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At the Money: Seasonality In Stocks · Masters in Business

• 0:00
  Speaker 1: Seasonality is the phenomena where during certain times of the
• 0:04
  Speaker 1: year markets behave almost predictably. It's rooted in the idea
• 0:09
  Speaker 1: that investors and businesses and economic cycles have regular patterns.
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  Speaker 2: These patterns aren't quite.
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  Speaker 1: As regular as the phases of the moon. They don't
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  Speaker 1: always work, but combine with other factors, they can take
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  Speaker 1: on a life.
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  Speaker 2: Of their own.
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  Speaker 1: Season I'm Barry Redults and on today's edition of At
• 0:36
  Speaker 1: the Money, we're going to discuss what you need to
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  Speaker 1: know about market seasonality to help us unpack all of
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  Speaker 1: this and what it means for your portfolio. Let's bring
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  Speaker 1: in Jeff hirsch Edler, in chief of the Stock Trader's Almanac,
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  Speaker 1: who's been studying seasonality just about his whole life.
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  Speaker 2: Jeff, welcome, Hey, Barry, great to be with you.
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  Speaker 1: So talk a little bit about this. I mentioned certain
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  Speaker 1: things happen every year. People raise money to pay taxes,
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  Speaker 1: They pay taxes certain times of year, they make regular contributions.
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  Speaker 1: What does the data you study say about seasonality?
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  Speaker 3: It says that people are creatures of habit and it's
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  Speaker 3: a behavioral for nance at its core, where people are
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  Speaker 3: doing the same things over and over on a regular
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  Speaker 3: basis you mentioned in the intro the four to one
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  Speaker 3: K contributions.
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  Speaker 2: One of the.
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  Speaker 3: Things that I learned early on when I started working
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  Speaker 3: for my father was about that mid month spike. So
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  Speaker 3: he had promoted a pattern for years, the best five
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  Speaker 3: days of the year, the monthly five day bulge, which
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  Speaker 3: was the last trading day of the month, in the
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  Speaker 3: first four of the new month, which is when people
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  Speaker 3: pay their bills and make all their transactions on a
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  Speaker 3: monthly basis, and then and I used to do those
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  Speaker 3: numbers by hand, using the Barons market lab pages and
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  Speaker 3: you know, underlining stuff and using an anti machine and
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  Speaker 3: all that by hand work, which was educational. But there
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  Speaker 3: we are looking at the pattern. We see there's a
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  Speaker 3: spike midmonth, and we're looking at each other, we're talking
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  Speaker 3: about it, and we realized that that was this new
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  Speaker 3: pattern of people with the payroll deductions going into the market,
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  Speaker 3: and fund managers have to be long so there is
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  Speaker 3: this spike where cash is coming into the market during
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  Speaker 3: the middle of the month, and you have that sort
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  Speaker 3: of super eight days of the month now where you
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  Speaker 3: have the middle three and the last two and first
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  Speaker 3: three that become that seasonal pattern.
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  Speaker 1: So my partner Josh Brown calls out the relentless bid.
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  Speaker 1: Your dad, Yalehurst, founded stock Trader's Almanac. Gee, is it
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  Speaker 1: sixty years ago?
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  Speaker 2: How long ago? It was nineteen sixty six, the year
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  Speaker 2: of my birth.
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  Speaker 1: Wow, that's I was amazing.
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  Speaker 2: Born bredwen raised on all these patterns.
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  Speaker 1: So one of the things that he has discussed and
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  Speaker 1: you've written about continuously is, Hey, it's not just the calendar.
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  Speaker 1: You have to look at things like technicals, fundamentals, sentiment,
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  Speaker 1: fun flows, monetary et cetera. How do you sort of
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  Speaker 1: take all these different factors and combine them with these.
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  Speaker 3: Well, I mean, right now in twenty twenty three, seasonality,
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  Speaker 3: the four year cycle, the president's cycle are firing on
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  Speaker 3: all pistons. It's it's almost too easy. It's not always
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  Speaker 3: going to be that way. But we are always combining fundamentals, macroeconomics,
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  Speaker 3: moninary policy, and technicals with sentiment. And you're looking at
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  Speaker 3: it and it depends upon, like any fund manager or
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  Speaker 3: any trader, which factors are leading and driving the market
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  Speaker 3: at any given time. And we're always looking for things that
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  Speaker 3: are you know, outliers and things that people aren't thinking about.
