A couple of years ago I made a discovery about Stockmarket seasonality.
It works differently during bull vs bear markets.
It’s one of those sorts of research findings where once you lay it out, it seems kind of obvious. But sometimes you just need to look at the same things differently to come up with unique insights and better understanding.
As a refresher, during down markets you tend to see a much more accentuated “Sell in May“ effect — while the same old rule of thumb barely works at all during bull markets.
So where do things stand today?
I used two methods in the original analysis to quantitatively define up vs down (bull vs bear) markets; and both saw consistent results.
One was simply “did the market close the year up or down?“, the other was “is the index above or below its 200-day moving average?“ — the first criteria requires perfect hindsight, so from a practical standpoint I’ve used the 200-day moving average analysis for this week’s chart because we can instantly observe whether the index is above/below its 200-day moving average.
As of the time of writing, the market is sitting below its 200-day moving average, so the “bear market“ or down-market definition is activated, and therefore we should be looking at a seasonality curve of how the market behaves under that condition.
Interestingly, the current rebound in the stockmarket comes at a time of seasonal strength during down markets — you tend to see a period of consolidation and rebound around April/early-May… with downward momentum picking up pace from May onwards.
So what?
Well, if we take this literally and if this is the only information we have, then you’d say the current rebound is going to run out of steam in the coming days/weeks; and will resume its downtrend imminently.
But of course, seasonality is only one factor, and it is just a statistical description of what happened in the past (and there are exceptions to the rule).
My approach is to use seasonality as a confirming factor; you go and do the work, come up with a view based on more fundamental factors, and then look at seasonality to see if it lines up with that; in which case you maybe raise your conviction levels.
Alternatively, you start with seasonality as a suspicion factor… you suspect something might happen based on seasonality, and then you go do the work to see if there is a larger fundamental case to be made that would support the suspicion.
As I outlined in my latest Weekly ChartStorm, I think there is a technical and macro/fundamental basis for caution, and the conclusions from this chart confirm and add to that assessment. $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$
Key point: Conditional seasonality says be prepared for more downside.
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