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The stock market has a tendency to move in certain directions during certain months of the year, and this general seasonal trend is a good one to keep in mind as part of the background of your timing decisions. Here are some general tendencies you find as the calendar pages flip:
- September tends to be the toughest month of the year. According to the Stock Trader’s Almanac (STA), the average return for the S&P 500 for the month of September from 1950 to April 2007 was 0.6 percent. The Dow Jones Industrial Average has had a worse time of it, having lost an average of 1 percent during the period.
- October has had its share of crashes. The most dramatic ones were in 1929 and 1987. Other Octobers, such as 1990 and 2007, were moderately nasty as well. The latter was essentially the month where the subprime mortgage crisis became a prime-time event in the stock market.
- November tends to be a good month for the bulls. The S&P 500 has a general tendency to rise during November. Several important market bottoms have occurred in November. In 1990, the market started the first leg of a multiyear bull market in November. That particular rally picked up steam as the United States invaded Iraq, in Gulf War I.
- December is another typically strong month. The general good cheer of the holiday season and the need for money managers to have good results at the end of the year in order to make themselves look good tend to move prices higher. The party in December often extends into January, although the action tends to be a bit more tentative in January. There can be a bit of a December hangover taking its toll in the new year.
If you want to time the stock market using a very broad seasonal system based on this analysis, here are your best bets:
- Own an S&P 500 or Dow Jones Industrial Average index fund during November, December, and January.
- Sell at the end of January and stay out of the market in February altogether.
- Buy back into the market in March and April.
- Take a vacation May and June; the market tends to be flat during those months.
- Buy your index fund back in July, and based on the way things look you can take it or leave it in August.
- Get out by September, though, as things are likely to get ugly.