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  Speaker 3: Contrary thinking is part of it. But at our core,
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  Speaker 3: it's always about cycles. People are creatures of habit, you know,
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  Speaker 3: they do things on a regular basis every day. I mean,
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  Speaker 3: people get up the same time, they have lunch, the
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  Speaker 3: same time, they go to bed, the same time. The
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  Speaker 3: market closes the same time it opens at the same time.
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  Speaker 3: And you see these patterns continually persist. So that's sort
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  Speaker 3: of our bias. But we look at you know, technical setups,
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  Speaker 3: and one of the key things is you know, if
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  Speaker 3: the market or the stock or the sector is tracking
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  Speaker 3: that pattern closely, then you know, gains we get gains.
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  Speaker 2: Or losses we get losses.
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  Speaker 3: And if it's if it's diverting, that's when we might
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  Speaker 3: not take advantage of a seasonal pattern because it hasn't
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  Speaker 3: come in setting up correctly or tracking the pattern closely.
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  Speaker 1: So we're recording this a few weeks before Christmas. Let's
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  Speaker 1: talk about some of my favorite seasonal patterns that you
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  Speaker 1: write about in Stock Trader's Almanac. Santa Claus Rally, what's
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  Speaker 1: happening with that?
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  Speaker 2: Everybody gets it wrong? Year in year out.
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  Speaker 3: Yale, my father created this devised this indicator back in
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  Speaker 3: nineteen seventy two, came out in the seventy three Almanac.
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  Speaker 3: It is this tendency for the S and P five
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  Speaker 3: hundred gain one point three one and a half percent,
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  Speaker 3: not a huge number over the last five trading days
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  Speaker 3: of the year, in the first two of the new year.
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  Speaker 3: It's not the rally, the year end rally, the fourth
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  Speaker 3: quarter rally from Halloween to January that everyone likes to use.
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  Speaker 2: That for the best few months of the year.
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  Speaker 3: It's not the best few months of the year. It
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  Speaker 3: is this indicator. And as Yale, everyone forgets who created
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  Speaker 3: the You know he a songwriter, Barry, He could coin
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  Speaker 3: a phrase my father. The line is if Santa Claus
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  Speaker 3: should failed to call bears may come to broader wall.
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  Speaker 3: And what that means is that during that last week
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  Speaker 3: of the year, when you know you might be away,
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  Speaker 3: I might be doing some family things, and the pros
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  Speaker 3: are on this, you know, on their desk, buying up
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  Speaker 3: bargain stocks that were sold for tax laws selling. If
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  Speaker 3: they're not doing that and the market doesn't valley during
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  Speaker 3: that time, it's an indication that things are amiss.
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  Speaker 1: So let's talk about the January effect. What does that mean?
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  Speaker 3: Well, the January fact not to be confused with the
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  Speaker 3: January barometer. The January effects is a tendency for small
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  Speaker 3: caps to perform large caps in January, and as we
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  Speaker 3: show in the Almanac, most of that January effect is
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  Speaker 3: really the December effect.
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  Speaker 1: Now it takes they dump those stocks in December and
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  Speaker 1: now they're buying them back.
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  Speaker 3: And right as we're speaking here, we're coming into that
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  Speaker 3: mid December period where small caps start to take off
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  Speaker 3: versus the large caps. We've seen the Russell two thousand
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  Speaker 3: already begin to perk up, as it does around the
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  Speaker 3: end of October. But the January barometer, which is the
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  Speaker 3: other season indicator, is as January goes, so goes the year.
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  Speaker 3: Another Yale invention at the same time in seventy two,
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  Speaker 3: and you know, we've seen January take take it on
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  Speaker 3: the chin a bit in recent years.
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  Speaker 1: I saw a really interesting analysis of the January barometer
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  Speaker 1: that said it's not limited to January. It's essentially a
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  Speaker 1: momentum measure. Any strong month usually leads to another strong month.
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  Speaker 2: There is the gains beginning gains.
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  Speaker 3: We've compared all the monthly barometers, a very single month
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  Speaker 3: of January the best, not just like it, but you know,
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  Speaker 3: we've looked at it from the subsequent eleven months, the
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  Speaker 3: subsequent twelve months, and the whole year.
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  Speaker 2: And the thing that happens in January is that it's
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  Speaker 2: the beginning of the year. Sets the tone.
