Looking at the seasonality of the stock market from different viewpoints can give you new insight into an old concept. Here's a look at the best and worst months in which to invest as well as some suggested investing guidelines. By Mark Vakkur, M.D.
One of the strongest arguments against the random walk theory is the observation that the stock
market tends to make most of its gains during certain months that are far from randomly
distributed. As Yale Hirsch points out in The 1996 Stock Trader’s Almanac, if an investor were to have
invested $10,000 in the Standard & Poor’s 500 index in May through October since 1950 but switched to
cash for the remainder of each year, that investment would have grown to $15,285 by 1994; however, if the
investor had invested that $10,000 every November through April since 1950, that investment would have
compounded to $173,788 — quite a difference.
When I first studied seasonality, I wondered if its effect were strong enough and consistent enough to
generate reliable trading signals. The answer to this question, as it turned out, is an emphatic yes. Here, I
will explore the development of a simple trading system that uses seasonality to generate buy and sell signals
for the Standard & Poor’s 500 index. In using these signals, a trader could have generated substantially
greater returns than buy and hold with less risk — but note this is offered more to illustrate the power of
seasonality than as a complete trading system in itself. As with any indicator, seasonality should be used
in conjunction with other indicators before actual capital is placed at risk.