Thursday, February 05, 2015

rules of thumb failed in 2014

There are plenty of handy guidelines for playing the stock market based on historical patterns and observed seasonal rhythms.

In 2014, it would have been best to ignore them. Close adherence to the calendar-based wisdom would have caused investors to miss much of the year’s upside and likely would have put them in the wrong kind of stocks for the rally that followed the October low.

The January Indicator
January is packed with supposed clues and patterns worth tracking. The January Indicator says that when stock indexes are down for the first month of the year, the rest of the year tends to be unusually weak.

In 2014, stocks dropped right from the start, with the Standard & Poor’s 500 shedding 3.6% in January. The January Indicator would have suggested the remainder of the year would be a relatively tough stretch. In fact, to date the S&P 500 is up 12.6% since Jan. 31 -- better than even the average year when January rose.

Sell in May and Go Away
This couplet is drawn from the fact that the vast majority of equity-market returns across more than a century were accrued between Nov. 1 and April 30.

Well, this year the S&P rose more than 7% from May through October -- the majority of this year’s upside -- with a maximum loss of 1.1% at the October low.

The Worst Two Months of the Presidential Cycle
Largely overlapping this year with the “sell in May” period, the second and third quarters of a midterm election year have been, over time, the worst of the four-year election/market cycle.

Oh well. This year, the “worst two quarters” had the market up 7%.

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