Seasonal Performance

Most of market corrections and bear market down-legs take place in an unfavorable season from May to October, referred to as “Sell in May and Go Away”. Even against the massive Fed influence during the recent years the effect of seasonality has been clear. During 2012 and 2013 there was no larger correction but the market still made most of its gains for the year in the traditional favorable seasons, and moved basically sideways in the unfavorable summer season.

“A 2012 study of the 40-year period from 1970-2011, published by the Social Science Research Network, concluded that the old adage “Sell in May and Go Away” remains good advice. On average, returns are 10 percentage points higher in November to April semesters than in May to October semesters.” (Barrons)

When the market plunged in 2011 Bernanke and the Fed rushed in to double the QE from $40 billion a month to $85 billion a month. Now Fed is tapering back stimulus, and will have it back down to $35 billion in May. The current bull market is now 61 months old. Not many have lasted as long. By most valuation metrics the market is overvalued by historic standards.

Seasonal Weak Part of the Calander

Seasonal Positive Bias

“As markets have discounted more or less linear tapering from the Fed a strong employment number will be good for stocks. 180k (or somewhat below (<-50k) in addition with up revisions of Jan) or higher is expected to lift stocks." (SEB)

SEB got the employment number and the revision all wrong, but the positive market response from “seasonal positive bias” seems to be right on the spot.

Seasonal Bias

Risk of a Drawdown Rising

Forecasts for upcoming dips that are to be bought (if you believe in Goldmans forecast). Historically markets rally into the year end. 2014 will start with another move to the north and then we get the seasonal selling in May. Could it really be that easy.

“Drawdown risk is rising after a rally with no correction. The S&P 500 has soared 26 % YTD. The median expected drawdown equals 6 % in the next three months and 11 % during the next 12 months. We estmimate a 67 % probability of a 10 % drawdown at some point in 2014.” (Goldman Sachs)

There has been amazing inflows into equity funds in general, during 2013 and especially during the second half of the year. Historically, I would say that this increases the risk of a larger move than in the normal case.

Risk (1)

Personally I think there will be plenty of opportunities going forward to question Goldman’s forecast.

S&P 500 EPS & Price

Great Tailwind For Equity Markets

Stock market still has quite a lot going for it (Goldman Sachs):

(i) Our call for sustained, above-trend growth in the US: This is under-appreciated, under-priced by asset markets.
(ii) The market still enjoys an exceedingly accommodative monetary backdrop: No taper to March, a reduction to a 6% unemployment threshold and no rate hikes until 2016.
(iii) With ‘unused repurchase authorizations’ at a multi-year high: A huge story and under-recognized by market participants.
(iv) We are annualizing for over $130bn of inflows to US equity mutual funds this year: The recent pace has been the most aggressive of the year.
(v) We’ve only scratched the surface of the stock/bond flow wedge: Recall that from Jan ’07 through Dec ’12, over $1.2tr flowed into global bond funds whilst $600bn flowed out of US equity mutual funds.
(vi) The well-flagged Q4 seasonal: It’s the best quarter of the year for the stocks and it’s particularly strong when the market is already up double digits through October.

Seasonal Charts.gif

Late Session Weakness

BofAML’s warns that equities are vulnerable to a deeper correction, confirmed by a close below 1700 on the S&P 500. This would mark a near-term top and a possible correction down to 1653. They have made earlier calls for a market correction but perhaps they are right this time. There is a lot of late market session weakness, historically not a good sign.

BAML S&P 500

Seasonal Performance

September is the month that stands out as the weak part of the calendar. Given the recent rise in the stock market, the fact that we are very close to all time highs and that we are facing a number of important decisions and events it feels like it might be a good idea to reduce or take down certain exposure.

Seasonal Patterns