As we turn the page on September and enter into the final
quarter of the year, there are some major seasonal trends investors
should be aware of.
Three statistically positive trends occur around the end of the
First, the annual Santa Claus rally can add significant gains to
the market during the holiday season. Next, November also
kicks off the market's "best six months" out of the year.
Finally, October is statistically up by 0.8% on average for
the stock market.
Ho, Ho, Ho
According to the Stock Trader's Almanac, the Santa Claus rally
officially starts the fifth to final trading day of the year (12/26
this year) and runs through the first two of the new year
(01/03/14). The average market return (NYSEARCA:VTI) during
this period is well above average, at 1.5% in only seven days.
The better way to use the indicator, as suggested by the
Almanac's editor, Jeff Hirsh, is to "not catch this rally but to
use it as an indication for what may happen in the coming
Typically if a Santa Claus rally does occur, the following year
will also be positive. But, if the rally does not happen, it
has been a reliable indicator of an upcoming down year.
Buy in October?
Another statistical finding from Hirsch's book is that the money
invested in the Dow Jones Industrial Average (NYSEARCA:DIA) since
1950 from November through April has returned an average
7.5%. Money invested during the other six months of the year
has only provided an average yearly gain of 0.3%.
Measuring the Market's Mood with the VIX
An investor who put money to work in equities (NYSEARCA:IWM)
just six months out of the year, significantly increased their risk
adjusted returns, able to shift into other assets such as bonds
(NYSEARCA:IEF) or cash during the worst six months
This strategy is very similar to the popular "Sell in May and go
away", and implies indeed selling in May and buying back in late
October can be a beneficial strategy.
Historical Anomalies Do Happen
However, as has been the case with September, these are just
historical averages and may be meaningless on an individual, year
by year, basis. Over the long run, these strategies may work,
but as shown by this September, statistics can be
Historically, September is the worst month of the year, down an
average 0.6%, but this year it happened to rise significantly, up
around 4% thus far. Are you willing to forgo such gains
because over the long run statistically you should have been out of
the market (NYSEARCA:SPY)?
Buying stocks in October, because historically it has been a
positive month, may want to look at September as a recent example
of how trading statistics in isolation can be dangerous.
There are also other reasons to be cautious during this upcoming
year. Just because the end of the year typically provides the
best returns, does not mean a major risk off event can't
occur. In fact, other statistics suggest this time frame is
indeed the most likely period for a market shock.
Ready for the Volatility?
The table below is one I created of the S&P 500's VIX Index
and shows since 1990 the average monthly VIX (CHICAGOOPTIONS:^VIX)
price, monthly maximum price, and monthly standard deviation.
Highlighted in shades of red, the first, second, and third most
volatile months based on each respective average VIX price, maximum
VIX price, and largest VIX standard deviations are identified
The final three months are the most volatile of the entire
year. The least volatile are not surprisingly the summer
Again looking at the table, shown by the fourth column the first
standard deviation of the VIX's price for each of the twelve months
ranges between $5 and $12, October and November are the only two
that reach the upper end double digits. This means that volatility
in October and November is the highest of any of the other
months. December is a close third, also well above average
How Gold Experts are Misleading the Public
Noteworthy as well and highlighted in yellow is the average VIX
price in October and November. It also is significantly
higher than any other month, at over $22 versus an average closer
to $20. This shows that the monthly volatility is typically
skewed toward the upside instead of the downside during these two
months and also suggests that October and November have
historically provided the most "fear" as a result of the larger
pullbacks that have also accompanied them.
The final three months of the year may be some of the best
months for overall investment returns, but these returns come with
increased risk of a downside move as well. This suggests that
timing your entries in Oct-Dec is likely more important than the
other months due to the increased risk of a market pullback.
Capitalizing on Big Moves
These VIX opportunities are nothing new to ETFguide's
readers. Numerous times this year we have noticed the market
making new highs, but the VIX not making new lows. In
technical terms this is called a "positive divergence" and shows a
market rally that is suspect. Typically, volatility
drops as stocks rise, and volatility rises as stocks
When that doesn't occur, it can help in warning that the
market's upside (or downside) is likely limited. This
strategy helped us get long volatility many times this year for
some quick profits including this past February which we outlined
in our article, "
The VIX has Flipped
In that research piece, we noted when the VIX was below the 13
level and the stock market was making new 52 week highs,
we went long volatility per our subscriber alert
on 2/10 in our popular Technical Forecast. We wrote:
"The VIX still looks to be forming a base and given our overall
expectations of an eventual market decline and cheap cost of
protection, in the money calls remain good for hedging
Those VIX calls more than doubled as the VIX took off to the 19
level within a few weeks.
With the VIX (NYSEARCA:VXX) again approaching historically low
levels and with a statistically volatile October and November
around the corner, VIX calls remain a great choice for both
portfolio protection and contrarian traders. A move just to
the historical average VIX price of $23 would make VIX calls very
Profit Strategy Newsletter
identifies specific VIX trades along with other tradable asset
classes that offer high probability profit
opportunities. The VIX has again returned to levels
associated with volatility lows. This bottoming area along
with the statistical evidence of a volatile next few months means
traders should be ready.
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