Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Gold and Silver The Die Is Cast - 27th Feb 20
US Economy Permanently Addicted to Zero Interest Rates - 27th Feb 20
Has the Stock Market Waterfall Event Started Or A Buying Opportunity? - 27th Feb 20
Advantages of Enrolling in a Retirement Plan - 27th Feb 20 - LS
South Korea Coronavirus Outbreak Data Analysis Warning Rate of Infection is Exponential! - 26th Feb 20
Gold Price Long-term Trend Analysis Forecast 2020 - 26th Feb 20
Fake Markets Are on Collision Course with Reality - 26th Feb 20
Microsoft is Crushing the S&P 500, Secret Trait Of Stocks That Soar 1,000%+ - 26th Feb 20
Europe's Best Ski Resorts For The Ultimate Adventure - 26th Feb 20
Samsung Galaxy S20+ vs Galaxy S10+ Which One to Buy? - 26th Feb 20
Gold Is Taking on $1,700 amid Rising Coronavirus Fears - 26th Feb 20
Is This What Falling Through the Floor Looks Like in Stocks? - 26th Feb 20
Gold Minsky Moment Coming - 26th Feb 20
Why Every Student Should Study Economics - 26th Feb 20
Stock Market Correction Over? - 26th Feb 20
US Bond Market Yield Curve Patterns – What To Expect In 2020 - 25th Feb 20
Has Stock Market Waterfall Event Started Or A Buying Opportunity? - 25th Feb 20
Coronavirus IN Sheffield! Royal Hallamshire Hospital treating 2 infected Patients, UK - 25th Feb 20
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Are Some Proven Stock Market Investment Strategies Too Simple To Accept?

Stock-Markets / Stock Markets 2014 May 24, 2014 - 01:45 PM GMT

By: Sy_Harding


As goes January so goes the year. Avoid the first two years of the Four-Year Presidential Cycle. Buy in the fall of the 2nd year of the presidential cycle and hold through to the end of the third year. Sell in May and re-enter in October.

Those are all strategies proven to out-perform the market over the long-term. Don’t take my word for it. But also don’t blame the messenger. I am only reporting what hundreds of exhaustive academic and independent studies have clearly shown since forever.

However, as remarkable as the results of those strategies are, investors pretty much either ignore them, or blow them off as myths.

That evaluation is understandable by Wall Street’s brokerage firms and mutual funds, as well as money-management firms that advocate a buy and hold approach. They must do all they can to convince investors that the market cannot even be timed to the point of recognizing when risk is high and odds are to the downside. How on earth would they survive if their customers moved out of stocks and equity mutual funds to any degree, and the money went elsewhere for two years (in the case of the Four-Year Presidential Cycle), or for six months at a time (in the case of Sell in May)? Investors must be made to believe that it’s okay to buy any time, all the time, and let time take care of it.

Jeremy Grantham has some interesting thoughts on the subject. Grantham is the founder and CEO of GMO (formerly Grantham, Mayo, and Otterloo), which has grown from humble beginnings in 1977, to the international money-management firm it has become, with more than $117 billion under management for institutions and wealthy individuals. They must know something about markets.

Grantham has written often over the decades about his firm’s studies confirming the remarkable consistency and performance of the strategies and patterns noted at the top of this article.

In his recent quarterly letter to clients he writes of the Four-Year Presidential Cycle, “The results since 1964 of just holding from October 1 of the second year, and selling the following April, is that in 7 months you make almost all the returns of the 48-month cycle.” Yes, on average being invested the rest of the time adds little to long-term gains.

On another of the strategies, the third-year of the Presidential cycle is historically the most positive year in the cycle by far. Yet, regarding the Sell in May strategy, Grantham shows that from 1932 through 2013, even in the third year of the cycle, the average return from the previous October to April of the 3rd year, has been almost 20%, while from May to October the return on average was roughly only one percent.

On the ‘January rule’ (as goes the first five days of the month so goes the rest of the month, and as goes the month, so goes the rest of the year), he notes the tendency for January to most often be a positive month for the market. The catalyst seems to be that investors receive extra chunks of investable money around year-end, from tax-loss selling, year-end bonuses and the like. They look ahead at expectations for the year, and invest accordingly.

He notes that the January rule is quite consistent when both the first five days, and the month as a whole, are positive, forecasting that the market will be up for year.

However, he notes that it is even more consistent in the other direction, when the first five days, and the month as a whole, are negative. He says there have only been 14 such years since 1932. In all but one of those years the market ended down for the year. Even in the exception year, 1982, the S&P 500 was down 19% at it August low before recovering to close the year positive.

However, my interest is not that Grantham again confirms the importance of those patterns. I believe most investors are aware of them (except possibly those new to investing in the last five years or so).

Nor is my interest because 2014 is a year when all of those strategies are currently in negative mode; the Presidential Cycle, Sell in May, and the January rule.

What I found to be most interesting is what Grantham has to say about why investors and financial institutions ignore the proven patterns and strategies, or blow them off as unimportant.

I have always assumed it was because of the short-term ‘recency bias’ of investor thinking, and the fact that none of those strategies work every single year. It could always be pointed out that the Four-Year Presidential Cycle did not work last time around, or the January rule didn’t work three years ago, or Sell in May didn’t work last year. Admittedly, that seemed like odd reasoning, since no strategy, particularly buy and hold, works every year.

Grantham has a different explanation.

In his letter to clients, he notes that investors are very reluctant to take the strategies seriously, and admits to the same bias. He says that even though his firm’s research 35 years ago confirmed their performance, “They felt hokey and insubstantial 35 years ago, and another very good 35 years of performance has not changed that. Managers seem embarrassed to talk about these factors, and clients are reluctant to consider them. And this of course is the point: they carry career risk for professionals as being seen as trivial, and for clients just too simple to be true.”

Proven effective, but too simple! Yikes!

Of course this year the risk can be made to appear more complex by adding in valuation levels, the age of the bull, investor sentiment, heavy insider selling, and a dozen other factors that will no doubt get the credit if the market tanks, allowing the ‘patterns’ to be blown off again even if they follow their historic predictive value.

Sy Harding is president of Asset Management Research Corp., and editor of the free market blog Street Smart Post.

© 2014 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Sy Harding Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules