Posted 31 May 2006 - 09:59 AM
Silver lining in May clouds, by Mark Hulbert, MarketWatch.
Commentary: Stock market often gains after losses in May
Last Update: 12:01 AM ET May 31, 2006
ANNANDALE, Va. (MarketWatch) -- May has not been a good month for the stock market, needless to say.
Going into the last trading day of May, the Dow Jones Industrial Average is sporting a 2.4% decline for the month. That is worse than the returns produced by more than three quarters of all Mays since the late 1800s, when the DJIA was created.
Is there any way to put a positive spin on such a disappointing performance?
That was the task I set for myself in writing this column, since - as I wrote nearly two weeks ago - investment newsletter editors during the market's recent correction became too bearish too quickly. As a result, contrarian analysis suggests that the market should rally. Contrarian analysis reaches the same conclusion today, which is just another way of saying that few advisers are finding ways of putting a positive spin on what's happening.
I nevertheless discovered one such way, however, when I looked at what happens to stocks during the summer following losses in May. Much to my surprise, I found that the stock market's probabilities of rising between June 1 and Aug. 31 actually go up when May is a down month.
Consider first those years in which May produced as big or bigger loss as it has so far this year. Since the mid 1890s, when the DJIA was created, a total of 26 years qualify. The DJIA's average summer gain during those 26 years was 6.3%.
Contrast that with the summer gains during years in which the DJIA in May did better than it has in 2006. The average three-month gain during those summers was 2.5%.
This difference turns out to be significant at the 95% confidence level that statisticians often use.
To be sure, a pattern can have statistical significance and still not have that much investment significance. And, sure enough, the investment significance of the summer's inverse relationship to May turns out to be quite modest. So you would not want to make a wholesale change to your portfolio just on the basis of this particular pattern.
Nevertheless, the pattern's existence does add a small piece of confirmation to the contrarian argument that stocks' short-term direction from here is most likely to be up.