Stock market seasonality plays a role, but …

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I commented as follows in a post yesterday: “ … we enter April – the last month of the so-called “best six months of the year” before the start of the traditionally weaker May–October period”. A reader asked me to elaborate on this statement, i.e. the question of seasonality supposedly turning negative in a month’s time.

Focusing on the S&P 500 Index, I have done a short analysis of the historical pattern of monthly returns for this index from 1950 to February 2010. The results are summarized in the graph below.

Source: Plexus Asset Management (based on data from I-Net Bridge).

The six-month period from May to October has historically been weaker than the period from November to April as seen from the average monthly return of 1.05% for the “good six months” compared with 0.25%% for the “bad six months”. When considering individual months, all the months in the bad period returned less than the ones in the good period, with the exception of May (+0.73%) actually performing better than February (+0.56%). (Interestingly, when analyzing older data from 1871 –1949, May fared significantly worse than in “modern” times.)

As far as this month is concerned, bulls will take comfort from April (+1.2%) traditionally being the third best month of the year after December (+1.21%) and January (+1.25%).

Where does this leave us? When evaluating valuation levels and the technical outlook of stock markets, one should also take cognizance of seasonality but understand that it is not a stand-alone indicator and it is anybody’s guess whether a specific year will conform to the historical pattern.

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