There are three main seasonal and cyclical patterns that have stood the test of time and consistently provide me with an edge in managing my portfolios: While I am a strong proponent of historical and seasonal market patterns, I am always mindful that history never repeats itself exactly. I have used history as a guide for navigating current market conditions and anticipating trends with quite a degree of success over the years.

What happens on Wall Street is inextricably linked to what transpires in Washington. Presidential elections every four years have a profound impact on the economy and the stock market. Wars, recessions and bear markets tend to start or occur in the first half of the term, with prosperous times and bull markets in the latter half.

This pattern is most compelling. As you can see in Figure 1 , the third year in the presidential term has the best performance, as there have been no Dow Jones industrial average losses in pre-election years since war-torn DJIA Average Annual Percentage Gain — Incumbent administrations are duty-bound by their parties to retain the reins of power.

Incumbent administrations during election years try to make the economy look good to impress the electorate and tend to put off unpopular decisions until the votes are counted.

After the midterm congressional election and the invariable seat loss by his party, the president during the next two years jiggles fiscal policies to get federal spending, disposable income and Social Security benefits up and interest rates and inflation down.

By Election Day, he will have danced his way into the wallets and hearts of the electorate and, it is hoped, will have choreographed four more years in the White House for his party. Most bear markets began in such years—, , , , , and Our major wars also began in years following elections—the Civil War , World War I , World War II and the Vietnam War Post-election combined with for the worst back-to-back years since — These were first and second presidential term years.

Global financial calamity and the Great Recession sent the second-worst bear market for the Dow to its ultimate low in post-election Less severe bear markets occurred or were in progress in , , , , , , , and Only in , , and were Americans blessed with peace and prosperity in the post-election year.

Practically all bear markets began and ended in the two years after presidential elections. Bottoms often occurred in an air of crisis: But crisis often creates opportunity in the stock market. In the last 13 quadrennial cycles since , nine of the 16 bear markets bottomed in the midterm year.

A good number of these midterm bottoms occurred during the worst six months.

In the last 13 midterm election years second year in the presidential term , bear markets began or were in progress nine times; we experienced bull years in , and was flat. A swing of such magnitude is equivalent to a move from 10, to 15, The puniest midterm advance, The next four smallest advances were: On the flip side, the greatest concentration of pre-election year highs has been in December, with nine occurring in the last month of the year and six on the last trading day of the year.

There is no such thing as a perfect trading strategy, but our Best Six Months Switching Strategy has an undeniable track record. Leger Stakes is the last flat thoroughbred horserace of the year and the final leg of the English Triple Crown. Leger Stakes has little to do with stock market seasonality, it does coincide with the end of the worst months of the year for stocks. Market seasonality is a reflection of cultural behavior. In the old days, farming was the big driver, making August the best market month—now August is one of the worst.

This matches the summer vacation behavior, where traders and investors prefer the golf course or beach to the trading floor or computer screen. After that, trading volume tends to decline throughout the summer. Though we may be experiencing some shifts in seasonality, the record still shows the clear existence of seasonal trends in the stock market. Investing in the Dow Jones industrial average DJIA between November 1 and April 30 each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since Exogenous factors and cultural shifts must be considered, however.

Farming made August the best month from — DJIA Monthly Annual Percentage Gain — Figure 2 illustrates that November, December, January, March and April are the top months since Add in February, and you have an impressive trading strategy.

These six consecutive months gained 14, Figure 3 shows the average change in the Dow Jones industrial average for both the best and worst six-month periods. They are often interpreted literally, but this is not necessarily the situation. Average Percentage Change in DJIA Since A more conservative way to execute our switching strategy, the in-or-out approach as we like to refer to it, entails simply switching capital between stocks and cash or bonds.

Another approach involves making adjustments to a portfolio in a more calculated manner.

Seasonality

Taking this approach is similar to the in-or-out approach; however, instead of exiting all stock positions, a defensive posture is taken. Weak or underperforming positions can be closed out, stop losses can be raised, new buying can be limited and a hedging plan can be implemented. This is the approach that we use in the Almanac Investor Stock and ETF Portfolios.

