No replies to this topic

[TTHQ Staff]

BEING STREET SMART
____________________
Sy Harding

THE DRIVING FORCE BEHIND SEASONALITY. July 16, 2004.

I’ve been saying for some time that while there’s a window of opportunity for a summer rally this year, summer rallies don’t often amount to much, and I expect that summer rally or not, the market will see its low for the year in the September/November time frame, followed only then by a substantial rally.

A number of readers have written to question how seasonality can produce a substantial rally from a low in the fall this year since interest rates and inflation are rising, the market does not like either, and both will be even higher by fall. Others wonder if I’m thinking the threat of terrorist attacks will abate once we get past the political conventions and election, which will cause the market to rally, when in fact terrorist threats will be with us for years.

The market’s seasonal tendencies have nothing to do with such surrounding conditions and concerns. Seasonality is created by the extra chunks of money that flow into investors’ hands beginning in the fall, much of which finds its way into the stock market, driving it higher. The sources of that extra money dry up the following spring, depriving the market of that extra fuel and leaving it vulnerable then to any selling pressure that takes place because of concerns about surrounding conditions.

Those extra chunks of money come from mutual fund distributions in November and December, Christmas bonuses, year-end and profit-sharing bonuses, employer’s year-end contributions to their employee’s 401K and pension plans, year-end corporate dividends, income tax refunds, and the like. Some, like 401K and pension plan contributions, mutual fund distributions and corporate dividends, are automatically invested in the stock market. We’re not talking a few bucks either, but from all sources many billions of dollars.

That money comes to the market whether interest rates or inflation are rising or falling, whether the country is at war or peace, whether the economy is slowing or booming, or even if terrorists are threatening.

Fifty years of market history back it up. But we’ve also witnessed it ourselves in recent years. The market tends to make most of its gains in its favorable seasons, and tends to suffer its declines in its unfavorable seasons. For instance, in 1998, the best year of the 1990s bull market, the S&P 500 was up 28% for the year. But in getting there, it also had a decline of 19% between July and October, a decline that an investor following a seasonal strategy would have avoided.

In 1999 the fact that the Fed had begun raising interest rates in June, and had hiked them three times by November, in an effort to slow the overheated economy, did not stop the market from again having a great favorable seasonal period. Even bear market rallies usually take place in the market’s favorable seasons. For instance, not even the terrorist attacks of September 11 in 2001 (a time when we were also in the midst of the worst bear market since 1929), prevented the market’s seasonality from taking over two weeks later and producing a gain of 22% for the S&P 500, and 35% for the Nasdaq in the market’s subsequent favorable season (before the bottom fell out big time again).

Even the fact that the market did not follow its seasonal pattern last summer, but instead continued to rise during its unfavorable season, supports the fact that seasonality is the result of the large inflow of extra money that falls into investors’ hands beginning in the fall and ending in the spring, and has nothing to do with surrounding conditions.

How so? Think back. What had the biggest impact on the market last year? Was it that the country was at war? That oil prices were soaring? That the economy, in spite of numerous interest rate cuts, was still not recovering from the 2001 recession? That the number of laid-off workers was growing at an alarming pace? That the news and outlook from all directions could hardly have been worse? Not at all. The market ignored all those concerns. After flattening out and declining some from June to August last year, the market reversed to the upside for the rest of its unfavorable seasonal period. Why? Because Washington initiated the most aggressive economic stimulus package in history, with tax cuts, tax rebates, child-care bonuses, low interest rates to stimulate home-mortgage refinancing, all aimed at putting extra chunks of money into people’s hands during the usually dormant summer months. And since most of those tax cuts went to the wealthy, much of the money found its way into the stock market. Just more proof that seasonality is not a fluke. While economic and other factors drive the market’s long-term trends (bull or bear market), extra money drives the market seasonally, allowing the market to make gains in its favorable seasons, and causing it to have most of its declines in its unfavorable seasons, even within a different long-term trend, and despite surrounding conditions.

Those are the primary reasons I believe that, summer rally or not, concerns about surrounding conditions will produce a market low by the time the unfavorable season ends, but that the money flows of seasonality will then take over, and the market will again experience a substantial rise from that low.


Sy Harding
Email us at Subs@StreetSmartReport.com
Website link: www.streetsmartreport.com

ABOUT SY HARDING:

Sy Harding is the founder and president of Asset Management Research Corp., which has been providing market and economic research to institutions and serious investors for more than 16 years. The firm’s research, market-timing signals, and portfolio recommendations, are published on-line at StreetSmartReport.com.

With a background in engineering, Harding founded and operated successful high-tech manufacturing companies in Connecticut and New Hampshire. After selling them to NYSE listed corporations in the 1980s, Sy turned his life-long obsession with the stock market into a new career, founding Asset Management Research Corp. With his background in engineering and business management, it was natural that his economic and market research combined both fundamental and technical analysis.

Less than two years after founding Asset Management Research Corp. in 1988, Sy was ranked in the Top-Ten market-timers in the U.S. as compiled by Timer Digest. He was ranked #2 in 1990, and has been consistently highly ranked since. He was ranked the #1 Gold Timer in 1991 (Gold Timer of the Year), and remains highly ranked in that category, ranked #1 Gold Timer in 2003, as of September, 2003.

Harding authored Riding The Bear - How To Prosper in the Coming Bear Market, which was released in March, 1999, just 9 months before the Dow rolled over into the severe 2000-2002 bear market. In it, he revealed Street Smart Report’s Seasonal Timing Strategy™ as a method to prosper in both bull and bear markets. And indeed, it has significantly outperformed the market, with a 5-year total return (1998-2002), through the last two years of the super bull market and the subsequent 3-year bear market, of 114.1% compared to 2.9% for the Dow.

Harding says he is ‘the unknown investment advisor that beats the big names’ because “while the 'big names' spend most of their time out on the interview and seminar circuits promoting themselves, we keep our nose to the grindstone, working on what our subscribers pay us to work on - constant analysis and research of the markets.”

Street Smart Report Online: $225 per year (Best buy).*
$21.95 per month. Cancel anytime on 30-day notice.

* One –year subscription includes Sy’s 1999 book, Riding the Bear as a bonus.