Seasonality and the Stumbling Stock Market
The Stock Market is Stumbling Today
There has been somewhat of a meltdown in the markets this week. Both yesterday and today, saw major losses in the TSXV and in commodities. A wave of gloom and doom is spreading across the industry.
The Seasonality of the Market
Most securities professionals understand that historical trends have a tendency of repeating. There is even an ETF named Horizons Seasonal Rotation (HAC) that bases its performance upon seasonal trends in the market. This ETD was launched in late 2009 and has shown a remarkable consistency in increasing value until the fall of 2011. It accomplished this enviable track record by understanding and trading based solely on historical seasonal trends.
The Unpredictability of the Market
These seasonal trends are fooling us right now. The ETF HAC shows a radical departure from previous seasonal expectations. At the end of 2011, this ETF lost ground at a time that almost anyone would have said that the markets should rise.
The Santa Claus Rally
There is something called the “Santa Claus Rally”, which is a way of saying that the market usually improves in the late stages of the year. Some say this is a concentrated efforts by funds and money managers to show good results and get their bonuses based on performance, so they trade stocks higher as the year end approaches. Thise less cynical attribute this normal year end rally to market forces. Whomever is correct, it is rare that the markets fall as the year end approaches.
The TSXV fell in late 2011
The PDAC
In March each year, there is a major mining show called the PDAC. Historically, the commodities market has shown increasing strength coming up to the show and that strength normally continues until late May, when the surge abates and the markets weaken. Hence the phrase “Sell in May and Go Away”.
Once again the markets weaken at a very unusual time. The weakening started just before the PDAC, which rarely happens and continues until today. if anything, this weakening is exacerbating.
Once again the Seasonal Rotation ETF shows a fall in a period when it should be stronger.
What is Happening
There are many pundits that say we are on the verge of a major bull market. Historically the markets weaken and frighten away investors who finally just “give up”. It is at this low that the next great boom usually occurs, and the professionals make hay from anticipating the recovery while the retail investor sits on the sidelines.
What is very different this year, is that seasonality is a bit ‘wonky’. The predictive value of seasonality is fooling us.
The Economy is Improving and the Next Cycle is Starting
As we have repeated previously, almost all indicators coming out of the USA are stronger, in spite of day to day fluctuations. Jobs are increasing. Productivity is increasing. Energy imports are decreasing. Housing seems to have stabilized. The politics are starting to irritate the voters who want action rather than political bickering, and so on.
Don’t abandon ship. Stay strong and be rewarded with increases in the stock market. The world is recovering, as it always does. The next big cycle is starting as it always does,
We finish with a quote from Richard Bernstein, who essentially repeats our opinion.
February 3rd, 2012 Richard Bernstein Advisors
The market generally proves the consensus wrong, and 2011 certainly adhered to that historical precedent because the consensus “must owns” at the beginning of 2011 generally underperformed during the year. What is somewhat startling to us, however, is that conviction has yet to be shaken. ……..
Our view continues to be that the US markets are in the early stages of a decade of outperformance. US stocks have now outperformed BRIC (Brazil, Russia, India, and China) for more than four years, and the US dollar (as measured by the DXY) troughed in 2008. ……………………….
It’s déjà vu all over again. Investors during the early-2000s were waiting for technology shares to rebound, and ignored the asset classes that were outperforming, such as emerging markets, commodities, gold and REITs. Today, investors are waiting for emerging markets and commodities to rebound, and are generally ignoring the asset classes that are outperforming, such as US stocks and bonds.
We continue to favor US assets as the core of our strategies.
We may or may not have positions in the securities we name. In making an investment decision numerous factors must be considered including portfolio balancing, timing, cash and capital reserves, asset allocation and other factors. Readers are strongly advised to do their own research. Matters discussed contain forward-looking statements that are subject to risks and uncertainties and actual results may differ materially from any future results, performance or achievements expressed or implied.
Views expressed are opinions and not investment advice. Persons investing should retain a licensed professional to guide them and not rely on the opinions expressed herein. This report is neither a solicitation nor a recommendation to buy or sell securities. We are not a registered investment advisor nor a broker-dealer. The information contained herein is based on sources which we believe reliable but is not guaranteed as being accurate or a complete statement or summary of the available data.
Categories: Diversity in Investing • Economic Cycles • Gold, Silver • Jobs in the USA • Market Meltdown • OIl & Gas • Stock market • Value Investing
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