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. |
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