And in 2000, after a multi-month rebound in the Nasdaq, September was the beginning of the precipitous drop that culminated in the Nasdaq 100 shedding 83% of its value. So indeed,  there seems to be  a propensity for the stock  market to fall during these fall months, but just like with everything having to do the stock market it doesn’t happen every single year and it depends on what part of the market cycle we happen to be in. For those of you trading Stock index futures this is something to keep in mind.

The last seasonal pattern in the US stock market is actually quite simple: the stock market tends to rally in the day preceding a major US holiday.  Labor Day, Memorial Day, Thanksgiving and Fourth of July would fall under this tendency. This information is readily available throughout the internet and I would say that maybe there’s a bit of a self-fulfilling prophecy here because it’s so widely known to stock market professionals.

Since we’re on the subject of May, the Canadian Dollar (CD) has very strong propensity to move higher in the coming month, based on the data from the last 15 years. As always make sure that you look at a chart and find the lowest risk entry points and that it fits with your trading plan.

In sum, seasonal data is there because it does tend to have a higher than average number of occurrences and perhaps may help increase the probabilities of being on the right side of the market

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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