One of the stock market's strongest historical trends is to sell stocks in the Spring and buy stocks in the Fall. Two of the stock market gurus out in front of this are Jeff Hirsch and Sy Harding. I'm a yearly buyer of the Stock Trader's Almanac by Jeff Hirsch, and I read the friday freebie from Sy Harding. I don't know what Jeff is doing, but from Sy's freebie column on October 19th, The Market Remains in its Unfavorable Season.
The rule is that when October 16 arrives, if the MACD indicator is on a ‘buy signal’, that is showing that short-term market momentum is to the upside, the entry is to be made at that time. However, and this is the biggie, if the MACD indicator is on a ‘sell signal’, indicating that short-term market momentum is to the downside, the entry is delayed until MACD triggers its next ‘buy signal’. That has delayed the entry in some years to as late as late November.
In the spring, the best exit date on average is April 20. However the same MACD indicator is used to sometimes delay the exit. The rule is that if MACD in on a buy signal when April 20 arrives, the exit will be delayed until MACD triggers its next sell signal. In some years that has extended the ‘favorable season’ by as long as two months.
This year has been very interesting. The exit signal was triggered on May 15, which extended last year’s favorable season by about a month, and allowed for additional gains. During the unfavorable season this summer the S&P 500 experienced a 10% correction in July and August, while seasonal investors were safely on the sidelines adding to profits from interest on cash. It looked like the Seasonal Timing Strategy would surely re-enter in the fall with the market at a lower level than the May exit, and so would easily outperform the market for the year.
However, as you know, the market rallied back off the August low, reaching new highs, and the seasonal investor was behind by two or three percent even counting the interest being earned on cash.
More worrisome, MACD was recently still on a buy signal as October 16 approached, making it look like the seasonal investor might be re-entering near those high prices. That had me worried, given the many negatives that have been piling up for the economy.
Fortunately, or so it seems at this point anyway, the market lost enough momentum that as of the close a week ago Friday, MACD triggered a ‘sell signal’. And since it remained on that sell signal on Tuesday, October 16, the seasonal entry will not take place until it triggers its next buy signal.
So the market remains in its unfavorable season. And given what has happened this week I couldn’t be more pleased.
The funny thing is that I commented on October 11th:
...many have been hoping for a bit of a pullback to get a decent entry point instead of chasing things at new highs. The seasonal investors would probably like to see that, too. We're closing in on November, so a MACD crossover to the darkside followed by a crossover back up would trigger a buy for some of those folks at this time of year.
Looks like Sy got it. And it sounds like he caught a break in that he didn't have to give out a seasonal buy signal with stocks at their all-time highs, eh?