October is known for being a volatile period in the financial markets. And this year’s Halloween month is turning downright spooky for U.S equity indexes. Listen to any market “bear,” and you will hear a bag full of reasons:
– U.S. equity indexes currently trade 10% below recent all-time highs, and are wallowing in “correction” mode
– Global growth is contracting— including Europe, China, and many emerging markets
– U.S. employment numbers have dimmed and a recent Wall Street Journal headline sums it all up: “Global Turmoil Hits Jobs”
Still, in the face of the “Halloween Effect” which forecasts low-to-negative returns in the trick or treat month (such as the chilling -21.5% record drop in 1987), the hand-wringers among us recall: just as capital markets of industrialized nations rise and fall in cyclical patterns within those cycles, they also travel in foreseeable seasonal trends.
Our Behavior is Predictable…Season after Season after Season
These seasonal patterns occur because the markets are directed by humans. And we, humans, tend to repeat our behavioral patterns, over and over again…month after month…year after year.
Which leads us to the good news. Market seasonality tells us that November, December and January are typically the most profitable months of the year. Stocks enjoy bursts of buying before holidays—especially three-day weekends. And we have a flurry of holidays woven into these months, including Thanksgiving, Hanukkah, Christmas and New Year’s Day.
In fact, one typical bout of momentum is December’s “Santa Claus Rally,” an enthusiastic price surge the market can experience between Christmas and New Year’s Day.
Once through the holidays, the “January effect” describes the usual increase in stock prices during the first month of the New Year. We can attribute this rally to people putting their Christmas bonuses to work in the stock market. As well, investors who sold shares in December to create tax losses to offset capital gains may re-invest in January. Small-caps and value stocks usually get the most attention during this month, but the entire equity market can “feel the love.”
Returns in February and March, while mostly positive, tend to flatten and consolidate after the “Three Best Months” season. But then April normally brings a market uptick and attracts more buyers, with returns averaging over 1%.
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Leave in May and Stay Away
You may have heard the old market saying, “Leave in May and Stay Away.”
That means that during the six-month period from May 1st until October 31st, stocks generally return puny profits. Studies show that since 1950, standing on the market’s sidelines from May through October would keep investors safe from a 10% loss and major bearish moves.
Knowledge of the market’s seasonal trending patterns can be helpful for traders and active investors. Even so, please keep in mind that exogenous shocks (unexpected events) can interrupt our behavior patterns—and so the market’s traditional seasonal trending patterns—at any time.
So far, this October has lived up to its scary reputation, and the bears have been in charge.
But we can take comfort in knowing that the three best months are coming up . . . ‘tis almost the season to be jolly!
Keep green on your screen,
Toni Turner is the President of TrendStar Group, LLC, is an accomplished technical analyst as well as a popular educator and sought-after speaker in the financial arena.
She is also the author of best-selling books: A Beginner’s Guide to Short-Term Trading, Short-Term Trading in the New Stock Market and Invest to Win: Earn and Keep Profits Bull and Bear Markets With the GainsMaster Approach, co-authored with Gordon Scott, CMT.