Fall months historically send stock market downward


By Mike Zaccardi

We are in the heart of what is known to be the worst two months of the year for the stock market. September and October are infamous as times to be very defensive when investing in equities. This year, September is off to a racing start, with the benchmark S&P 500 up several percentage points.
The financial markets have seasonal trends to which investors should pay attention. In addition to September and October weakness, many other trends are prevalent.
As investors should be weary of equities right now, according to historical seasonal trends, gold and treasuries typically have strong performances.
I question whether these so-called seasonal anomalies will continue much longer as the market becomes increasingly efficient. Everyday and institutional investors, particularly high-frequency traders (computer algorithms), are surely aware of seasonal trends and will likely exploit any anomaly quickly.
Look at what happened this year. August was a terrible month for stocks; it was as if traders were playing the September and October weakness in advance.
What are some other seasonal trends?
History shows January is a strong month for small companies. Usually new money comes into the stock market at the beginning of each year, as investors look to contribute to their retirement plans by investing in more risky stocks. Also, investors sell their losing investments at the very end of the previous year for tax purposes – that money has to come back into the market.
The “Santa Claus rally” occurs near Christmas, as money is invested from holiday bonuses and in anticipation of a strong January. This trend counteracts some of the tax-loss selling which occurs at the very end of year.
It is said “as January goes, so goes the year.” This anomaly is known as the “January Barometer.” 2010 saw a negative January with the S&P down 3.7%.
There is an old adage in the market, “sell in May and go away.” The rule-of-thumb here says the best months for stocks are November-April. History shows returns on the S&P 500 during November-April have beaten those of May-October 71 percent of the time since 1945.
Note that the major stock market crashes of 1929, 1987 and 2008 all occurred during the weak May-October period.

Another common anomaly that is about to shape up in the current market will be a boon for bulls. The third year of a Presidential cycle is the best, on average, for the stock market. Also, gridlock in Washington is bullish for equities. It appears the GOP will take control of the House, and we may have a split Congress come 2011. This condition is a good sign for stocks in 2011.
On a smaller time scale, Mondays and first days of the month are usually strong when the stock market is generally moving higher. “Merger Monday” is quite often bullish as new deals are announced between companies – one buying out another. Historically, Mondays tend to be weak overall, according to data the famed Wharton professor Jeremy Siegel gathered.
On the first day of the month in a bull market, institutions invest new money, and the stock market does quite well. On the flip side, during bear markets, the market is vulnerable to sharp sell-offs near the beginning of the month. Studies show the beginning six days and ending two days of the month are unusually strong in the aggregate.
Commodities are known to have strong seasonal trends. Soybeans perform well from February-June, gasoline moves higher from February-May as driving season approaches.
As efficient as the market is said to be, seasonal trends still hold today. If you want to be a better investor or trader, it is important to be aware of seasonality in the market.