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Summary

  • The SPY exchange-traded fund’s behavior was comparatively weak in 2014’s first quarter, when it advanced on an adjusted basis to $187.01 from $183.88, a gain of $3.13, or 1.70 percent.
  • In contrast, the S&P 500-based ETF’s performance was comparatively strong in 2013’s Q1, when it soared to $153.57 from $138.98, an increase of $14.59, or 10.50 percent.
  • SPY’s advance in the latest quarter also was lackluster when compared with the cumulative monthly mean and median returns for Q1 compiled during its first full 20 years.
  • Based on seasonality between 1994 and 2013, SPY’s share-price gains appear likely to move lower as U.S. air temperatures move higher, not only in Q2 but also in Q3.
  • This tepid outlook for SPY is complemented by the Federal Reserve’s actions to consign its current quantitative-easing program to the dustbin of history.

April is the cruelest month for those short and the kindest month for those long the SPDR S&P 500 ETF (NYSEARCA:SPY), according to the exchange-traded fund's mean monthly returns during its first full 20 years, 1994-2013. And April could be so again this year, despite SPY's wild gyrations this week. However, the data related to the ETF's seasonality paint a very different picture for the months thereafter.

SPY's seasonal tendencies appear more important in 2014 than they seemed in either of the other years since 2011 because of the U.S. Federal Reserve's actions concerning two of its quantitative-easing programs. The Fed actually completed its QE2 program in the middle of 2011, and it is projected to conclude its QE3+ program by the end of 2014. The Federal Open Market Committee indicated most recently the continuation of the current QE program tapering in the FOMC March 18-19 meeting minutes released on Wednesday.

The completion of the Fed's QE2 program was associated with SPY's 2011 bear market, when the ETF dipped on an intraday basis to $107.43 on Oct. 4 from $137.18 on May 2, a drop of $29.75, or 21.69 percent, as mentioned in "SPY, MDY And IJR At The Fed's QE3+ Market Top."

Figure 1: SPY Annual Percentage Changes, 1994-2013

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on Yahoo Finance adjusted monthly share-price data.

All three massive equity-market bubbles associated with the 21st century have happened since SPY's debut in 1993 (Figure 1). As measured by SPY on an unadjusted intraday basis, the first bubble was fully inflated at $155.75 on March 24, 2000, and fully deflated at $77.07 on Oct. 10, 2002. As measured by the same ETF on the same basis, the second bubble was fully inflated at $157.52 on Oct. 11, 2007, and fully deflated at $67.10 on March 6, 2009. Meanwhile, the third bubble is a work in progress.

Figure 2: SPY Mean Monthly Percentage Changes, 1994-2013

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on Yahoo Finance adjusted monthly share-price data.

SPY's mean percentage advance of 2.33 percent in April during the ETF's first 20 full years certainly was helped by its soaring 9.93 percent in April 2009, a couple of months before the culmination of the so-called Great Recession that ran from December 2007 to June 2009, as delineated by the National Bureau of Economic Research. However, SPY also recorded April gains of 8.55 percent in 2001 and 8.47 percent in 2003. Moreover, its April returns were positive 15 times and negative only five times.

In contrast, SPY's share-price movements have shown a seasonal tendency to make the ETF's investors and traders sweat out the five months after May Day (Figure 2).

Figure 3: SPY Median Monthly Percentage Changes, 1994-2013

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on Yahoo Finance adjusted monthly share-price data.

SPY was seasonally strong in April when measured by both the ETF's mean and median advances during the month over its first 20 full years, but more so in the context of the former and less so in the context of the latter. Ranked by monthly mean returns, April was No. 1; ranked by monthly median returns, it was No. 5 (Figure 3).

Meanwhile, there is also a difference between the mean and median data sets in the pictures they paint of SPY's share price subsequent to May Day. The mean data indicate comparative weakness during the five months from May to September; the median data suggest comparative weakness over the three months from June to August.

Figure 4: SPY Monthly Changes, 2014 Q1, 2013 Q1, 1994-2013 Mean

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on Yahoo Finance adjusted monthly share-price data.

SPY was comparatively weak in Q1 this year, when it climbed to $187.01 from $183.88, a gain of $3.13, or 1.70 percent. In contrast, the ETF was comparatively strong in Q1 last year, when it rose to $153.57 from $138.98, an increase of $14.59, or 10.50 percent. SPY's gain in the latest quarter also appears lackluster when compared with the cumulative monthly mean return of 2.05 percent for Q1 compiled during its first full 20 years (Figure 4).

Figure 5: SPY Monthly Changes, 2014 Q1, 2013 Q1, 1994-2013 Median

(click to enlarge)

Source: This J.J.'s Risky Business chart is based on Yahoo Finance adjusted monthly share-price data.

SPY's advance of 1.70 percent in the most recent quarter also seems mediocre when compared with the cumulative monthly median return of 4.35 percent for Q1 between 1994 and 2013 (Figure 5). The ETF's middling price performance in Q1 this year is especially noteworthy because the Fed's QE3+ program was still largely intact throughout it.

Don't Fight The Fed

Seasonality has historically packed a punch vis-à-vis the equity market in general and SPY in particular. If it throws jabs, however, then the Fed throws crosses, hooks and uppercuts, as indicated in "The Dow And The Federal Reserve's Transitions": "Loose monetary conditions are associated with rising share prices and tight monetary conditions are associated with falling share prices, all other things being equal (or even unequal at times) in the U.S. equity market."

Between Sept. 12 of 2012 and March 31 of this year during the Age of QE3+, SPY rocketed on an adjusted basis to $187.01 from $139.17, a gain of $47.84, or 34.38 percent. Over the same period, assets on the consolidated Federal Reserve Bank balance sheet soared to about $4.23 trillion from about $2.82 trillion, an astounding increase of about $1.40 trillion, or 49.71 percent. Meanwhile, there has been an almost-perfect positive correlation between the level of the ETF share price and the value of FRB assets.

It appears clear SPY has been driven to its current dizzying height by the Fed's QE3+ program, which seems to be on its last legs, based on the FOMC March 18-19 meeting minutes released this week:

"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, [FOMC] members decided that it would be appropriate to make a further measured reduction in the pace of its asset purchases at this meeting. Members again judged that, if the economy continued to develop as anticipated, the committee would likely reduce the pace of asset purchases in further measured steps at future meetings."

As a result, both the Fed's actions with respect to its QE3+ program and seasonality soon will be serving together more as headwinds and less as tailwinds, not only for SPY but also for the stock market overall. The forecast here and now thus calls for a bumpy ride with SPY share-price gains moving lower as U.S. air temperatures are moving higher.

Related Reading

"SPY Coppock Guide: Away From Bullishness, Toward Nonbullishness As Of March 31, 2014"

"Building A Martin Zweig-Like Fed Indicator Integrating Innovations Of The 21st Century"

"S&P 500 Flattish As VIX Rises In 2014"

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author's best judgment as of the date of publication, and they are subject to change without notice.

Source: SPY Seasonality: Share Price Cools Down While U.S. Air Temperature Heats Up