November, December and January – The best Three-Month Span for the S&P

Average Month-to-Month % Change in S&P500 (Based on Monthly Closing Price)

The most important observation to be made from a chart showing the average monthly percent change in market prices since 1950 is that institutions (Mutual funds, pension funds, banks, etc.) determine the trading patterns in today’s market.

The “investment calendar” reflects the annual, semiannual, and quarterly operations of institutions during January, April, July and October, besides the last campaign month before elections, is also the time when most bear markets seem to end, as in 1946, 1957, 1960, 1966, 1974, 1987, 1990, 1998 and 2002. (August and September tend to combine to make the worst consecutive two-month period.)

Unusual year-end strength comes from corporate and private pension funds., producing a 4.2% gain on average between November 1 and January 31. In 2007-2008, these three months were all down for the fourth time since 1930; previously in 1931-1932, 1940-1941, and 1969-1970, also bear markets. September’s dismal performance makes it the worst month of the year. However, in the last 16 years, it has been up 11 times after being down 5 in a row 1999-2003.

In post election years since 1950, July is the best month +2.1%. November is second best with an average of 1.8% gain. January, March, April May, October and December are also positive. February is the worst month, -1.5%. June, August and September are also net decliners.

November through June – NASDAQ’s Eight- Month Run

Average month-to-month % change in NASDAQ Composite, prior to Feb 5th 1971, based on National Quotation Bureau Indices, monthly closing price

The two and a half year plunge of 77.9% in NASDAQ stocks, between March 10 2000, and October 9, 2002, brought several horrendous monthly losses (the two greatest were November 2000, -22.9% and February 2001, -22.4%), which trimmed average monthly performance over the 48.33-year period. Ample Octobers in 15 of the last 22 years, including three huge turnarounds in 2001 (+12.8%), 2002 (+13.5%) and 2011 (+11.1%) have put bear-killing October in the number one spot since 1998. January’s 2.8% average gain is still awesome, and more than twice S&P’s 1.3% January average since 1971.

Year-end strength is more pronounced in NASDAQ, producing a 6.1% gain on average between November 1 and January 31 – nearly 1.5x greater than that of the S&P 500. September is the worst month of the year for the OTC index as well, posting an average loss of -0.5%. These extremes underscore NASDAQ’s higher volatility – and moves of greater magnitude.

In post-election years since 1971, July is best with an average gain of 3.4%. January, April, May, June, October, November and December are all positive too. March, August and September are all losers. February os the worst, -3.3%.

Sectors to Position

With the tapering in sight, will continue to position into banks and financial institutions. The key is how fast these financial institutions are able to convert their balance sheet into yield assets.

With consumers’ confidence improving, the consumer discretionary sector is another segment to allocate capital.

With global travel starting to gain some traction, travel and hospitality industry is another segment to position. The sector will stand to gain from the reopening of global economy.

With NASDAQ‘s history of outstanding year-end performance, this is another sector to allocate capital. Though many have argued that the possible hike in interest rates in the future will hamper the valuation of technology companies, but history has proven otherwise (refer to chart below). The last time the market experienced a taper was in the year 2013. We can see from the chart that the NASDAQ continues its climb even with the FED tapering. Possible explanation can be that technology companies continue their earnings growth when the economy recovered from Global Financial Crisis and the Sovereign Debt Crisis. And thus, we can see that the technology sector will also benefit during a economic expansionary phase.

NASDAQ Performance 2013-2015