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. (See Sy Harding’s book Riding the Bear for details on this subject.) 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.
Below are two one-year charts that begin on May 1, and end on April 30. The left half of the chart shows the unfavorable May through October period and the right half shows the favorable November through April period. The green line shows the beginning of the favorable period, the red line the beginning of the unfavorable period. As you can see, regardless of how the market performs on average, every year is different and presents its own challenges, and there is no guarantee that any given period will conform to the average. In fact, it is obvious, at least in the last few years, that bull and bear market pressures will override seasonal tendencies more often than not.
This chart is a snapshot of part of the last bear market, and both periods were unfavorable.
In this next chart you can see that the current bull market began shortly before the unfavorable period, and, as a result, the entire year was favorable.
The final chart is the recently ended May 2010 through October 2010 period, which was supposed to be unfavorable, but it wasn’t. Part of the correction from the April top occurred in the first third of the period, but the ensuing rally made up for the losses and the Dow managed to finish the period slightly above its starting point (as of midday Friday). Note that the historically horrible months of September and October beat the averages and were positive.
As we enter the next six months of favorable seasonality, it seems likely that it will begin with a correction. I don’t think that will set the tone for the entire six months, but it sure starts it out on the wrong foot.
Conclusion: Be aware of current seasonal tendencies, but first and foremost follow the primary trend.