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The Reason Is Not the Season

Cody Willard

As we head into the year-end, the biggest debate on the Street seems to be whether or not the seasonal "year-end rally" (YER) is so anticipated that it won't occur. It's remarkable how much of the bullish argument for the YER is based on the seasonality play, particularly because that play hasn't worked this year -- at all.

I'll be blunt -- I never have and never will make a trade based on seasonality, as there are too many moving parts and too many real inputs that affect the market at any given juncture to put too much weight into something that can be so arbitrary. That said, I don't mind being on the same side with history. Unfortunately for those who do put a lot of weighting into seasonality, 2005 has been a disaster. In fact, it's almost been a year of uncanny un-seasonality.

I mean, along with the year-end, the new year is also supposed to be a historically seasonally strong time of year. But it was Jan. 3 this year when the market collapsed and continued cratering though the "seasonally bullish" spring, leaving the Nasdaq down double digits by the time the summer arrived.

And of course, summer is historically very seasonally weak. "Sell in May and go away" and all that. So what did the market do this year? It rallied, of course, with the Nasdaq bottoming almost to the day that the seasonal people would tell you to get out. The technology-laden index rallied almost without pause from May through July. The Nasdaq is now up double digits from that time and is hitting new multiyear highs today.

So here we are in late November, and despite 2005 being the year of the antiseasonality trade, the pundits are saying to buy based on the strong seasonality trends. For example, as I heard on CNBC this morning and have read many other places in the last month, the S&P 500 has been up in the fourth quarter nine out of the last 10 years.

More to the point, most of those rallies have been led by tech and the Nasdaq. Taking into account even more history reveals that November and December are two of the very best months for the market over the last 100 years. Of course, thus far in November, that trade has mostly been right!

Seasonally favorable or not, I do think the setup into year-end continues to favor the bulls. The consumer appears to be strengthening (nobody on the Street expects that), and enterprise as well as carrier spending is steady and strong. The fundies are in good shape, as I have continually outlined . Meanwhile, the action in the stocks speaks for itself, as Applied Materials(AMAT Quote) joins Texas Instruments(TXN Quote), Broadcom(BRCM Quote) and so many others that fell after their earnings report, only to rally back. With so many strong reports and subsequent 52-week highs, it's been a rather remarkable earnings season for the bulls when you add it all up.

So even if the next few weeks provide another anecdote upon which arbitrary indicators like "seasonality" can be built, I'd attribute this year's seasonal YER to this market and economy, especially because the rest of the year has seen the antiseasonality trade prosper.

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