The markets have had a good summer. They have built on a base off the March 9th lows. The market has climbed over 50% and has increased 14% since May 5th. In the May newsletter I was recommending investors use the 3 R’s – Reduce equities, Redeploy equities to less riskier assets and Re-adjust the overall risk in the portfolio. Does the fact that the market has gone up in the summer mean that the six month favourable-unfavourable cycle of investing is dead? No! Aside from the two R’s of redeploying assets and readjusting the risk in a portfolio, Investors have to remember that seasonal investing is a long-term discipline.
The six month cycle is built upon the premise that the markets perform better from October 28th (buy at the end of the day October 27th) to May 5th, than they perform from May 6th (buy at the end of day May 5th) to October 28th. It does not state that the market will be negative in the unfavourable months. In fact it is positive approximately 56% of the time from 1950 to 2008. When gains occur in the summer months they tend to be small and when corrections occur, they can be large. From a risk-reward relationship the favourable months are a much better deal than the unfavourable months. In addition, from a short-term perspective it must be remembered that the unfavourable months in 2008 produced a loss of 40% in the S&P 500. I don’t mind giving up a 14% gain and saving myself a 40% loss.
Despite the run in the market at this time, investors should be cautious. From a technical perspective the market is showing both bullish and bearish signs. It has been able to stay over 1,000 (bullish). At the same time the market has been forming a rising wedge (bearish). Given that we are in the worst performing month of the year it makes sense to be defensive until the last week in October. October is typically the most volatile month and there may be earlier opportunities to enter the market on large downdrafts (topic to be covered in the next newsletter – October 5th).
Gold has been the in the newspapers recently as it breached the $1,000 level. Every time gold reaches an important milestone the gold bugs come and the newspapers report how gold may one day hit an astronomical amount. Although I believe has more upside, I still believe that it is better to focus purchases in the seasonal zone. Currently gold is ﬂ irting with the $1,000 level. It is up in its seasonal time but is bumping into resistance.
Because October has traditionally been a very weak month for gold (see Thackray’s 2009 Investor’s Guide) investors need to be very careful at this time. If gold is able to breach $1,000 before the end of September, then investors can use this level as a stop-loss. If gold is under $1,000 then investors should consider taking proﬁ ts. It is better to err on the side of caution during the typical negative month for gold.
In this newsletter I will discuss the merits of investing in the oil, health care and consumer staples. I will also discuss the merits of investing in a sector that has recently done well, but typically does poorly at this time – materials.
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Brooke Thackray is President of alphaMountain Investments, a firm that publishes investment reports and books. The main goal of the publications is to use seasonal analysis to give investors and money managers an edge in the markets.