We very much adhere to the KISS methodology (Keep It Simple, Stupid) when it comes to much of our system—we’ve found that if you go down the rabbit hole in search of arcane and tertiary indicators and data, you almost always find yourself way off the mark. Usually, the simpler, straightforward, rubber-meets-the-road measures like trend, price and volume provide much better results.
That said, it’s a fact that the market isn’t a kid’s game, either—if you try to make it too simple, you’ll also get burned. That’s one reason why we’ve never been big fans of seasonal investing, or the idea that the calendar itself tells you high-odds times of when to buy or sell. Simply put, if investing were as easy as looking at your calendar, we’d all be rich, but unfortunately that’s not how the world works.
That said, there is one way we do like to use seasonal investing, and it’s to see when the market isn’t doing what it “should” do. Some of this can be anecdotal—for instance, most know that the market tends to do well around holidays, especially into year-end, so on the rare occasion that the indexes sell off hard after Santa has come, it’s usually a tell as to the underlying market’s weakness.
However, a couple of these seasonal measures are real indicators … and they just flashed green last week. One revolves around the notion of the best and worst six-month periods. Generally speaking, most of the market’s net gains over time have come from November through April, while the other six months (May through October) is often where you’ll find some harrowing declines.
Again, we’re not huge fans of the best/worst six-month strategy, as an average over many decades tell you little about what’s going to happen this year. But there is one study that is very impressive—and again, it involves when the market doesn’t do what it should.
The data comes from Wayne Whaley, a sharp technician/student of the market (editor of the Wayne Whaley Market Commentary Studies) and concerns how the market does during what he defines as the worst six-month period (technically May 5 through October 27). It turns out that it’s relatively rare for the market to rally 5% during that period—from 1950 to 2020, such gains occurred just 20 times.
But they almost always portended good things for the “best six-month” period that followed—in fact, the S&P 500 rose every single time during the ensuing six-month stretch, and by an average of nearly 11%! That’s significant because it just happened this year, with the S&P gaining more than 9% during Whaley’s worst-six-month stretch. So, history tells us the major indexes should enjoy further gains through April.
Another (somewhat related) seasonal tidbit came from Ryan Detrick of LPL Financial (give him a follow on Twitter @RyanDetrick). It turns out 2021 is just the ninth time the S&P came into November up at least 20% on the year; of the prior eight times that happened, the S&P rose every single time during the rest of the year, and by an average of 6%.
As always, there are no guarantees in the market, and we’ll be listening to our market timing indicators and the action of leading growth stocks for any sign the sellers are taking control. But these two unusual, calendar-based studies back up the view that this bull market has further to run.
Timing is Everything
There’s no question that, over time, it’s the fundamentals that entice big investors to build big positions in leading stocks, which in turn drives the price much higher over time. But where many investors get tripped up is they fail to incorporate what Jesse Livermore called the “time element”—sales and earnings growth are vital, but so too is getting onboard when demand is overwhelming supply.
For instance, we may have been too eager when we added CrowdStrike (CRWD)—shares looked primed to breakout (shares powered ahead last Tuesday before growth stocks got hit), but now shares have sagged back into their recent up-and-down period, partially due to a recent analyst downgrade. (We wrote more about that earlier in this issue.) The stock isn’t broken (we still rate it Buy), but at least so far, our timing has been off.
Usually, it’s better to wait for a stock to declare itself on the upside, especially if it’s a newer issue. ZoomInfo (ZI), for instance, is a name we’ve been watching for months—it has rapid growth (revenues up 60% in Q3), big earnings and free cash flow and a long-term growth story (a must-have solution for sales reps) that should persist for years. But we’ve been waiting for the stock to get moving: ZI looked like it was breaking out in August from a big post-IPO base but has spent the last three months etching another rest period under 70.
But now it’s testing those highs after earnings this week—with plenty of volatility. Fundamentally, we think ZI has all the characteristics of a winner and is high on our watch list, but we’re waiting for the timing element to be there. WATCH