Seasonality takes the year off

"What in the world happened to the seasonality of the stock market?" asks Sy Harding of StreetSmartPost.com in the Dec. 14 Barron's (subscription required to access article).

Over the years, the market has scored most of its gains between November and April, and most of its losses between May and October. Researchers have thoroughly documented the trend both in the U.S. and overseas.... Hence the familiar expression, "Sell in May and go away."

The past 12 months have been a clear exception. The rally that began last November, at the traditional start of the market's favorable season, lasted only until the end of December, when stocks began falling to their March low. The rally that followed lasted through summer, typically the weak season, and kept going.

Harding notes that something similar happened in 2003. The common denominator? A government "stimulus" plan combined with low interest rates.

Back then, Washington launched a record stimulus package to pull the economy out of a recession. Interest rates were dropped to extreme lows, and massive amounts of liquidity were pumped into the system....

Lesson: In those rare years when the financial system is flooded with money to help the economy, the excess liquidity overwhelms normal seasonal trends.

Annual Seasonality isn't a part of SMI's core investment strategies, but we do keep it among our stable of "Advanced Strategies" for those who wish to implement a seasonal approach to their investing.

Going forward, however, it certainly seems worth keeping in mind that when Washington starts trying to stimulate the economy and the Fed is dropping rates, seasonality may well be out of season.
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Joseph Slife is a contributing author and editor for SMI. Visit www.soundmindinvesting.com to learn more.