Capitalogix

Should You Sell in May and Go Away? Seasonality Suggests That's Not Such a Bad Idea

Is it safe to get back in the Market?

 

According to popular trading rules, May 1st marks the beginning of a 6-month period of unfavorable seasonality. This is often referred to as "Sell-In-May-and-Go-Away".

 

Research published by Yale Hirsch in the Trader's Almanac shows that the market year is often broken into two six-month seasonality periods.

 

• From May 1 through October 31 seasonality is unfavorable, and the market most often finishes lower than it was at the beginning of the period.
• The period from November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher.

 

Here is a recent chart showing the returns, for the past 20 years, of this Halloween through April bullish seasonality idea.

 

 

 

Superficially, it seems to work.

 

While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds.

 

Assume that bull and bear market pressures tend to override seasonal tendencies. 

 

In addition, it's also pretty safe to assume that there are no guarantees in trading.  That means that every year is different and presents its own challenges.

 

As we approach May, traders get wary.  That doesn't mean they sell.  Instead, they acknowledge that, historically,  a volatile, sideways-moving market is likely ... and they prepare accordingly.

 

Nonetheless, price is your primary indicator and it makes sense to follow the primary trend.

 

Related articles

Favorable 6 Month Seasonality Period Begins

Should You Sell in May and Go Away?

Jeffrey Hirsch Reveals Stock Trader's Almanac's View

What Level of Market Correction Is Normal Historically? [Chart]

There's always some pain to endure.

This chart shows S&P 500 intra-year declines compared with calendar year returns. The bars represent year-end returns since 1980, while the purple dots mark each year's market low.

Buy and Hold investors must stomach significant drawdowns to get their returns — even in 'good' years.

 

via JP Morgan Funds.

 

Basically, you have to understand that 10-15% pull-backs are normal (perhaps even healthy) for the market.

According to Business Insider, here are market correction averages and their historic frequency. Since 1900, we've seen:

• 5% market corrections: 3x per year.
• 10% market corrections: Once per year.
• 20% market corrections: Once every 3.5 years..

Interesting.

Here Are Some Links to Start Your Week

Trading pros may not think things are different.  However, the public is reacting to suggestions that Wall Streets may be rigged against them.

 

In this cartoon, Darkow draws the Carnival Midway Game of Wall Street, "Spill the Milk" ... which disguises the super-fast high-frequency stock trading center for insiders only.

The Carny beckons to the 'Little Guy': "Step right up, friend... It's a game of skill. Trust Me!".

This kind of public sentiment often triggers regulatory scrutiny ... which, in turn, triggers new games of 'skill'.

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• The Science of Making Your Story Memorable - Scott Adams. (Dilbert)
• 45 People Share the Best Piece Of Advice They’ve Ever Heard. (Thought Catalog)
• The Best April Fools’ Pranks of 2014. (TechCrunch)
• Meet The Seven People Who Hold The Keys To Worldwide Internet Security. (The Guardian)
• Chicago Police Department Believes It Can See The Future, Starts Warning Citizens About Crimes They Might Commit. (TechDirt)

 

Trading Links:

• Will Last Year's Winners Be This Year's Losers? (BlackRock)
• Goldman Sachs Chief: The Responsible Way to Rein in Super-Fast Trading. (WSJ)
• Themis Trading Response To Goldman Sachs Market Structure Op-ed. (ThemisTrading)
• Technical Analysis Practice: Contrast between Individuals and Professionals. (DragonflyCap)
• Scott Adams Blog: Robot Geniuses are Coming. (Dilbert)

Weekly Market Winners and Losers Performance Comparison

Even during a week like this one, there is always something working ... if you look in the right places.

The chart shows the top-and-bottom performing markets, ranked by weekly performance.

The data is color coded based on sector. The first column shows last week's performance, followed by six columns of the most recent weekly market performances.

 

Click this link to view weekly, monthly, quarterly, and yearly views of this data.

So, how does that compare to other markets around the world? Here is an interactive chart to answer that question.

Is the U.S. Stock Market Rigged?

Did you see the 60 Minutes report on Michael Lewis' new book, "Flash Boys," that reveals some of the ways that high speed traders work the stock market to their advantage.

 

 

Here is an excerpt from the intro.

 

Steve Kroft: What’s the headline here?

Michael Lewis: The Stock Market is rigged. The United States stock market, the most iconic market in global capitalism is rigged.

Steve Kroft: By whom?

Michael Lewis: By a combination of these stock exchanges, the big Wall Street banks and high-frequency traders.

Steve Kroft: Who are the victims?

Michael Lewis: Everybody who has an investment in the stock market.

