The 'Best Six Months' That Weren't

Steve Strazza
May 1, 2020

From the desk of Steve Strazza @Sstrazza

Now that April is in the books that old Wall Street adage of “Sell in May and Go Away” is making its annual tour around the world of financial media. The reason this is such a commonly rehearsed phrase this time of year is that it was one of many seasonality trends first introduced by Yale Hirsch in his book, The Stock Traders Almanac.

The theory is rooted in historical research which shows that stocks tend to experience their worst performance between the months of May and October. Alternatively, the best months of the year typically occur between November and April, which is what we're going to cover in this post.

Notice how significant the disparity in average return is between these two six month timeframes.

Click table to enlarge view.

LPL Financial's Ryan Detrick shared these stats on Twitter this week.

Over the past 70 years, the six month period starting in November ranks higher than any other rolling six months in both average return and the percentage of occurrences the market is higher. Likewise, the six months starting May 1st (that's today!) rank lowest by both of these same measures.

Most US Equity Indexes broke above multi-year highs in late October/early November of last year and went on to rally into the middle of Q1. Things were looking good for stocks and their strong performance made sense within the context of the seasonal trends we're discussing. Then we experienced an unprecedented selloff and equally impressive rally in the time since.

The stock market just had its best month since 1987 but that means nothing for this exercise as we need to analyze the full six month period. Here are the "best six months" returns for a variety of major averages, factors, and sectors in the US.

The main takeaway should be simply that there is a lot more red than green in this table, but here are some highlights.

  • The average ETF in this table is down by roughly -10%.
  • Of all the major averages, only the Nasdaq 100 (QQQ) was positive.
  • Risk-on areas such as Transports (DJT) and Small-Caps (IWM) were among the worst performers, losing -21% and -17%, respectively.
  • Growth (IWF) was the only positive factor with High Quality (SPHQ) close to breakeven. The remaining five were all lower by at least -13%.
  • The only positive sectors were Technology (XLK) and Health Care (XLV). Cyclical sectors lagged noticeably.

I know what you're thinking... If that was the "best six months," what are Equities going to do during the worst six? Probably not too well.

The reason we analyze this seasonal trend is not so we can buy stocks In November and sell them in May. Please don't do that. That is a fool's errand and not at all how this information is intended to be used.

The real value comes from measuring the current years' seasonal performance relative to its historical trend. In comparing the present stock market to its historical tendencies, we can identify divergences that provide insight into the future performance of the market.

For example, one of the most effective seasonal indicators is when the market performs poorly during what is supposed to be its strong season, as it just did.

The fact that the S&P 500 fell -4.5% during what was supposed to be its strongest season tells us there is a good chance it will continue to struggle during its weakest season. This simply adds to the weight of the evidence we're already seeing which makes us believe US equities are likely to remain under pressure for the foreseeable future.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team

 

 

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