Market Correction May Be Delayed, Not Skipped

Brace yourself because we are about to enter the best months of the year for the stock market. This seasonality pattern is most commonly called the “Halloween indicator” and lasts from November to April - where most of the returns have tended to originate historically.

But this year was atypical in that we had a spectacular rally early in the year. In fact, this was arguably the most hated rally since very few purportedly believed in it or predicted it. And yet it happened. In any case, seasonality patterns should not be confused with blueprints. They are merely loose fitting guides to be draped over price action. The stock market certainly does not heed them every cycle.

According to Mary Ann Bartels, a technical analyst ranked second by Institutional Investor magazine, the weakness we should have seen may simply be delayed, rather than skipped outright. Here is a chart comparing the S&P 500 so far this year, compared with the other instances where seasonality was turned upside down:

Source: Bloomberg

While Bartels is looking forward to a correction to end the year, she does expect that to set up a base for further gains next year. She expects the S&P 500 to reach 1325, a further 22% rise from here.

Diligent readers will recall a historical study provided by guest writer, Wayne Whaley where 7 consecutive months of positive return have a surprisingly bullish bias going forward. October isn’t over obviously but with a 3.21% return (so far) we are set for a continuation of the short term strength that defies the intuitive expectation of ‘mean reversion’ after so many positive months.

Comments

[doubleguns:]

I am floored that there have only been 3 instances of this, or is someone picking their data very carefully for a reason.

Oct 21 12:51 PM

[doubleguns:]

I am back and it took me 9 minutes to find the follow.

29-30, 30-31, 31-32, 47-48, 69-70. All had the same chart. I could look for hours. This was just years I had suspect. Several years did not pan out however but this occurs more than rarely.

Oct 21 01:02 PM

[doubleguns:]

Paco i just saw your dates and I missinterpreted them. i thought they were Oct to Mar of these years. Now I am confused by the dates selected being different for a seasonal rally. What season are we talking about.

Oct 21 01:05 PM

[proxyjoe:]

The decline you are predicting/warning of, is just business as usual.. bull markets have corrections. They are healthy. That is why we have stop loss and stop limit orders. So we don't suffer excessive loss.

BFD

Oct 21 01:52 PM

[Frugal Joe:]

Funds usually sell end of year to take profits...add to that this rally is basically "hot money" directly from the government stimulus packages and a "jobless, profitless" recovery seems more and more distant with a correction being delayed as the author says imho.

Oct 21 03:47 PM

[bartpr:]

this comparison is silly. the time frames mentioned have no relationship to the time span of todays market top or down and up.
the economic and state of the country are a separate experiences.

Oct 22 08:51 AM

[thiazole:]

I'm surprised so many posters missed the point the author was trying to make with two examples where the correction occured during this part of the year. The 1974 and 1938 recessions were both in the middle of secular bear markets, both of similar magnitude to the recession we just came out of, both resulted in very deep market crashes, and both had very strong market rallies that followed. They are the most logical years to compare to this recession. The only thing I would have done differently is line the charts up so that he could put the actual months on the X axis.

Oct 23 02:40 PM

[David Van K...:]

Good point, but, similar to the Bespoke article elsewhere today (comparing this September to this October), these comparisons are basically meaningless. In 100 years of stock market history, there are bound to be several years of almost any description that look sort of like other years.

The November-April "good months," while prevalent enough that they can't be ignored as total coincidence, certainly do not happen every year. They are the result of 100+ years of charts that have been all over the place. All were the products of their time: government policies, wars and peace, inflation and deflation, recessions and growth periods, secular and cyclical market cycles, etc. "Sell in May and go away" didn't work too well this year. This September and October have defied the historical averages, and the next few months may too. Or not. That's what averages are all about.

Oct 23 03:45 PM