"Seasonally adjusted, there is no Santa Claus"
-- The Statistician Who Stole Christmas
If the task of the journalist is to comfort the afflicted and afflict the comfortable, then this will be just another day at the office. How many times have we heard about this being a seasonally strong time of the year in the stock market? Yes, sir -- as goes January, so goes the year. Sell in May and go away. April showers bring... . You get the idea.
After our recent completion of the Best October Ever, an award about as coveted as the Best Chicago Cubs Season Ever, the question arose whether any of the pundits ever sat down and ran the seasonal adjustment numbers.
If you want an insight into Census Bureau X-11 seasonal adjustment, the method used to decompose an economic time series into its trend, seasonal factors and irregular components,
click here. But there are more interesting things on the Internet, trust me.
How Now, Seasonal Dow?
Let's start with the granddaddy of them all, the
Dow Jones Industrial Average
. We will have to start this analysis not in 1896 but in December 1914, as the market was closed for four months at the outbreak of World War I. It's easy to see over this very long time period just how variable seasonal factors are. Raw DJIA numbers are divided by the seasonal adjustment factors below to produce the final seasonally adjusted data.
Dow Jones Industrial Average Seasonal Factors
Source: CRB Infotech
As is the case for so much stock market data, the bear markets of the Great Depression had the greatest seasonal variation, and both the 1970s and our current market rank high in seasonal volatility. By contrast, the bull markets of the 1920s, 1950s, mid-1980s and mid-1990s had low seasonal variation. Curiously, the late-1990s bubble was highly seasonal. Please recall the summer swoons and winter wonders of those years.
Can we consolidate this time series into average monthly seasonal patterns? Would I be asking otherwise? The consolidated data contain some surprises, most notably the distinct presence of a summer rally and seasonal weakness in the vaunted November-February period. The averages are shown plus/minus one-half standard deviation.
Yes, Virginia, There Is a Summer Rally
Source: CRB Infotech
Why would this picture differ from the received wisdom of assorted Wall Street customs? One answer may be its long history. Few ever take the time to go back to the Wilson administration anymore. But the real answer is a lot more obvious: The dream merchants need something to sell, and what's better than the promise of a year-end rally?
Interest Rate Seasonality
As long as we're having such fun with seasonality, let's take a peak at 10-year Treasury note yields, available in a consistent form back to 1953. The seasonal volatility of yields is now at its highest levels over the past half-century, and that is something of a puzzle.
After all, the highly seasonal credit cycle in agriculture is a much smaller component of the overall economy, and inventory cycles have been dampened by improved management information systems. And, as hard is it may be for many to believe, interest rate derivatives, like all derivatives, effectively lower swings in the bond market by transferring risk across time. Finally, the seasonal volatility of note yields doesn't bear any apparent resemblance to the level of yields, either nominal or real.
Ten-Year Note Yield Seasonal Factors
Source: CRB Infotech
What's even more surprising is how much more seasonal yields are than stock index prices. If we consolidate the data above into average monthly seasonal factors and display them plus/minus one-half standard deviation, we see a clear pattern of higher yields in the summer and lower yields in the winter. This would almost suggest an annual cycle in the supply and demand for Treasury notes.
In an economy dominated increasingly by noncyclical service businesses, that simply does not make sense. However, it does conform in an odd way to the standard impression of seasonally stronger equity prices in the winter and weaker equity prices in the summer -- if you are old enough to remember when stocks and bonds rose and fell together.
Lend In Summer, Borrow In Winter
Source: CRB Infotech
Will It Go Around in Circles?
I've always had a mixed mind about the use of seasonality and cycles in trading. The
reducto ad absurdum
is that all we would ever need to trade successfully is a calendar, and while I've seen people use astrological charts, I've never seen this calendar-only system. However, many markets, including grains, livestock and energy, have such obvious seasonal influences that only the foolish would dare ignore them.
Other industrial cycles exist as well, and they generally are produced by investment booms and busts. All participants in an industry see the same signals at the same time and pursue them in the same manner, much to the amusement of the wildebeest and other herding animals watching the spectacle.
However, these cycles are irregular in their periodicity, and anyone who is ready to bet their money on a four-year replacement cycle on personal computers should be aware that this is a tendency, not a certainty.
So, if this is a seasonally strong period in stocks, let's enjoy it for what it's worth. If not, mark your calendar for late February and the four most joyous words in the English language: "Pitchers and catchers report."
Howard L. Simons is a special academic adviser at Nasdaq Liffe Markets, a professor of finance at the Illinois Institute of Technology, a trading consultant and the author of
The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. The views expressed in this article are those of Howard Simons and not necessarily those of NQLX. As a matter of policy, NQLX disclaims the private publication of materials by its employees. While Simons cannot provide investment advice or recommendations, he invites you to send your feedback to
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