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Wednesday, October 9, 2013

Sell in May and Go Away, Go back in Late September to October

Some thoughts on Index Seasonality (Dow Jones)

Key takeaways:

- The Dow is back where it was 6 Months ago (around April 10 to Present)

- In a 1 Year perspective, it seems Index Seasonality is in play

Dow Jones YTD Chart

 Dow Jones 15Y Seasonal Average

If you've been following the markets, you've probably heard of the Wall Street Jargon "Sell in May and Go Away", but seldom you will hear about when to come back on a seasonal stand-point.

Reviewing the charts, based in a 15Y seasonal average, you should come back in late September to October.

So perhaps the complete seasonal jargon should have been, "Sell in May and go away, Go back in late September to October".

It fascinates me that when you relate the Seasonal average to the current market events that led to the most recent correction - US Government shutdown and debt ceiling concerns w/c could lead to the US to potentially default from it's debt obligations to name a few, It would appear that the current "concerns" in the market is very timely for the "one last drop" before the 4Q rally based on seasonality.

Market events that could potentially lead the year-end rally would be.

1. Upbeat 3Q and 4Q earnings
2. Anticipation of Halloween and Santa Claus rally (above average consumer spending)
3. Yellen (with a Dovish reputation) decides to push-back "Taper", as the Fed could reason out the "less reliable" economic data gathered due to the Government shutdown.
4. US Policy makers find a way (what ever it is) to fix or momentarily fix debt ceiling concerns to prevent default.
5. Lastly, if the above specially 3 and 4 happens, this will lower the perceive "risk" in the system hence could potentially demand for higher earnings multiple a.k.a. higher PE, in short higher prices.

On the other hand, the risks here are.

1. Policy makers fails to make a deal before 17-Oct and the US Defaults on it's debt - this will be catastrophic
2. All of a sudden, Yellen, despite having a dovish reputation decides to Taper or worst, end QE with a snap
3. Weak 3Q and 4Q earnings (though we think this is unlikely given the Q1 and Q2 trend and general improvement of global PMIs).
4. Some unknown event that we do not know yet.

Hmm.. I guess that would be it. Happy investing!

This is not an investment advice and the author shall not be responsible or liable for any trading or investment decisions made based on this information.
The author hereby expressly disclaims any responsibility for any error or inaccuracy in the information.

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