Seasonality: Beware the Dead Zone

05/21/2015 9:00 am EST


Alan Newman

Founder, Crosscurrents Publications, LLC

Despite the sage advice offered for decades to buy and hold for the long-term, the long-term investing strategy has really only been effective for the months from November through April, reports Alan Newman, editor of Crosscurrents.

Amazingly, the seasonal effects that have been so pronounced for so many decades are never given more than a very brief mention by the media and are roundly ignored in spite of the statistics.

If you invested $10,000 in stocks only in the six months of November through April, you would now have a portfolio worth $828,602. If you had instead invested only in the six months of May through October, you would only have $9832 remaining.

Fund inflows are primarily responsible for seasonal effects. Since 1984, 74.4% of all inflows have occurred from November through April. Only 25.6% of inflows have occurred in what we have termed the “Dead Zone.”

The two periods are so disparate that the months of November through April have literally been responsible for all of the market’s gains over time.

That’s right. Sixty-five years later, you would have less money than you started with (ex-dividends). In stock market history, there has never been a pattern as stunning and persistent as this.

The two months in which inflows are the strongest are January and April, partially explained by yearend bonus money being put to work in January and IRA contributions put to work in April. In just those two months, we see 38.2% of all net inflows into mutual funds.

As measured by the broadly-based S&P 500 over 65 years, January is higher 62% of the time and April is higher 69%. Once May 1 rolls into view, we typically see inflows begin to subside until September, when they usually bottom.

Since momentum plays such a large role in price action, this is the reason we seem to form significant bottoms in the month of October. However, the facts support September as the worst month performance-wise.

Judging by our studies of inflows, liquidity, and sentiment, the next six to eight months should prove—at best—discomforting to investors. At worst, a huge rout may be in the offing.

The US stock market is no longer an investment market. Stocks are now simply trading vehicles. As late as 1958, the average holding period for stocks was seven years and seven months. By 1984, the average holding period for stocks had fallen to only 26 months. It is currently less than four and a half months.

We have no doubt, this is the third veritable mania in 15 years. It is not going to end well and we expect a news event to catalyze a 180 degree turn. Critical support for the Dow is at 17,579 and for the SPX, critical support is at 2039.

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