Understanding Seasonality in Investing
Seasonality has long been a factor in stock market trends, providing insights into predictable cycles of strength and weakness throughout the year. Yale Hirsch, the founder of the Stock Trader’s Almanac, is a prominent figure in the study of these patterns. His research has shown that certain times of the year consistently offer better opportunities for investors to generate returns, while other periods call for caution.
The saying "Sell May and Go Away" is a common topic of discussion among investors. Historical analysis supports the notion that the market tends to be weakest during the summer months. Hirsch's Stock Trader’s Almanac introduced the idea that the stock market follows a seasonal rhythm, where certain times of the year offer greater return potential. This work has helped investors identify key periods where market performance historically improves, allowing them to adjust their strategies accordingly.
The Adage: "Sell in May and Go Away"
This well-known market seasonality concept reflects the tendency for stocks to underperform during the summer months, roughly from May through October. Investors are often advised to exit or reduce exposure during this time to avoid potential downside risk.
The Best Six Months
Conversely, the period from November through April has historically been stronger for stocks, with higher average returns. This seasonal trend is based on data showing that a significant portion of stock market gains often occur during this half of the year.
The Math Behind Seasonality
A chart demonstrating that $10,000 invested in the market from November to April significantly outperforms the same amount invested from May through October supports this concept. Interestingly, the maximum drawdowns are significantly larger during the "Sell In May" periods. Notable dates of major market declines occurred in October 1929, 1987, and 2008.
However, not every summer results in poor performance. Historically, there have been many periods when "Sell In May" did not work, and markets rose. 2020 and 2021 were examples of massive Federal Reserve interventions that pushed prices higher in April and subsequent summer months. However, 2022 was the opposite, as April declined sharply as the Fed began an aggressive interest rate hiking campaign the preceding month.
Improving Outcomes with Technical Analysis
Technical analysis can improve outcomes. While seasonal trends provide a useful framework, Hirsch's research goes further by applying technical indicators like the MACD to refine entry and exit points. The seasonal MACD (Moving Average Convergence Divergence) signal, in particular, serves as a trigger that confirms when it’s the right time to re-enter the market after the weaker summer period.
The Role of the MACD in Seasonal Investing
The MACD is a momentum-based indicator that measures the relationship between two moving averages of a security’s price—typically the 12-day and 26-day exponential moving averages (EMAs). When the shorter-term EMA crosses above the longer-term EMA, it generates a buy signal, indicating the potential start of an uptrend. In seasonal investing, this technical indicator is combined with Hirsch’s seasonal trends to offer more precision in market timing.
Seasonal MACD Buy Signal
This signal typically triggers near the end of October or early November, aligning with the start of the "Best Six Months" period. It confirms that market momentum is shifting upward and is a favorable time to re-enter the market.
Seasonal MACD Sell Signal
Similarly, at the end of the "Best Six Months" (usually in late April or early May), the MACD sell signal indicates weakening momentum, suggesting it may be time to reduce equity exposure.
On Friday, October 11, 2024, the S&P 500 index triggered its seasonal MACD buy signal, marking the beginning of what has historically been a seasonally strong period for the stock market. This signal arrives just before November, reinforcing Hirsch’s findings that the months ahead tend to deliver better returns.
3-Market Supports For Seasonality
In 2024, three primary drivers will likely support markets from the middle of October through year-end and likely into early 2025.
Earnings
The first is earnings season, which has proved normal so far, although the next week will be very important in corporate outlooks. As discussed in the latest BullBearReport, analysts significantly lowered the "earnings bar" heading into the reporting season. As noted in "Trojan Horses," analysts are always wrong, and by a large degree.
Performance Chasing
Secondly, according to Morningstar, during the first half of 2024, only 18.2% of actively managed mutual and exchange-traded funds outperformed the cap-weighted S&P 500 index. This underperformance occurs during the best presidential election year in roughly 90 years, which will pressure fund managers to play "catch up" with performance moving into year-end reporting. Given the "career risk" to managers of significant underperformance, additional buying pressure could manifest.
Corporate Share Buybacks
Lastly, corporate share buyback windows will reopen in November and December as companies exit their earnings "blackout period." With nearly $1 Trillion in authorizations for 2024, the pace of buybacks will be exceptionally strong this year.
Seasonality: Not A Risk-Free Adventure
For investors, this seasonality signal could be an opportunity to increase exposure to equities, particularly in large-cap stocks that tend to drive the broader market. However, it’s essential to recognize that while the MACD signal aligns with historical trends, it does not guarantee future performance.
Despite the historical reliability of seasonality and the MACD buy signal, investors must still be aware of risks. These include monetary policy, geopolitical risks, market volatility, and the fact that historical trends are not guarantees.
Navigating Into Year-End
With the S&P 500 now in a seasonally strong period, bolstered by the weekly MACD buy signal, investors may want to consider several strategies. These include increasing equity exposure, reviewing portfolio risk, rebalancing allocations, and using stop-loss orders.
Yale Hirsch’s research on market seasonality, paired with the power of the MACD signal, offers a disciplined approach to navigating historical market trends. The recent MACD buy signal for the S&P 500 provides investors with a potentially advantageous entry point into the market as we head into the historically strong "Best Six Months" period. However, it’s crucial to remain aware of the risks, including macroeconomic headwinds and market volatility.
Bottom Line
Seasonality and the MACD buy signal can provide a useful framework for investors, but they are not foolproof. It's essential to consider other factors such as monetary policy, geopolitical risks, and market volatility. While the MACD buy signal has been a reliable indicator in the past, external factors could reduce its predictive power. Investors must be cautious and not rely solely on seasonality and technical signals. What are your thoughts on this approach to investing? Share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing, which is everyday at 6pm.
