by Brooke Thackray, Horizons ETFs
And in case you were wondering, the diagram to the left is the chemical structure for Teﬂon.
This stock market is currently in a Teﬂon state. No matter what gets thrown its way, it plods along, There has been the occasional dip, but investors have seen all minor dips as major buying opportunities. Recently, the possibility of a confrontation with North Korea has provided investor angst, but every missile launch and every dip has been treated as another buying opportunity.
Despite the feeling of euphoria that is stoking investors, most stock markets in the world, including the U.S. and Canada have not rallied strongly in the summer months. Since May 5, the start of the unfavorable six-month period for stocks, the S&P 500 has increased by approximately 2.5% (at the time of this writing). This is nothing to sneeze at, but lags behind the average performance of the stock market in favorable six-month period (October 28th to May 5th), in both the short and long-term.
Recently, some people have accused me of being bearish on the stock market. Although a lot of my comments on the stock market have had a bearish tone, as I have said before, I am neither a bear, nor a bull. I am seasonal. In the unfavorable six-month period from May 6th to October 27th, it is generally a good idea to decrease risk and the returns tend to be minimal and the volatility high. This summer, the returns have been small so far, but volatility has remained low. For most investors, it is the returns that matter. Why take outsized risks when the expected returns are low?
Many pundits, look at the minimal returns that are often produced in the unfavorable six-month period and state that a small gain was made so therefore reducing equity exposure during the six-month unfavorable period was not successfully. The pundits do not take into account the excessive risk that was taken in order to generate the small gain. The unfavorable six-month period is replete with large corrections, much more so than the favorable six-month period. From a seasonal point of view, it makes sense to avoid the periods when large corrections occur. So far, investors that have stayed in the stock market in the six-month unfavorable period have been rewarded with a small return.
Although the stock market is less than two months away from the start of its favorable six-month period, a seasonal entry strategy makes sense. When the stock market has corrected sharply in the summer months, late September is often a good time to start stepping into the stock market. On the other hand, if the stock market does not suffer a substantial correction in the summer months, it is often best to be patient entering the stock market, and delay entry until later in October.
The current situation supports the strategy of delaying entry into the stock market until late October.
Aside from a broad market strategy based upon the six month seasonal cycle, different sectors of the stock market tend to perform well at different times of the year. Currently, there are sectors of the stock market that are in their seasonal period and performing well. As we ap.proach the six-month favorable period for stocks, there is an increasing number of sectors that are entering their seasonal periods. Lots of seasonal opportunities ... but investors need to be patient.
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