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Seasonality Triggered: Sell In May In Effect At Republic Wealth Advisors

Seasonality Triggered: Sell In May In Effect At Republic Wealth Advisors

Seasonality recent history fared well, what seasonality is, a brief history, and what clients need to do moving forward.

As the market adage goes, “Sell in May and Go Away”.  For the past week, we have been monitoring our technical indicators for signals that the favorable market season for equities was coming to a close.  With yesterday’s waterfall drop in major equity asset classes, that drop triggered our seasonality technical indicators.  This change in our seasonality indicator led us to reposition to more conservative positions in our investment portfolios for now.  

Seasonality From November 2016 To Present

Looking back to last fall, our buy indicator for seasonality came after the conclusion of the Fall Presidential election.  The election conclusion brought some certainty to the markets about our political landscape.  Since entering our seasonality position (IVV – S&P 500 or alternative) on November 11th, that position gained over 9% through Tuesday’s close – not a bad gain for six months work.  

Major market indexes including the Dow and the S&P 500 have been trading sideways since topping in early March although they have been scratching back to record highs in the last week.  Conversely the tech dominated NASDAQ has continued to trade higher on the strength of technology leaders posting strong earnings such as Apple, Microsoft, Amazon, Facebook, and Google.   Late news on Monday about the Trump / Comey controversy caused investors to sell during Tuesday’s session.  Nothing changed economically, but the market is sensing the Trump agenda for tax and healthcare reform are in jeopardy with fractures in the Republican Party.

Seasonality Overview

As a refresher, the seasonality pattern started after World War II and has continued into the present.  With seasonality, most market gains in the equity markets occur from late October and into late spring.  Just like the weather can vary from year to year, seasonality in the equity markets vary from year to year and there are years when it rewards an investor to stay fully invested through the unfavorable period.  But over a multi-year period there is no denying the research that major market advances do not occur in the summer months.  

In fact, research from Stock Trader’s Almanac reflect that from 1950 to early 2016, there was no reward for investors being invested in the equity market during the unfavorable months.  Additionally, most bear markets end in the unfavorable months of May through October with October being the “bear killer” month.  

A Short History Of “Sell In May”

Here’s a brief history of the strategy from Stock Trader's Almanac®…

Sell in May is an old British saw, soundly based on inherent behavioral finance patterns and the collective cultural behavior of the investment community, but it did not truly become a tradable investment strategy until after WWII…

Prior to about 1950, farming was a major portion of the U.S. economy and from 1901-1950, August was the best performing month of the year, up 36 times in 49 years (market closed in August 1914 due to World War I) with an average gain of 2.3%. July was the second best month, up 31 of 50 with an average gain of 1.5%. June was fourth best, averaging 0.9%. Why, you may ask? Simply: planting, sowing, reaping and harvesting. As crops were planted and then brought to market and sold, cash began to move and so did the stock market. 

Agriculture’s share of GDP began to shrink post World War II as industrialization created a growing middle class that moved to the suburbs where hard-earned salaries would be spent filling new homes with all the modern conveniences we all take for granted now. Farming became more efficient and fewer and fewer people worked on the farm. 

Suddenly, summer was less about the hard work of harvesting crops and more about vacations and relaxing.  As the economy evolved and peoples’ lives changed, the market evolved.  June and August went from being top performing months to bottom performing months.  August went from #1 to #10 in 1950-2016 with an average DJIA loss of 0.2%.  June went from #4 to #11 (–0.3% average loss).  The shift in DJIA’s seasonal pattern is clear in the following chart. “Sell in May” is a post WWII pattern, prior to then it would have been “Buy in May”.

Image from The Stock Trader's Almanac®

As you can see from the chart, the black line representing 1901-1949 shows that equity market continued to rise throughout the summer.  Conversely on the blue line, from 1950-2016, there is no market gains from late April to late October (aka the “Bear Killer” month).  

What This Means For Our Clients

If you’re invested with Republic Wealth Advisors, you don’t need to do anything.  Our team of portfolio managers has or is in the process of adjusting allocations to more conservative positions as appropriate.  We will continue to monitor the markets and make adjustments as things play out in the next few weeks and months.

Our goal is for you to concentrate on what you do best in work, retirement, or your other projects, not worry about the ever-shifting financial markets.  

Please feel free to reach-out if you have any questions about your individual situation. 

 


 

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

 

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Seasonality Update: Entering the Historically Strongest 6 Months

Seasonality Update: Entering the Historically Strongest 6 Months

Dozens of investing strategies compete in the stock market. It’s one of the features that make a market: investors invest differently. However, some strategies have performed better than others for decades running.

You may be familiar with the adage ‘Sell in May and Go Away’ which we have discussed in many past instances and believe to be a viable investment strategy.  Seasonal investing is a strategy that seeks to capitalize on the market historically performing better from November to April in most years. 

Seasonal Stock Investing: An Overview

Seasonal stock investing has historically outperformed traditional buy-and-hold investing over time. One seasonal investing proponent is the Stock Traders’ Almanac. According to The Stock Traders Almanac

“After decades of historical research, we discovered that most market gains occur during the months November through April. Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950.

Thus far we have failed to find a similar trading strategy that even comes close over the past six decades. And to top it off, the strategy has only been improving since we first discovered it in 1986.”

Stock Trader's Almanac Strategy Historic Results

The Stock Trader’s Almanac: Best 6 Months Strategy – Image Courtesy of The Stock Trader’s Almanac

The numbers are pretty compelling. Starting in 1950, a hypothetical $10,000 account invested in the Dow Jones Industrial stocks would have a total return of $1,210,096 in 2015 – assuming no withdrawals. However, had you invested with the modified Best 6 Months strategy – i.e. the ‘Sell in May’ strategy – the total return would be $1,692,679 or 39.9% better! 

Of course, every year is different. Sometimes the ‘Best 6 Months’ strategy underperforms the broader market. Still, the ‘Sell in May’ strategy tends to outperform the broader market while limiting risk over time.

Republic Wealth Advisors on Seasonality

At Republic, seasonal investing is a tenant that we believe has added value for our client portfolios compared to traditional buy and hold investing.  Over the past few years, we have explored seasonal investing on this blog. As recently as last September, we discussed how selling in May helped returns in 2015. 

Republic Wealth’s strategy does not follow ‘Sell in May’ by selling exactly on May 1st.  We use other indicators to fine-tune our seasonal “buy” and “sell” signals. This year, the election is throwing a wrench at seasonality. The stock market is not showing a clear upward direction like we would normally expect on November 1. Our research and real-world experience tell us the seasonal buy signal alone isn’t enough. Instead, our approach utilizes seasonality, technical analysis, and fundamental considerations to enter and exit the market. 

As the market awaits the US election results, we are also awaiting a more clear entry signal to follow our seasonality “buy” signal for this year. When we see alignment in the signals we track, our programs which follow the seasonality trends will re-enter the stock market with more aggressive positions with an aim to “buy” the best 6 months of the year. 

We don’t know if the historically strong period from now through May of 2017 will meet historical norms or if this upcoming 6 months will be an anomaly like we saw last year.  We do know that over long periods of time, following seasonality can help put the odds in your favor. 

   

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.

 

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