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A TIME TO SOW, A TIME TO REAP!
by Sy Harding

May 9, 2003

As is the case each spring and fall, it's time to remind you of the market's amazingly consistent seasonal pattern.

Farmers know there's a time to plant and a time to harvest, and that ignoring those seasonal requirements would be disastrous to their success. It's strange that so few investors realize they are working in a field of similar seasonal patterns that significantly affect their success.

In both bull and bear markets, the market makes most of its gains in a four to seven month period between fall and the following spring. The time to plant new holdings then is in the fall, and the time to reap the profits is in the spring.

There are powerful and consistent forces that produce that pattern, and those forces are with us in all kinds of markets and surrounding conditions. That force is that investors and institutions receive large chunks of extra money every fall and winter, and much of that money finds its way into the stock market. The extra money comes in the form of dividend and capital gains distributions from mutual funds, which begin in November. It comes from year-end contributions by employers into their employee's 401k plans, IRAs, profit-sharing plans. It comes from Christmas bonuses. It comes from small businesses that calculate their profit for the previous year in January and distribute that money to themselves in January and February. It comes from income-tax refunds.

A lot of that money isn't even subject to a decision to invest it or not, but automatically goes into the stock market, including automatically re-invested dividend distributions from mutual funds and corporations, and employer contributions to 401K, IRA, and pension plans.

That extra fuel for the market almost always pushes stock prices higher regardless of what is going on in the world or in the economy. In the early fall, institutions and astute investors begin anticipating those positive months ahead and start buying, planting their seeds. That early anticipatory buying begins a rally that the extra chunks of money add to for the next several months.

However, as April and May roll around, those chunks of extra money come to a halt, depriving the market of that extra fuel. In fact, not only do the chunks of extra money stop flowing in, but some money begins to be withdrawn from the market - to pay income taxes, to pay for deposits on vacations, etc. Institutions and astute investors, still thinking of the market's seasonal pattern, also begin withdrawing money from the market, reaping their profits from the 'favorable season'. This not only stalls any rally that is underway, but leaves the market unusually vulnerable to any disappointing news that comes along during the summer months, from the economy or geo-political situations.

The old Wall Street maxim is "Sell in May and Go Away". But my firm's research into seasonality found that the market's favorable season does not lend itself that specifically to the calendar. We discovered that although the market does have an amazing pattern of seasonality, the favorable season can last anywhere from four to seven months, sometimes ending in April, sometimes lasting into late June. So we incorporated a technical indicator designed to indicate in the spring when the market's momentum does actually reverse to the downside. That is, the market remains in its favorable seasonal period even though April, and then May, arrives, as long as the momentum indicator says that the market's upside momentum has not ended.

That new way of harnessing the market's seasonal pattern is the strategy I outlined in my 1999 book, Riding the Bear - How to Prosper in the Coming Bear Market, as the means of continuing to prosper from the stock market even when a serious bear market arrives. Back-tested over the last 50 years, such a seasonal strategy greatly outperformed the market, and in real-time in our newsletter's seasonal timing portfolio, it not only avoided the devastating losses of the last three years of bear market, but actually added more gains.

The market's seasonal patterns have continued to be very obvious over the last twelve months. The market's favorable seasonal period last year ended in April (2002). The market was then down substantially for the next six months, in fact reaching a new bear market low last October. In the current favorable season, which began in October, the S&P 500 has rallied 21%, and the Nasdaq 37%, off their lows of last October. It has actually been a mini-bull market.

But the thing is that, although our seasonal strategy currently remains in its favorable season, and could possibly remain so into June, warning signs are already beginning to show up.

For instance, our technical indicators are beginning to get into overbought territory, and the latest statistics show that although many public investors are just beginning to believe the rally, with money flowing into mutual funds again, selling by corporate insiders to take profits from the favorable season rally, has already begun.

So we are at a time again when you should remind yourself of the market's strong seasonal pattern. We have not seen the end of the upside momentum yet, but it is time to begin making a list of bear-type mutual funds, and stocks that look like they're becoming overpriced, and may be good candidates for short-sales once this favorable season does end.

(This article was reprinted with the permission of Sy Harding.)

Sy Harding is president of Asset Management Research Corp., in Meredith, NH, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of Riding The Bear - How To Prosper In the Coming Bear Market, which warned in 1999 of the approaching bear market just 9 months before the Dow topped out on January 14, 2000.