It has been reported that the January effect was first identified by economist and investment banker Sidney Wachtel. He studied the seasonal movements in the stock market and is believed to have coined the term. The theory and pattern was that U. The January effect phenomenon was originally likely caused by year-end tax-loss selling of small-cap stocks, driving their stock prices down.

These bargain stocks are often bought back in January with the help of year-end bonus payments. In a typical year, small-cap stocks stay on the sidelines, while large-cap stocks are on the field. Then, around late October, small stocks begin to wake up and in mid-December they take off. Anticipated year-end dividends, payouts and bonuses could be a factor. Other major moves are quite evident just before Labor Day—possibly because individual investors are back from vacations—and off the low points in late October and November.

Small caps hold the lead through the beginning of May. Investors tend to get rid of their losers near year-end for tax purposes, often hammering these stocks down to bargain levels. When there are a huge number of new lows, stocks down the most are selected, even though there are usually good reasons why some stocks have been battered. We call this the Free Lunch Strategy. In response to changing market conditions, we tweaked the strategy the last 13 years, adding selections from the NASDAQ market, the American Stock Exchange Amex and the OTC over-the-counter bulletin board, and selling in mid-January some years.

We have come to the conclusion that the most prudent course of action is to compile our list from the stocks making new lows on Triple-Witching Friday before Christmas, capitalizing on the Santa Claus Rally. This also gives us the weekend to evaluate the issues in greater depth and weed out any glaringly problematic stocks. This Free Lunch Strategy is only an extremely short-term strategy reserved for the nimblest traders. It has performed better after market corrections and when there are more new lows to choose from.

The object is to buy bargain stocks near their week lows and sell any quick, generous gains, as these issues can often give up these bounce-back gains immediately.

The January Barometer has registered only seven major errors since , for an Of the seven major errors, Vietnam affected and The market in January was held down by the anticipation of military action in Iraq.

Stock Market Seasonality Forecasting

The second-worst bear market since ended in March of , and Federal Reserve intervention influenced As the opening of the New Year, January is host to many important events, indicators and recurring market patterns. Financial analysts release annual forecasts. Residents of earth return to work and school en mass after holiday celebrations. Detractors of the January Barometer refuse to accept the fact that the indicator exists for only one reason: Prior to , newly elected senators and representatives did not take office until December of the following year, 13 months later except when new presidents were inaugurated.

Since , Congress convenes in the first week of January and includes those members newly elected the previous November.

Inauguration Day was also moved up from March 4 to January In addition, during January, the president gives the State of the Union message, presents the annual budget and sets national goals and priorities. These events affect our economy, Wall Street and much of the world. Switch these events to any other month and chances are the January Barometer would become a memory. Over the years, there has been much debate regarding the efficacy of our January Barometer.

In light of this debate, we calculated the January Barometer results with both the full-year results and the returns for the following 11 months February through December. The lack of a Santa Claus Rally has often been a preliminary indicator of tough times to come. This was the case recently in and There have been several instances in which a Santa Claus Rally preceded bad years or markets, so some caution is in order.

This was the case in , although the market did manage to recoup most of its losses to finish the year flat. The last 40 up First Five Days were followed by full-year gains 34 times, an In post-presidential election years, this indicator has a solid record. Only was a loser, coinciding with the start of a major bear market caused by Vietnam, Watergate and the Arab Oil Embargo.

The other five post-election years gained Since , all three indicators have been positive 27 times and full-year gains followed 25 times.

Losses occurred in Vietnam and just barely in U. Eleven-month average gains are impressive at The January Barometer, Santa Claus Rally and First Five Days indicators were all positive this year—increasing the odds, but not guaranteeing, positive returns for I may be totally confused, but it appears to me that the article totally contradicts what has occurred in the market during the full 5 months of January through May of this year.

Apparently the article may have been written in January or February of this year, and if so there appears to be no correlation between the author's theorems and what stocks are doing today.

Maybe by the end of June the analysis will begin to make more sense. But if I'm reading this correctly, it certainly does not bode well for the remainder of Great article picking up suggestions after the fact. How about suggestions for now, looking forward.

