The seasonality trade is wrapped up in the understanding that the six-month period from November to April is historically a positive period for the stock market.
We called attention to the seasonality factor in our October newsletter, citing the findings by the Stock Trader’s Almanac that show a compounding $10,000 investment in the Dow Jones Industrial Average made in 1950 resulted in an $838,486 gain for the November to April period through 2014 when allowing for a switch into fixed income for the other six months. Meanwhile, a similar compounding investment from May through October resulted in a $221 loss in the 65-year period from 1950 to 2014.
It’s a remarkable compounding track record and it serves as an inducement for many to put cash to work this time of year.
Another seasonal trade involves increased interest in the small caps. This pertains to the so-called «January Effect,» which relates to the historical outperformance of the small-cap stocks versus blue chips that begins in mid-December after beaten-down small caps are sold for tax loss purposes and carries through the early part of the new year when they are repurchased on rebound expectations.
The small-cap outperformance doesn’t always happen, yet the 36-year average rates of return (Dec. 1979 – Feb. 2015) from mid-December through the end of February shown in the Stock Trader’s Almanac reflect a distinct edge for the Russell 2000 (+6.1%) versus the Russell 1000 (+3.2%).
Now, how about those underperforming money managers? Reports suggest there are plenty of them this year. It stands to reason that they will be aiming to make up some lost ground relative to their benchmarks. They could do that on either the short side or the long side of things, yet short selling could be a more difficult undertaking considering seasonality and the prevailing narrative that 2016 will look better due to a strengthening US economy.
— Patrick J. O’Hare, Briefing.com