In my last article, I mentioned the fact the stock market had
risen for seven months straight, and while this was not a rare
event, investors should be ready for a pause in this upward trend
at some time in the near future. The main theme of that article
was not to start to put all of your sideline cash to work after
such an impressive run, but to be methodical in making new investments
if you find yourself being cash heavy today.
I thought the concept of the seven up months was worth a deeper
look to see if, historically, there may be some significance to
this trend. After all, while financial market history is not guaranteed
to repeat itself exactly, there are certainly some themes which
can act as a guide.
According to www.tradersnarrative.com, there have been 15 occasions
since World War II where the S&P 500 Index went up seven months
in a row. The previous 14 reveal some trends which may be helpful
when determining whether to buy, sell, or hold in your portfolio.
While this seven consecutive up month trend was generally a positive
sign for additional future returns for stocks, there is at least
a moderate risk of decline in the near future, supporting my cautionary
comments in the last article to not be in a hurry to put a lot
of cash to work now.
The three month time period following the seven consecutive up
months had the most risk with 29 percent of the time (4 out of
14) resulting in declines ranging from 1 to 12 percent in the S&P
500 Index. Honestly, I was surprised the results were this favorable,
and despite my cautionary tone a couple weeks ago, I was pleased
to see there were 4 cases where the market moved higher in the
next three months, with gains exceeding 5 percent.
The really good news, and, of course, there can be no guarantees
that a historic pattern repeats itself in a predictable manner,
is that the results six and 12 months after the initial seven consecutive
up months are impressive. Better yet, the ratio of up to down experiences
is very much skewed to the up side.
For example, the next six months after a seven consecutive month
run had 13 cases of the S&P 500 moving higher, and only one
where it went down. The one losing case was -5.4 percent and the
average gain for the 13 up cases was +7.9 percent.
Looking at a 12 month horizon following a seven consecutive up
months event, declines occurred twice, with the biggest loss being
just 3.3 percent, and 12 times were positive, with 7 of the 12
being double digit gains in excess of 11 percent.
While we’re at this review of history, we also want be fair and
relate how historical trends don’t always come true. It is widely
known that September and October are the poorest months for stock
market performance on average, with September being the worst.
Most expected a market correction this September, but instead the
S&P 500 went up over 3.6 percent. Since 1950, 57 percent of
Septembers resulted in losses for stocks prices. But when September
is up, like this year, the returns during the fourth quarter of
the year are positive 84 percent of the time, or about 8 out of
10 years. The average fourth quarter gain following a positive
September is about 4.8 percent.
One last time – no guarantees can be implied or taken from looking
at how past market trends unfolded. But some lessons and conclusions
may be drawn as long as the investor understands the consequences
to his/her personal situation if the trends discussed do not result
in the anticipated or hoped for result.
Also, while I was personally glad to read of these statistics
to support the potential for continued recovery in stock prices,
I stilla believe a methodical approach to investing additional
capital in the stock market is a good idea.
Tom Breiter is president of Breiter Capital Management, Inc.,
an Anna Maria based investment advisor. He can be reached at 778-1900.
Some of the investment concepts highlighted in this column may
carry the risk of loss of principal, and investors should determine
appropriateness for their personal situation before investing.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.