In bear hunting, you do not have to see the bear before it sees you; you just have to see it and act before it takes you down. In investing, there is a point where you have to make a decision as to whether a decline is merely a correction and then buy the dip, or the beginning of a bear market and then either reduce risk exposure immediately or sell into the bear market’s first rally. In reality, there are not many bull market tops, but acting quickly and making the right decision when one occurs makes all the difference. I would like to provide a simple observation to add to your investor tool kit, or gun rack as it may be, to assist in making the right decision in a timely fashion in the current bear hunt.
Many studies have identified the six months loosely defined as the November-May as the strong market season which on average significantly outperforms the rest of the year–the weak season. In doing a little seasonal analysis of the SP500 since 1995, I observe a seasonal reversal occurred after the top of the last two bull markets. In other words the market ended lower in May than it started in November following the bull top. This negative strong season lead to significant losses in the follow-on May to November weak season. In continuing bull markets the strong season was always up. The weak seasons can be either down, neutral or in many cases up. The last two bull market tops actually occurred in the weak season in 2000 and 2007, then the reversal began with a down November and the market continued down through the end of April. I am defining a seasonal reversal as either a “down” strong season after a cyclical bull market top, or an “up” weak season after a cyclical bear market bottom.
In both bear markets, the most significant declines still happened in the weak season after a seasonal reversal. Similar to Dow Theory signals, if we wait until a down strong season to determine if the bear market commenced we would have given back much of our gains, but in the long run if you followed Dow Theory signals you would have outperformed a buy and hold strategy. The question then becomes, can we find a quicker seasonal indicator to identify the start of a bear market. While two data points do not make an indicator, the month of November in the 2000 and 2007 were both down significantly unlike all the bull continuation Novembers.
Let’s look at November’s numbers:
1st Bull Reversal: 1995 4.05%; 1996 7.12%; 1997 4.49%; 1998 5.84%; 1999 1.96%; 2000 -8.18%
2nd Bull Reversal: 2003 .76%; 2004 3.83%; 2005 3.49%; 2006 1.66%; 2007 -4.22%
Current Bull: 2009 5.68%; 2010 -0.14%; 2011 -0.12%; 2012 0.3%; 2013 watching
2010, 2011 and 2012 were basically neutral Novembers. And to be fair, prior to 1995 there were numerous down Novembers, but the above observation holds true in the last two bull/bear markets. 2012 was interesting in that November had a significant correction, but recovered by the end of the month. While interesting to watch November’s results, it is the performance of the entire strong season we should watch.
The key is a down strong season turns into more than a correction and November’s performance could be a harbinger of the strong season’s performance. A down strong season signals a bear market and a challenging weak season will follow. While seasonal analysis should never be the only tool in an investor’s toolbox, consider it an indispensable one. Good luck in your bear hunt and watch the November to May SP500 return.
Written and edited by Michael H Bond for Almanac Smart
Categories: Seasonal Perspectives