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  Speaker 3: It sets the tone you've got. And the reason why
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  Speaker 3: the January barometer works is that is the nineteen thirty
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  Speaker 3: three lame Duck Amendment to Congress. When they passed this,
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  Speaker 3: newly elected senators and congress people were would take office
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  Speaker 3: thirteen months later after they were elected, hence lame ducks,
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  Speaker 3: and then and presidents were also inaugurated in March. There
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  Speaker 3: was a whole period where you know, now it's January.
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  Speaker 3: Winter was tough back in you know, the colonial times
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  Speaker 3: to get to DC. So it moved inauguration of January
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  Speaker 3: twenty If new Congress is convening to the first week
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  Speaker 3: of January, and everybody, including you know, President company here
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  Speaker 3: makes forecast, outlooks, sets, agendas, and precedents. You have States
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  Speaker 3: of the Union, State of the Union, addresses, and a
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  Speaker 3: lot of forecasts.
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  Speaker 1: So it tends to be an optimistic timing year.
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  Speaker 3: Tends to be optimistic. But also it's the time where
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  Speaker 3: people are looking to the future.
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  Speaker 1: So you mentioned Congress and presidents. Let's talk about the
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  Speaker 1: presidential election cycle. I know you've been writing about this
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  Speaker 1: for as long as I know you. We're in the
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  Speaker 1: third year of a president's term. That is your favorite year.
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  Speaker 3: It is the most bullish year. But I want to
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  Speaker 3: I want to just finish one thing on January if
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  Speaker 3: I can. There's a new, a new rinkle we've added
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  Speaker 3: to it since January has has had some trouble recently
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  Speaker 3: with a lot of profit taking. We've taken the old
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  Speaker 3: first five days of the year, which the early warning
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  Speaker 3: sess but it's also on the almanac, plus the Santa
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  Speaker 3: Claus rally plus the full month January barometer created something
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  Speaker 3: called the January Indicator trifecta. Since nineteen fifty, when the
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  Speaker 3: three are up the Santa Claus rally, first five days
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  Speaker 3: in a full month, the S and P has been
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  Speaker 3: up ninety point three percent at the time, twenty eight
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  Speaker 3: to thirty one years for an average came to seventeen
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  Speaker 3: and a half percent.
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  Speaker 2: That's pretty big, pretty good numbers.
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  Speaker 1: How did the numbers look last year after we mand
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  Speaker 1: those lows in October of twenty two?
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  Speaker 3: Did you have the track we get the Triffact in
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  Speaker 3: twenty three. Guess what twenty two? No sh effecta in
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  Speaker 3: a midterm year, which segues back to your question about
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  Speaker 3: the four year cycle, which you know you talked about
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  Speaker 3: things happening on a regular basis. There's only one country
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  Speaker 3: in the world that elects its leader on the same
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  Speaker 3: day every four years. That's the United States. Everyone's got
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  Speaker 3: these parliamentary votes.
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  Speaker 1: Called for an election. Yeah, it's a week later and
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  Speaker 1: they're done so, which, by the way, in America, that
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  Speaker 1: doesn't sound too bad.
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  Speaker 2: Get it over in a week.
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  Speaker 3: Well, we can get into politics in theology. But the
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  Speaker 3: cycle here is, you know, the pre election year is
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  Speaker 3: the best year of the four year cycle, up about
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  Speaker 3: sixteen in.
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  Speaker 2: The S and P. This is nineteen fifty.
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  Speaker 3: We see the mid term lows that move from the
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  Speaker 3: mid term low like we had last year really well, yeah,
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  Speaker 3: I mean average gains about forty eight percent for the
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  Speaker 3: Dow from the mid term low to the pre election
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  Speaker 3: year high, and it's about sixty eight percent for Nasdaq.
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  Speaker 3: And what I've seen and what I show when I
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  Speaker 3: when I when I present to people is that amazingly,
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  Speaker 3: you know, there's a good cluster of lows in the
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  Speaker 3: midterm Octobers. We know that October is a bear killer
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  Speaker 3: and another one of Yale's phrases. But a lot of
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  Speaker 3: the highs, the yearly highs, occur in December and in
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  Speaker 3: good chuckle them on the last trading day of the
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  Speaker 3: pre election year.
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  Speaker 1: Now, how much of that is just window dressing and
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  Speaker 1: how much of that is just people have cash that
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  Speaker 1: they have to allocate in the calendar year and they're
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  Speaker 1: just putting it to work.
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  Speaker 3: I think it's a lot of both of those. Yeah,
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  Speaker 3: I mean window dressing happens every year. Windows in September
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  Speaker 3: is what creates the negative period.
