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Stocks’ Seasonal Tendencies: Why Context is Key

Consider the market's seasonal biases, but don't overlook other indicators before making a judgment

by Bob Stokes
Updated: November 28, 2018

EWI's analysts pay close attention to the stock market's seasonal tendencies.

Having said that, they are called tendencies for a reason. For a better grip on the trend, an investor must also consider other market indicators.

A classic Elliott Wave Theorist remarked:

Be wary of making a market judgment based only on seasonal tendencies.

Context is key.

Here's a recent example of providing context from our Sept. 17 U.S. Short Term Update:

Short term, the stock market is entering a very weak seasonal period. Over the past 119 years (back to 1899), 12 out of the top 20 single day DJIA percentage declines occurred in either September, October or November. The stock market's exceptionally tame rally to the recent highs and the extraordinarily low volatility in the S&P... places the market in a position to continue to decline from near current levels, when volatility should burst higher.

Just 12 trading days later, the DJIA topped, and volatility skyrocketed. As you'll recall, the DJIA closed down 831 points on Oct. 10, the third-largest one-day point drop in history, and more triple-digit declines followed before the book was closed on October.

When the month was over, many investors let out a sigh of relief. But the Oct. 31 Elliott Wave Theorist said:

Reaching the end of the traditionally scary month of October is providing comfort to the bulls. But the stock market, especially in today's environment, is no place to feel comfortable. I recall that the stock market rose strongly in September and October of 1973, only to collapse in November.

Well, at first, it seemed like November might provide that comfort for the bulls. The DJIA closed up 241 points on the first day of the month.

But, the downside volatility returned, which included the Nov. 12 drop of 602 points and that 551-point plummet on Nov. 20.

Now investors face the stock market's tendency to rise between Thanksgiving and Christmas.

Since 1990, the S&P 500 scored gains during that stretch 78 percent of the time, according to data analytics company Kensho.

Of course, we'll have to wait and see if the stock market adheres to the tendency for a year-end rally this year.

The key questions are: Which way is market psychology pointing? Is the Elliott wave pattern compatible with a rally through Christmas?

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