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This Tenacious Rally Has Seasonality On Its Side at Trader’s Narrative

This is a guest post by Wayne Whaley (CTA):

I’m not sure whether this market reminds me more of my grandfather’s beagle puppies or the current Secretary of State’s husband, but either way he (the market) doesn’t seem to be inclined to hang around the house for long. It looked like this market might show signs of mean reversion in the second half of October, but then yesterday, it caught wind of the third quarter GDP report and wondered off again, allowing the S&P 500 to post it’s 8th straight up month since the bottom was established in March 2009.

So what’s ahead? A couple of considerations from a seasonal vantage point:

First, since 1950, the average annual return on the S&P 500 index is 8.05%. Over half of that annual return (4.25%) has arrived in the three months November to January.

Second, some respected market technicians have argued that since we didn’t get our usual autumnal sell off, that it may come later in the year. I do agree that the market tends to try to confuse as many of us as possible, but it is very possible the 5% sell off in late October was all we needed to rattle a few cages and I am still inclined to believe that the market’s ability to prevail against traditional seasonal headwinds is a sign of forward strength.

Last month, I posted an article “When September Flexes Its Muscle“, that showed that if the market can manage to post a gain in the seasonally weak September month, the market was has a very high probability of finishing the last quarter positive with an average gain of 4.84%.

Below is a table, with an update of those results for the final two months of the quarter, when both September and October are positive.

nov-dec performance after positive sept-oct statistics

Since 1950, the November & December time frame, following up September & October , was 13-2, with a median +6.69% return. If you can allow yourself to consider 1968 to be an unchanged data point (-0.18%), then 2007 was the only noticeable loser in the 15 data points. Under the theory, when the market goes against the seasonal trend - go with the market, the 2007 data point provided strong clues as to what was to come in 2008.

There is a meaningful pullback coming. And staying long for the well known, traditionally strong, year end rally almost seems too logical. But I think that given it has been eight in a row with the holidays to go (rhyme intended), we are well advised to stay with the trend at least through January of 2010 or until the tape shares some information with us to the contrary.

Those of you who follow my commentary know that I am also influenced by the three strong breadth thrust “The Mother of All Momentum Thrust Years” we had this year, the last coming in September. However, if the year end rally doesn’t materialize (ala 2007), one would be well advised to take some defensive measures.

Good luck to us all.

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8 Responses to “This Tenacious Rally Has Seasonality On Its Side”  

  1. 1 wayne

    Babak, since you posted this on Oct 30 instead of Nov 1, I’m afraid we may have doomed the sp to a last day selloff. I hope it doesnt become a moot point.

  2. 2 Babak

    lol, you think I jinxed it?

  3. 3 wayne

    yea, is soon as I saw the post, I went short

  4. 4 steve

    As I’ve watched this rally since March, it has reminded me oh so much of 2003. Capitulation lows, stimulating low interest rates, and a wall of worry that kept so many investors on the sidelines for most of that year.

    There are plenty of reasons to be skeptical about the economy and the stimulus gigantus that has kept it afoat, but just like 2003, we were a full year in a bull run before any kind of pullback really began.

    I scratched my head then, and I’m doing it now, but I’m still buying the dips and trading the short term declines with inverse ETF’s like the DXD and QID.

    I’m sticking with that plan until there are clear signs the bigger bull move is finished. A simple 40 week moving average can help with that, just as it did signaling a bigger bear starting back in 2007.

  5. 5 wayne

    Sorry I took up space with this post. Please disregard.

    I had told Babak I would give him some end of the month comments. I sat down Thursday morning, (Oct 29) wrote this piece to send to Babak after the close on Friday. I went ahead and sent it to him Thursday afternoon to give him a chance to peruse, with the comment that 8 months in a row was contingent on close Friday above 1057. Obviously Oct closed down a bit. Miscommunication on our part.

    The Nov-Jan stats are still pertinent, but of course the consecutive Sept-October stats are now irrelevant. I need the weekend to cogitate on the future direction of the end of year. We have speculated here that we would get a pullback before yearend. Not sure if the down October, really changes the odds much. I owe everyone an epifhany for the foul up on this post. I will share when it hits me.

    Those familiar with my comments, know I was being facitious, when I posted above that I went short midmorning. I’m not that smart. Took several daily shorts during October, but unfortunately missed the last two days. Ive been hurt some over the last few months by the failure of the end of month-first of month patterns. For example, I went in today with the knowledge that 11 of the last 12 last Fridays of October had been up, with the one percent moves 8-0. The kind of odds I traditionally play. But it didnt work out here. Ran stops took a 1.25% loss today.

    Again my apologies for the goof up on above post. Have a good weekend.

  6. 6 Babak

    Wayne, the historical data stands, irregardless of how October closed. And if it is one thing that makes successful traders, it is the ability to turn on a dime and not be married to a position but to change as new information is assimilated. Have a great weekend :)

  7. 7 wayne

    Thx Babak, if I were doing the study today, I would have run it based on the Sept-Oct period being up rather than each month being up and expect I would have gotten very similar results.

    I believe it is epiphany not epifhany

  8. 8 wayne

    Babak, 4th quarter numbers are real and their spectacular! (for you younguns, Terri Hatcher on Seinfeld, youtube it).

    I took Saturday off, came in early Sunday morning to study and look what fell in my lap. Below are the results for Nov-Dec after an up Sept and a Down Oct. The Nov-Dec period was up 10 down 1, for an avg gain of 4.66%.

    Dave notice 1973, another data point supporting our theory.

    Year Sept Oct Nov-Dec
    1954 8.31 -1.95 13.57
    1955 1.13 -3.05 7.42
    1967 3.28 -3.53 3.40
    1970 3.41 -1.25 10.69
    1973 4.01 -0.13 -9.92
    1976 2.26 -2.22 4.43
    1979 0.00 -6.86 6.01
    1983 1.02 -1.52 0.84
    1995 4.01 -0.50 5.92
    1997 5.32 -3.45 6.10
    2005 0.69 -1.77 3.40

    I’m a little long and doing a little buying Sunday night.

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