THE MARKET'S FAVORABLE SEASON APPROACHES!
As I remind you twice a year, in the spring and in the fall, the stock market moves in remarkably consistent seasonal patterns. It makes most of its gains in the winter and early spring, and suffers most of its declines in the summer months.
The pattern has been obvious for many years, as evidenced by the decades-old Wall Street maxim "Sell in May and Go Away". However, it wasn't as clear when one was to re-enter the market in the fall.
Research by Ned Davis Research Inc. in the 1980s indicated it was a good bet to re-enter on October 1, while research by Yale Hirsch of the Hirsch Organization came up with November 1 as the time to buy. Hirsch found that over the previous 50 years an investor who bought the S&P 500 index on November 1 each year, and sold it the following May 1, would have equaled the profits of a buy and hold investor, while cutting market risk by 50% (since he or she was in the market only six months each year). By doing so the 'seasonal investor' would also have avoided some nerve-wracking market plunges, including the worst months of the 1973-74 bear market, the 1987 crash, and the 1990 bear market.
However, the rally that begins the market's favorable season obviously does not begin exactly on either October 1 or November 1 every year, nor does the favorable season end each year on May 1.
So when I began my own research into seasonality in the 1990s it was my goal to find a way to catch the variations in seasonality as they take place each year. That research finally led me to combine the market's general seasonal pattern with a technical 'indicator', MACD, which was developed by Gerald Appel in the 1980s, to 'trigger' a signal when the market changes direction into either a sustainable rally or correction.
The result was my Seasonal Timing Strategy, introduced in Riding the Bear in 1999 as a means of continuing to make gains in the remainder of the 1990s bull market, and not give the gains back in the severe bear market I predicted was just around the corner.
The strategy says the earliest entry in the fall is October 17, but only if MACD is on a buy signal at the time. If the market remains in a decline, as indicated by MACD remaining on a sell signal, the entry is delayed until MACD triggers its next buy signal. In the spring, the earliest exit is April 20, but only if MACD is on a sell signal when that date arrives. If the market remains in a rally, as indicated by MACD remaining on a buy signal, then the exit is delayed until MACD triggers its next sell signal.
Back-tested over the previous 50 years, the entry was sometimes delayed by MACD to as late as late November, while the exit was sometimes delayed until mid-June. Thus the favorable and unfavorable seasons lasted between four and eight months, and the 'seasonal investor' was able to be aware of that at the time.
It made a big difference in what could be expected from seasonality. Back-tested over the previous 50 years, the strategy tripled the performance of the S&P 500, and used in my newsletter has had similar performance in real time. In particular it got us nicely through the severe 2000-2002 bear market by missing the biggest parts of the declines, which as seasonality tells us to expect, took place mostly in the unfavorable seasons each year.
So where does that leave the market now in regard to its seasonality?
According to my version of seasonality, the earliest possible entry would be Monday (October 17), but only if MACD is on a buy signal by the close of the previous trading day (Friday, October 14), and MACD was still on a sell signal as of the close Friday. Its present condition is such that it would take a fairly significant upside reversal in market momentum to produce a buy signal.
However, after four down weeks in a row the market is somewhat oversold short-term, and should be due for at least a brief technical bounce off that oversold condition. Next week, being a usually positive options-expirations week, would be a logical time for such a bounce. So with the earliest possible entry date having arrived, we will have to begin watching MACD closely for a potential buy signal.
Yet I don't expect to see enough upside market momentum quite yet. The market has just recently broken below intermediate-term support levels, and is looking quite negative. Additionally, investor sentiment is usually quite gloomy by the time a market correction reaches its low, and by most sentiment measurements the decline has not resulted in much fear in the market yet.
If seasonality holds to its history, odds are that the market will launch into a typical favorable season at some point within the next few weeks. But I expect it will be from a lower level.
Meanwhile, if you are so inclined you can check the MACD indicator at the close each day on free websites like bigcharts.com. My rule is that an entry signal requires a buy signal by MACD on both the Dow and S&P 500.
Sy Harding
Market Data 
Markets 
AI