 

The 60 Minutes piece has a interesting explanation of what is happening.

For an even better one, click to watch this Michael Lewis interview on Bloomberg, where he defends his claim that the market is rigged.

 

 

via Bloomberg Television's “Market Makers.”

 

Let me know if you want to talk about high frequency trading or what is likely to happen as a result of press coverage like this and the ensuing regulatory scrutiny.

 

We live in interesting times.

 

Related articles

Michael Lewis Explains How HFTs "Screw" Investors Every Day.

Big Picture - More Videos: On how the U.S. stock market is rigged?

Wall Street Pit: On How 'Rigged' The Stock Market Really Is

How a Few Poorly-Timed Trades Can Wreck Decades of Healthy Returns

Few investors are good at swing trading — meaning, they're not good at predicting short-term swings in the market.

 

Recently, BusinessInsider observed that more often than not, investors find themselves buying high and selling low. And when the market starts selling off sharply, investors will panic, sell their own shares, and sit on the sidelines.

 

Here is a great way to visualize that.

 

 

via BehaviorGap.

 

Unfortunately, some of the biggest one-day upswings in the market occur during these "tough to trade" volatile periods.

 

In its 2014 Guide to Retirement, JP Morgan Asset Management illustrates what can happen to investor returns when they miss out on these good days.

 

 

 

 

via BusinessInsider.

For instance, if an investor stayed fully invested in the S&P 500 from 1993 to 2013, they would've had a 9.2% annualized return.

 

However, if trading resulted in them missing just the ten best days during that same period, then those annualized returns would collapse to 5.4%.

 

In this trading methodology, missing 'big win' days does so much damage because those missed gains aren't able to compound during the rest of the investment holding period.

 

The Big Mac Index - A Feast of Burgernomics

Image by Simon Miller via Flickr

The Economist's Big Mac index seeks to make exchange-rate theory more digestible.  They say, tongue-in-cheek, that it is arguably the world's most accurate financial indicator to be based on a fast-food item.

The Big Mac index is based on the theory of purchasing-power parity (PPP), according to which exchange rates should adjust to equalize the price of a basket of goods and services around the world. For them, the basket is a burger ... a McDonald’s Big Mac.

According to this measure, the most undervalued currency is India's Rupee at about 67%  below its PPP rate.  In India, a McDonald’s Big Mac costs just 95 Rupees on average, the equivalent of $1.54 at market exchange rates. In America, the same burger averages $4.62.

The interactive graphic, below, shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued.

 

 

The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run. It is only a rough guide, because its price reflects non-tradable elements ­such as rent and labor. For that reason, it is probably least rough when comparing countries at roughly the same stage of development.  The Economist has added an adjustment option to account for this in the interactive version of the data.

Related articles

The Euro Is Not Overvalued (Nor Is Any Other Currency)

Spotify The New Big Mac Index, Priced Lowest In Malaysia

Beeronomics Ousts Burgernomics

This is What a Bull Market Feels Like

Were you surprised how quickly Markets digested the risk of Russia and the Ukraine?

It's not the news ... it's what markets do after the news hits.  In Bear Markets, markets are looking for excuses to pull-back and take risk off the table.  In Bull Markets, things can advance, even with uncertainty. 

The New York Stock Exchange publishes end-of-month data for margin debt.  Historically, surging peaks of margin debt often happen before big market pull-backs.

The chart, below, shows the relationship between margin debt and the market (using the S&P 500 as the proxy for the market). Even adjusted for inflation, the latest data puts margin debt as at an all-time high.

 

 via Doug Short.

Victor Sperandeo advised speculators to ride the false train of hope as far as possible and jump off just before it falls into the abyss.

Good luck.

 

Who Received the Most U.S. Patents Last Year [List of Top 15]

According to IFI Claims, IBM was assigned a record 6,809 patentsin the United States last year, marking the 21st straight year that IBM has topped the unofficial U.S. patent ranking.

 

via Statista 

 

Google and Apple, often considered the most innovative companies in the world, were ranked 11th and 13th, respectively, both breaking into the Top 20 for the first time.

 

Related articles

Top 15 Recipients of U.S. Patents in 2013

Tech patent leader remains IBM, but Google accelerates

The 10 Most Innovative Companies In The World: 24/7 Wall Street

Here is a Yearly Market Performance Comparison, Back to 2007

The chart shows the top-and-bottom performing markets, ranked by yearly performance.

The data is color coded based on sector. The first column shows 2013 performance, followed by six columns of the most recent yearly market performances.

 

 

Click this link to view weekly, monthly, quarterly, and yearly views of this data.

So, how does that compare to other markets around the world? Here is an interactive chart to answer that question.