This article is just an advertisement for the Almanac. The author left just enough out of this article to make you want to read the book. I recommend it highly. And the Stock Market Almanac should be on everyone's book shelf. If the data in the stock traders almanac is correct, it would appear that the most logical approach to increase total returns would be the exact opposite of that recommended in your "more conservative" recommendation.

This might make some sense for someone who simply wants to "play the market" and not focus on picking quality stocks for the long haul. Personally, I think it makes a lot more sense to buy quality stocks at the right price and hold them until there is a proper sell point This is a basic premise, but market fluctuations are the result of money flows, and money flows tend to follow a seasonal character.

This year is unique in that there is additional liquidity brought to bear on the market through QE. I can think of many other such guidelines, including: Bad Thanksgiving, good Santa Claus.

Bear Market bottoms are steep, Bull Market tops are flat. Second biggest economy is ahead of the biggest, Low interest rates in Japan 13 years ago vs.

US rates more recently, etc. This is a good article. To those that think it's not forward looking, remember that there is a December and a January in every year. And those of you who don't get the Stock Trader's Almanac, you should. Give a drunken monkey a machine gun and 10, rounds of ammunition. Have him blaze away at a barn wall until every shell is fired.

Go look at the side of the barn. Increasingly smaller percentages struck the other three quadrants. It is accurate to say that "in the data we examined, upper-right bullet strikes were the most common outcome. Stock market results provide a rich field of data. Looking back at those results, it will always be possible to correlate any selected result to some contemporaneous event or condition. It does not follow that there is any causative connection between the two, or that the event or condition is predictive of future outcomes.

Then again, who's interested in reading an an article entitled "Seasonal and Cyclical Stock Market Patterns -- As Likely to Be Explained by Random Outcome as by any Other Cause. I think all of the indicators are good, but the election indicator is probably right for the wrong reasons.

In addition, federal spending would affect profits only, but growth in the PE ratio, which indicates greater risk tolerance by investors, account for about half the variation in stock prices. My guess is that what he calls the election cycle is really the business cycle, which averages 4 to 5 years over the long run. Understanding the business cycle and how it affects the stock market is import for avoiding major downturns in the market.

Hi Edward, The table is showing when all three indicators are positive. No timing indicator or set of indicators is routinely perfect. More importantly, just because a pattern has existed in the past, there is no guarantee that it will continue to exist in the future. This appears to be little more than a rambling diatribe on "voodoo trading" that has very little, if anything, to do with long-term investing. Sticking with fundamental analysis just might yield better long-term results. I've been using the 'Stock Pickers Almanac for a long time and I gotta tell you,it has more useful insights than anything else I've ever found.

Insights and Observations to be incorporated into a thoughtful investing strategy. It's perspective is very strategic and certainly not infallible I have successfully bought oversold small cap stocks in December that bounced hard in January. Works particularly well if you have a IRA and don't have to pay a capital gain tax of course not all oversold stocks bounce and thus the investor needs understand why the stock sold off and its bearing on that stocks future prospects. Has anyone tested a strategy of combining the "best six months" strategy with the presidential cycle approach?

For example, rotate out of stocks for May through October ONLY in the first two years weaker years of the presidential cycle? Highlighted rows are post-election years. Fred from Utah posted over 4 years ago: It would have been helpful if you had published this article in March or April Walter from New Jersey posted over 4 years ago: Bruce Campbell from NC posted over 4 years ago: Daniel Ballisty from CA posted over 3 years ago: Werner Emmerich from PA posted over 3 years ago: Tom from TX posted over 3 years ago: Harold Skelton from ME posted over 3 years ago: Charles Rotblut from IL posted over 3 years ago: Dick Marr from NY posted over 2 years ago: Michael Dwyer from IL posted about 1 month ago: Works particularly well if you have a IRA and don't have to pay a capital gain tax of course not all oversold stocks bounce and thus the investor needs understand why the stock sold off and its bearing on that stocks future prospects E Kast from VA posted about 1 month ago: Sorry, you cannot add comments while on a mobile device or while printing.