S&P 500 & Nasdaq Analysis and Trends

[Stock]

I have a lot of trouble thinking about market history pre-1970s. Hirsch admits this in their Almanac writings.

They evidence this by post-harvest market periods being historically the strongest market periods up -- until the 1970s.

The old market axiom was that when farmers brought in their crops, the markets would rise as they invested their returns. This ceased in the 1980s and now the post-harvest seasonal time is the weakest time in the markets. (You also have to consider -- in my mind anyway -- the advent of the NASDAQ ushered in a completely new age in investing in equities. As did the impact of discount brokerage and online trading change the landscape.... but this is not discussed by Hirsch).

I am writing this from memory. I do not have my copies of The Almanac with me right now. But this is essentially the message in the Almanac: Sell in May and Go Away -- it started with Hirsch's daddy -- and he never said to buy in September.

His son has started to employ a little techincal analysis with their fall buy signal, but even he still says to avoid going long in September. October, maybe. Maybe November. But not September:

ANYBODY SEE SEPTEMBER ANYWHERE ON THIS LIST? http://www.stocktradersalmanac.com/sta/research_tool_MACDEntryExitSP.jsp

As for post-war periods, I need to go reference my copies of The Almanac from 2006 and 2007 and post what they say about it. Hirsch has been very outspoken about the UNCERTAINTY in the markets in periods of WAR and what this can do to markets. The newsletter material on their web site it pretty good, but the Alamanac is published months in advance, not monthly, so there tends to be a longer view to the material in the actual book. It's better information, IMO.

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This I also offer for discussion -- from August 2004 -- Safe Haven and the like -- "they" remind you not to buy stocks this time of year EVERY year (LOL!) #msg-3731487 :

...according to Stock Trader's Almanac (STA), harvest time in the agrarian economy of the early 20th century made August the best month of the stock market from 1901-1936. Since that time, however, August has become the worst month in the past 15 years for the Dow and S&P, and the second worst on the NASDAQ (although the NASDAQ was up 11.7% in 2000). The best Dow gains in August were in 1982 (+11.5%) and 1984 (+9.8%) as bear markets ended....

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And I also offer this from AUGUST 2003 from Jim Cramer's company The Street Dot Com -- when the markets were coming off the March 2003 Iraq Invasion bottom a year before and everyone thought the markets were toast then, too -- I highlight some really funny stuff (in hindsight) below:

August's Harvest Increasingly Grim on Wall Street
By Rebecca Byrne
Staff Reporter
08/05/2003 11:41 AM EDT
URL: http://www.thestreet.com/markets/rebeccabyrne/10106006.html

Right now, the stock market rally's biggest threat might not be rising interest rates, mixed second-half guidance or nosebleed tech valuations.

It may simply be the calendar.

Over the past 15 years, August has proven to be the worst month for the Dow and S&P 500 and the second-worst month for the Nasdaq, according to the Jeff Hirsch, an analyst at the Hirsch Organization, which publishes the Stock Traders Almanac.

"Volume dries up in August," he said. "Everyone's on vacation and there aren't a lot of people to support the market."
What's Worse

One reason that stocks fare so poorly in August is that investors are usually anticipating a bleak September, when tax-loss selling starts to kick in. Portfolio managers typically sell losing investments around this time to offset capital gains.

The tax year for most mutual funds ends on Oct. 31, while individuals have until Dec. 31 to neutralize their tax hit. But most investors make adjustments to their portfolios well in advance of those dates to get ahead of other sellers.

According to Hirsch, September has been the worst month for stocks over the last half-century. August's relatively recent stranglehold on the title is due in part to some specific events, including the 1998 Russian turmoil and the 1990 Kuwait invasion, as well as the higher concentration of people who take the month off, he said.

And things don't get much better in October. Although not as bad as many people think, October is still remembered as a month when big stock market crashes have occurred.

Amplification

So how seriously should you take these seasonal trends? John Bollinger, president of Bollinger Capital, thinks they could definitely have some impact on the market this year.

"In consolidating markets, like the one we're in now, seasonality becomes more important because there is no overarching bullish trend to bail people out," he said. "It's certainly a good time to be cautious and hedge where appropriate."

Hirsch agrees and said he is looking for stocks to pull back over the next eight weeks.

"I don't see us making a new low. I see us giving back another 1000 Dow points at most and then having a strong finish," he said. Although there are few positive catalysts to support the market in the near term, stocks typically pick up steam in November and December.

Tom McManus, chief investment strategist at Banc of America, isn't concerned about a near-term correction. He notes that although stocks did fall in September of last year, August was still a pretty good time to get into the market. The S&P 500 is up almost 7% from where it was at the end of July last year.

Jeff Matthews, president of Ram Partners and a contributor to TheStreet.com's sister site Street Insight, also noted that there have been a few times in history when stocks did very well in August.

"One of the great bull markets of all time started in August 1982, so if you were sitting there saying August is a terrible month you would have missed huge moves in the market," he said.

Indeed, stocks rose 11.5% that month and were up 9.8% in August 1984 as bear markets came to an end. The month of September has also been good to investors on several occasions, including 1995, 1996, 1997 and 1998, with average gains of 4.2%. Meanwhile, October is known as the "bear killer" because it helped to turn the tide in nine bear markets, according to the Almanac.

"I don't pay attention to seasonal voodoo," Matthews said. "What I think investors should pay attention to is the rise in bond yields."

Alternatives

The 10-year note's price has fallen roughly 10% over the past six weeks in one of the largest declines for any such period since 1980, according to David Joy, capital markets strategist at American Express Financial Advisors.

Analysts say equity valuations are becoming increasingly stretched in the face of rising long-term interest rates.

Indeed, Richard Bernstein, chief quantitative strategist at Merrill Lynch, said his dividend discount model now suggests that stocks are about 15% to 20% overvalued. The proportion of S&P 500 stocks with dividend yields greater than the 10-year note has also plummeted, he said.

"Cash is not trash anymore," said Matthews. "That's what's really changed the landscape to the detriment of stocks."