The best time during the past 61 years to enter North American equity markets has been at the opening of trade on October 28 . This year, the optimal date is the opening of trade this Monday, October 29.
How does the entry point look this year?
Thackray's 2012 Investor's Guide notes that the best period to own U.S. equities during the past 61 years has been from October 28 to May 5. A $10,000 investment in the S&P 500 Index purchased each year on October 28 since 1950 and sold each year on May 5 during the past 60 periods increased in value to $1,057,851 by May 5, 2011. The trade was profitable in 53 of the past 61 periods. In contrast, a $10,000 investment in the S&P 500 index purchased each year on May 6 and sold each year on October 27 fell in value to $6,862. Calculations did not include dividends or commission costs.
The best period to own Canadian equities is identical. Data for the past 34 years shows that a $10,000 investment in the TSX Composite Index purchased each year on October 28 since 1977 and sold each year on May 5 increased in value to $200,778 by May 5, 2011. The trade was profitable in 29 of the past 35 periods. In contrast, a $10,000 investment purchased each year on May 6 and sold on October 27 fell in value to $6,674.
The main reason for the period of seasonal strength is a response by equity markets to a series of positive annual recurring events from late October to early May. Annual recurring events include transactions for tax purposes, anticipation of quarterly and annual corporate reports, the timing of analyst opinion changes, key economic reports, and special holidays, including the U.S. Thanksgiving holiday and the Christmas holiday.
The beginning of the period of seasonal strength at the end of October typically happens just after a majority of S&P 500 companies have reported third quarter results. Prior to the end of October during the third quarter earnings report period, U.S. equity markets have a history of exceptional volatility. This year was no exception.
The October 28 to May 5 favourable period of investment is best known as the "Buy when it snows, sell when it goes" strategy . By coincidence, the phrase is particularly relevant this year. Calgary experienced its first snow storm this week.
Negative return indicated in the data during the May 6 to October 27 periods does not imply a "Sell in May, go away" strategy . "Sell in May and go away" is a myth. The S&P 500 Index has gained in 38 out of the past 61 periods and the TSX Composite has advanced in 20 of the past 35 periods. However, gains were modest and the losses were higher relative to the period of seasonal strength. The May 6 to October 27 periods is plagued by higher volatility and fewer annual recurring events that influence equity markets.
The October 28 entry date for the annual seasonal trade is an average date. The optimal date to enter the trade each year is fine-tuned using short term momentum indicators. The optimal date normally occurs on the average date plus or minus three weeks. Last year, the optimal entry date was October 5.
What about this October? Short-term momentum indicators for the S&P 500 index and TSX composite index already are oversold, but have yet to show signs of bottoming. A trigger recording a momentum buy signal is likely to occur during the next few days.
Year-end "window dressing" by U.S. mutual fund companies could have an impact on U.S. equity markets this year. Most major mutual fund companies have a fiscal year end on October 31. Managers of these funds frequently add best performing equities prior to November in order to "pretty up" their portfolio for unit holder reporting purposes. Net result is a positive bias in equity markets during the last four trading days of October.
Thackray's 2012 Investor's Guide notes that the last four trading days in October have recorded an exceptional return on investment in U.S. equity markets . Average return per period from 1950 to 2010 for the S&P 500 Index was 1.0 per cent. Moreover, the first three trading days in November have provided above average returns.
Given current short-term oversold condition in the U.S. equity market, chances of a successful trade this year starting this Friday and continuing to November 5 are above average.
An opportunity to enter into North American equity markets at current or lower prices for a seasonal trade lasting until spring has arrived . A wide variety of exchange traded funds are available that track major U.S. and Canadian equity indices.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation ETF. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs.