The period of seasonal strength for North American equity markets has generated unusual returns this year.
According to Thackray's 2012 Investor's Guide, the optimal period to own the S&P 500 index, the TSX composite index and their related sectors and equities is from Oct. 28th to May 5th. Data showing performance for the past 61 periods for the S&P 500 index shows that the average return per period was 7.7 per cent per period plus dividends. The trade was profitable 85 per cent of the time. Data showing performance for the TSX composite index for the past 34 periods shows an average return per period of 8.0 per cent plus dividends. The trade was profitable 79 per cent of the time. Usually both indices have moved higher in unison during their period of seasonal strength.
The current period is different. Returns by the S&P 500 index to date from the close on Oct. 27th, 2011, is 9.2 per cent plus dividends, while the return to date for the TSX composite index is a loss of 1.8 per cent. During the current period, most of the gains by the S&P 500 Index have come from one stock, Apple. Performance by the TSX composite index has been dampened by weakness in the energy, base metals and precious metals sectors.
Seasonality works when a series of annual recurring events have an impact on equity prices. For example, the annual recurring events that tend to impact equity markets during this time of year include news from annual meetings, the release of first-quarter results and guidance for the remainder of the year. Earnings from first-quarter reports released to date by most large cap U.S. and Canadian companies have exceeded consensus, but guidance frequently has been lowered. Many U.S. and Canadian stocks have come under selling pressure following release of first-quarter results unless blow-out results were announced.
What happens to equity markets from May 6th to October 27th? Performance by North American equity indices tends to be random. The period lacks the annual recurring events that have a significant influence on equity prices.
North American equity markets tend to move higher in the first week in May as the annual meeting and first-quarter earnings report season reaches a climax. However, negative guidance included in the current season could dampen prospects this week.
Thackray's 2012 Investor's Guide notes, "Overall, investors at the beginning of the month of May should consider using the three R's: Reduce equities, Reduce beta and Reallocate into seasonally strong sectors."
Following is the average performance of broadly based equity indices during the past 10 Mays with symbols for their related actively traded exchange traded funds:
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Daily reports are available here at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. 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 Management.