[Chart Of The Week] The End Of The Worst Time Of The Year For Stocks

JC Parets
October 20, 2016

It's important to recognize what type of environment we're in for the market. During different times of the year, traders and investors tend to behave in certain ways. When you smooth out the data over many years, their patterns become clear. We all hear about, "Sell in May and Go Away", but what about, "Remember to Buy In November"?

Today we're focusing in on the end of what is historically the worst seasonal period of the year for the Dow Jones Industrial Average. So what happens next?

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[hide_from visible_to="member"]Today's chart comes from my pal Jeff Hirsch who is the author of the Stock Traders Almanac. He does excellent work and makes it clear that the major shift in seasonal tendencies is quickly approaching. Prior to 1950, farming was a major portion of the US economy and August was historically the best performing month of the year. After World War II, as industrialization created a growing middle class, farming became a much smaller piece of the US economy and the behavior of market participants changed accordingly.

This is a chart showing the annual seasonal pattern for the Dow Jones Industrial Average from 1901 to 1949 (in black) and the seasonal pattern from 1950 to 2015 (in blue). The key line we want to focus on here is the blue line approaching a major bottom towards the end of October:

djia seasonals

The best 3-month period of the year historically is from November through January. Halloween also marks the beginning of the "Best 6-month period" of the year until May, when the annual weaker period begins again.

Also, I think it's important to reiterate that we like to use seasonality by looking in the rear view mirror. Rather than flipping the book to cash blindly on May 1, and piling back in after Halloween, we want to see whether or not the market respected the seasonal tendencies or if it ignored them.

Well, as we approach the end of the worst 6-month period of the year, the Dow Jones Industrial Average is actually up around 2.5% during this period. The S&P500 is up 3.7% since the beginning of May, the Russell2000 (IWM) is up almost 8% and Emerging Markets (EEM) are up almost 10% during this period. So I think we can all agree that the resiliency in stocks during the worst period of the year is a feather in the hat for the bulls.

As we enter the best time of the year for stocks, I think it's important to remember how strong stocks have acted heading into this period. I would argue that seasonality is currently a tailwind for stocks going into year end, not a headwind.

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Tags: $DJIA $YM_F $SPX $SPY $ES_F $DIA $IWM $RUT $EEM

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