Seasonality Surprise?

Sell in May and go away” was our overview on the 1st May of this year, commenting on the research published by Yale Hirsch in the Trader’s Almanac, which shows that the market year is broken into two six-month seasonality periods. From May 1 through October 31 it is seasonally unfavourable, when the market most often finishes lower than it was at the beginning of the period, whereas from November 1 through April 30 it’s seasonally favourable, and the market most often finishes the period higher.

While the statistical average results for these two periods are quite compelling, trying to guess the market purely based on these historical results is not always as easy as it sounds.

“Sell in May and go away” did not work this year as the S&P 500 was up by 11% over the period and although the Dow trailed at 5.75% it was still a gain.

weekly_blog_131107_01There were obviously positive forces working against the negative seasonal tendencies this year which overcame the light trading volumes, holidays etcetera.

The next six month’s seasonality is supposed to be positive and we remain aware of seasonal tendencies because their effect on the market can be profound, albeit that there are a host of obstacles to overcome this year, such as the ongoing US budget deficit and debt ceiling talks not to mention the box that central banks have placed themselves in.

A final observation to be aware of are the extreme bullish sentiment extremes, which we have been at pains to mention of late. The odds must be high that the next period of seasonality will also surprise.

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