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  Speaker 1: In September the fiscal year.
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  Speaker 2: Then in September thirty.
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  Speaker 3: And also the October thirty first botch of front deadline
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  Speaker 3: by the irs, where you got a file, you got
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  Speaker 3: to reconcile your accounting for the ten months of the
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  Speaker 3: twelve months.
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  Speaker 1: And you know, so let's talk about what I know
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  Speaker 1: as your all time favorite seasonality factor. Sell in May
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  Speaker 1: and then go away.
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  Speaker 3: I always say you got to buy in October to
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  Speaker 3: get your portfolio sover.
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  Speaker 2: So again, this was something that you know.
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  Speaker 3: David Aronson is a technical technician through the CMT organization
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  Speaker 3: as well as a brute college. He did a book
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  Speaker 3: in eight which was our best investment book of the
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  Speaker 3: year called Evidence based Technical Analysis.
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  Speaker 2: Oh sure, I remember that.
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  Speaker 3: So what he did was he took six thousand plus
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  Speaker 3: about sixty two hundred different black box systems and put
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  Speaker 3: them through the scientific method, which I had to learn
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  Speaker 3: what that is that testing the null hypothesis.
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  Speaker 1: Taking it, taking it out of sample, running it against
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  Speaker 1: other is shoes, not just cherry picking the best assortment
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  Speaker 1: of dates.
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  Speaker 3: Right, and seeing if any of these systems had predictive
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  Speaker 3: power or were just a result of chance. So when
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  Speaker 3: we picked that book, we said, David, can you take
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  Speaker 3: the best six months and do the same thing. So
• 11:14
  Speaker 3: he took it from Yale invented that strategy, the best
• 11:18
  Speaker 3: six months Switching strategy, and it was in nineteen eighty
• 11:21
  Speaker 3: six and the eighty seven Almanacs, so he took it
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  Speaker 3: from eighty seven forward so that he didn't have any
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  Speaker 3: of the back test bias in that and he found
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  Speaker 3: that unlike any of the other six thousand plus different
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  Speaker 3: black box systems, the best six months switching strategy had
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  Speaker 3: predictive power and the results were not.
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  Speaker 2: The result of chance.
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  Speaker 3: So It is one of the main overlays we have
• 11:41
  Speaker 3: in our newsletter and portfolio construction that we do.
• 11:45
  Speaker 1: So rationalize this. What is it about May, June, July, August,
• 11:50
  Speaker 1: September that seems to be so met.
• 11:53
  Speaker 3: Well, I mean I mentioned the October thirty, first weeks
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  Speaker 3: of fund deadline, which creates that sort of low period.
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  Speaker 3: You have the you know, most of the human race,
• 12:03
  Speaker 3: most of human beings live in the northern hemisphere, right,
• 12:05
  Speaker 3: most of the land masses up there. So we have,
• 12:08
  Speaker 3: you know, this period of time where you know, there's
• 12:10
  Speaker 3: a lot of light from May through September, and we
• 12:14
  Speaker 3: do a lot of other things.
• 12:15
  Speaker 2: I've seen you go on fishing.
• 12:16
  Speaker 3: Trips, I play a lot of golf, My kids go
• 12:19
  Speaker 3: to camp, people go on vacation, okay, And.
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  Speaker 2: You know, you remember, everyone's distracted else everyone's distracted.
• 12:24
  Speaker 3: And you know when you have lower volume stock sandaco
• 12:28
  Speaker 3: down especially you know, after you've come into the Q
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  Speaker 3: four and Q one with all that extra money and
• 12:34
  Speaker 3: all that extra buying. So it's a it's a not
• 12:36
  Speaker 3: a vicious cycle, but it's a regular cycle of the
• 12:39
  Speaker 3: flow of cash and money in and out of the market,
• 12:42
  Speaker 3: and people try to debunk the best six months by
• 12:44
  Speaker 3: going back to eighteen ninety six when the dow started
• 12:47
  Speaker 3: and you know, it didn't work back then, but back
• 12:49
  Speaker 3: to people.
• 12:49
  Speaker 1: Really didn't go on summer vacation. There weren't a lot
• 12:52
  Speaker 1: of sleepway camps back then.
