We have just begun a new six-month period of favorable seasonality. Research published by Yale Hirsch in the Trader's Almanac shows that the market year is broken into two six-month seasonality periods. From May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. From November 1 through April 30 is seasonally favorable, and the market most often finishes the period higher. 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.
The chart below shows the last two six-month seasonality periods. The first, November 2011 through April 2012, was supposed to be favorable, and it was, with prices closing well above where they started. The second period was supposed to be unfavorable, but, while prices did close slightly below their starting point, prices moved steadily higher after the initial decline in May. It is interesting that both periods began with a one-month decline, but this is not characteristic of the seasonality process.
Seasonal tendencies are always at work, but their influence on stock prices can be dampened or enhanced by the primary trend. For example, the chart above shows a one-year slice of a cyclical bull market, and the overall trend is obvious. The bottom line is that we should be aware of current seasonal tendencies, but first and foremost follow the primary trend.
Technical analysis is a windsock, not a crystal ball.
