The Unfavorable Season Begins

05/12/2016 9:00 am EST

Focus: STOCKS

Alan Newman

Founder, Crosscurrents Publications, LLC

Despite substantial recent price advances for the major indexes from the February lows, a fairly reliable indicator with a 65-year history is about to signal bad times for stocks are dead ahead, cautions Alan Newman, editor of CrossCurrents.

We are referring to the market’s seasonal tendencies observed since 1950. The seasonal pattern is one of the most astounding phenomena ever observed in any financial arena.

Virtually all of the US stock market’s gains over time are attributable to only the months of November through April.

An initial $10,000 investment in the Dow Industrials in 1950 has grown to $821,360 when invested only in the months of November through the end of the following April.

This represents an annualized gain of 13.5% despite being exposed to risk for only half of each and every year.

If you were invested only from the beginning of each May to the end of every October, the same $10,000 investment would now be worth less money, a shockingly poor outcome.

At this juncture, we have reason to believe an even worse dichotomy may develop between the market’s favorable and unfavorable seasons.

The market’s favorable season just ended and the Dow Industrials were up a mere 0.6%, the S&P 500 were down 0.6% and the Nasdaq Composite was down 5.5%. So much for favorable!

What will the market’s unfavorable season bring? Clearly, we do not expect much in the way of good stuff.

Quite the opposite. While we are avoiding talk of collapse and crash at this moment, we do see sufficient odds of a dramatic downside in the months ahead.

We are currently ensconced in a mania, driven primarily by institutional investors, specifically mutual fund managers.

From 1984 through 2009, mutual funds had an average cash-to-assets ratio of 6.9%. Since 2010, the average cash-to-assets ratio of mutual funds has been only 3.6%.

As well, in this period, domestic equity funds have suffered over $629 billion of outflows, an average of $8.4 billion per month. The statistics and the trends provide no escape from the conclusion that whatever remaining demand we see for stocks stems from ever dwindling sources.

Under the circumstances, the market’s unfavorable season appears to be perfectly aligned this year.

Dow 17,399 has taken on huge importance. If prices break down below that point, there is zero support for the next thousand points down.

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By Alan Newman, Editor of CrossCurrents

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