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  Speaker 3: No, And you know, it was a farming agrarian society
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  Speaker 3: where I was worked, where money pretty much buying me
• 13:01
  Speaker 3: in the first half of the last century of the
• 13:02
  Speaker 3: twentieth century, where money would come into the agriculture that'd
• 13:05
  Speaker 3: be buying a fuel, seed, you know, fertilizer equipment, and
• 13:09
  Speaker 3: they also were borrowing money. And then when the loans
• 13:12
  Speaker 3: came due at harvest time is when the market rolled
• 13:15
  Speaker 3: over in September.
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  Speaker 1: So this is the inverse of that. So what's the
• 13:19
  Speaker 1: worst month of the year for stocks.
• 13:22
  Speaker 3: August or September, depending upon if you go back to
• 13:25
  Speaker 3: nineteen fifty or eighty seven post crash. So I mean,
• 13:28
  Speaker 3: and they delivered this year back to back.
• 13:31
  Speaker 2: That was the low. August.
• 13:32
  Speaker 1: September was the low this year, and we had an
• 13:35
  Speaker 1: amazing November following that. October was pretty good.
• 13:38
  Speaker 2: November was October was in turn.
• 13:40
  Speaker 3: October was the turn, which is I mean, there's a
• 13:43
  Speaker 3: picture from the sixty nine Almanac, which shows that you know,
• 13:46
  Speaker 3: October bear killer bargain month, the best time to buy stocks,
• 13:49
  Speaker 3: especially small and tech stocks.
• 13:51
  Speaker 2: What are the best months for the year.
• 13:53
  Speaker 3: November, December, January or the three best consecutive months we've seen?
• 13:59
  Speaker 2: You know, October over.
• 14:00
  Speaker 3: Get better on the turnaround, but basically November December are
• 14:03
  Speaker 3: the best. January has gotten a little bit weaker with
• 14:05
  Speaker 3: profit taking. It seems to happen in the new year
• 14:07
  Speaker 3: these days.
• 14:08
  Speaker 1: Last question, we're coming up on the fourth year of
• 14:12
  Speaker 1: a presidential term. It's an election year in twenty twenty four.
• 14:16
  Speaker 1: What does seasonality tell us about presidential election years?
• 14:19
  Speaker 3: Well, I mean, we have a sitting president running for
• 14:22
  Speaker 3: re election and our research shows that you know, as
• 14:26
  Speaker 3: we all know, the market hates uncertainty. So with the
• 14:29
  Speaker 3: same person in office who's running again, whether whatever the polls.
• 14:32
  Speaker 2: Say is one thing.
• 14:34
  Speaker 3: But the fact that the potentiality of the same policies,
• 14:38
  Speaker 3: the same economic, civic and you know, market oriented policies
• 14:42
  Speaker 3: are going to be in play or at least the
• 14:44
  Speaker 3: same mentality, the power of a sitting president is really undeniable.
• 14:48
  Speaker 3: Years when you have a sitting president running for reelection.
• 14:50
  Speaker 3: The Dow is up they excuse me, S and p
• 14:53
  Speaker 3: is up twelve point six percent, twelve point eight percent,
• 14:56
  Speaker 3: excuse me. And when there's an open field, it's minus
• 14:59
  Speaker 3: one and a half percent.
• 15:00
  Speaker 2: Huh So for US.
• 15:03
  Speaker 1: You think it's bullish having a president run for reelection,
• 15:06
  Speaker 1: even if it's against a prior president.
• 15:09
  Speaker 2: There's not a whole lot of data points for the Madrids.
• 15:12
  Speaker 2: You gotta go back a century and chall what's it? One?
• 15:16
  Speaker 3: Amazing that's not a pattern. But anyway, we're bullish for
• 15:19
  Speaker 3: twenty twenty four.
• 15:27
  Speaker 1: It's important to note that while these seasonal trends have
• 15:30
  Speaker 1: been observed historically, they're certainly not guarantees of future performance.
• 15:35
  Speaker 1: Markets are influenced by a wide array of factors, and
• 15:39
  Speaker 1: past patterns do not always predict future results. Markets may
• 15:43
  Speaker 1: have become more efficient than ever between algorithmic trading and AI,
• 15:47
  Speaker 1: maybe that could have an impact on seasonal trends. Regardless,
• 15:52
  Speaker 1: investors should be aware of seasonality and what it might
• 15:56
  Speaker 1: mean in combination with all those other factors. Were their
• 16:00
  Speaker 1: comprehensive investment strategy. I'm Barry Ridolts. You're listening to Bloomberg
• 16:06
  Speaker 1: radios at the money,