Seasonal Strategies

Stock market seasonality has clearly been turned on its head this year. S&P 500 was down -4.1% during the Best Six Months (November-April) from October 31, 2019 to April 30, 2020, while it has been up 14.5% so far during the Worst Six Months (May-October) from April 30, 2020 through the close on September 29, 2020. However, with S&P 500 down -4.7% for September to date it appears seasonals are back in style again.

The typical end-of-September weakness is priming a constructive set up for our next Best Six & Eight Months Seasonal MACD Buy signal. October is the last month of the Worst Six Months and Worst Four Months. So it is time to begin preparing for our Tactical Seasonal Switching Strategy Best Six/Eight Months MACD Buy Signal. It can come any time on or after October 1.

October is also the first month of the majority of the sector seasonalities in the Stock Trader’s Almanac on pages 92, 94 and 96. Every year while preparing the annual Almanac, we revisit and analyze our seasonal sector trades in depth in order to make adjustments for any new or developing trends. Years of sector research allows us to specify whether the seasonality starts or finishes in the beginning third (B), middle third (M) or last third (E) of the month based upon the number of trading days in the month.

Seasonality Lives

We feel that there is no denying that market seasonality has not worked so well this year. But we believe we have been here before, and history is on our side. Over the long term, intermediate term and short term market seasonality has suffered brief periods when seasonality was overridden by more powerful forces. The COVID pandemic and economic shutdown certainly qualifies. We have seen it is only a matter of time until repetitive human behavior patterns reemerge, and people and institutions return to moving money around in the usual daily, weekly, monthly, quarterly and seasonal patterns.

The return of perennial September weakness is emblematic of a return to normal market behavior and a reflection of the fact that despite the continuing concerns about surges in coronavirus cases life is beginning to return to normal. Our kids are beginning hybrid learning, playing rugby, lacrosse and other sports (yes with some COVID protocols, but tackling and facing-off), golf outings are happening and people are going to restaurants and out and about.

The chart here shows the historical One-Year Pattern of the S&P 500 Since 1950 versus 2020. The black line shows the seasonal pattern since 1950. The blue represents the pattern since 1988. We use 1988 as it is the first year after the 1987 Crash when the market underwent a major systemic change with the implementation of downside protection circuit breakers and collars. It is noteworthy how the seasonal pattern persists during both the 70-year and 31-year timeframes.

2020 is plotted on the right axis due to the magnitude of the move this year. The yellow box highlights the rebirth of seasonality this September, especially during this notoriously negative Week After Triple Witching Week as detailed page 108 of the 2020 Almanac, indicated by the two black arrows

Years like 1980, 1982, 2009 and 2016 with unseasonably early weakness and bear markets like 2020 returned to normal seasonal patterns in short order. And years like 1954, 1958, 1980, 1982, 1995 and 2009 that exhibited double-digit gains in the Worst Six Months still proceeded to deliver further sizable gains in the subsequent Best Six Months (page 52, STA 2020). We believe the return of market seasonality is upon us. Be alert to Octoberophobia, but remain ready for our Best Months Seasonal MACD Buy Signal.