6 Month Seasonality Turns Favorable

By Carl Swenlin, Decision Point

We have just begun a new six-month period of favorable seasonality. Research published by Yale Hirsch in the Trader’s Almanac shows that the market year is broken into two six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. From November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher. While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds.

The chart below shows the last two six-month seasonality periods. The first, November 2011 through April 2012, was supposed to be favorable, and it was, with prices closing well above where they started. The second period was supposed to be unfavorable, but, while prices did close slightly below their starting point, prices moved steadily higher after the initial decline in May. It is interesting that both periods began with a one-month decline, but this is not characteristic of the seasonality process.

Seasonal tendencies are always at work, but their influence on stock prices can be dampened or enhanced by the primary trend. For example, the chart above shows a one-year slice of a cyclical bull market, and the overall trend is obvious. The bottom line is that we should be aware of current seasonal tendencies, but first and foremost follow the primary trend.

In our subscriber area we have seasonality charts going back to 1950.

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  • http://www.monetaryrealism.com Traders Crucible

    Great Post. I am a huge fan of the “Sell in May and go away” technique.

    I read at CXO that using some short term MA crossover as the entry/exit signal for the exact days extends profitability by a rather significant amount.

  • http://YahooFinance freebird

    Defensive players should note that Nov to May works best for capital preservation as well. Table below needs a fixed fontsize to format correctly, so clip and paste into notepad.

    S&P 500 6-month raw returns starting by month 1950 to 2011
    source: Yahoo Finance historical data by month download

    Month Avg Sigma 10% 50% 90%
    1 3.871 11.254 -11.689 4.008 17.074
    2 3.642 9.587 -10.617 3.835 16.265
    3 3.816 10.531 -8.916 4.326 16.057
    4 2.171 11.93 -14.199 2.403 18.187
    5 1.134 9.474 -12.265 2.068 12.965
    6 2.55 10.674 -10.807 3.852 13.912
    7 4.344 11.193 -9.234 4.781 18.838
    8 4.461 11.184 -9.712 4.992 16.761
    9 4.574 12.197 -9.724 4.944 18.683
    10 6.553 12.571 -7.583 8.107 22.581
    11 6.97 10.244 -5.295 6.567 21.527
    12 5.49 10.02 -8.922 4.785 17.198