By: Larry MacDonald
The best time to invest in stocks is from November to April, according to the Stock Trader’s Almanac for 2009. In fact, say authors Jeffrey and Yale Hirsch, most of the long-term gains in stocks occur in these six months.
Say an investor put $10,000 into the stocks of the Dow Jones Industrial Average (DJIA) during the six months to April 30, 1950. Then they rolled the proceeds successively into the same six months every year to 2008. The $10,000 would have gained $531,444. If they did the same thing from May 1 to Oct. 30, the $10,000 would have gained a mere $1,021.
Even more astounding, says the Almanac, is that one can triple the return on the best six months to $1,546,114 by tweaking entry/exits points. Instead of using the first/last day of the six-month period to buy/sell, one can use a simple Moving Average Convergence Divergence (MACD) indicator. In upward trending markets, the MACD gets the investor in earlier and longer; in downward markets, it gets them in later and out sooner.
Also, it appears the Almanac analysis did not use total-return indexes (which include dividends). If they did, the gains would be even larger! On a side note, one wonders if the annual returns would be sensitive to the starting year, and how the results would have been affected if the investor averaged in a position over several years.
I did a quick search for academic studies on this seasonal pattern but came up with little. Anybody know of any? But I do know there has been academic research into “market anomalies” in general and much of it warns investors to be wary of investing on the basis of historical patterns because of the Efficient Market Theorem (EMT).
As awareness of the repeating profit opportunity spreads, goes the EMT, it is discounted by investors seeking to capture the profits. If one is coming in at the late stages of the discounting process, they’ll end up taking a random walk. The Almanac, an annual publication, has been expounding the “best six months” strategy since the mid-1980s. More details on the lags etc. in the EMT are in this July 17, 2007 post.
9 Responses to “ Best time to invest ”
Larry,
The probability of the Almanac being correct this time is very high. In fact the broad index is already up 20% from it’s Nov. low. Combine this with a historical positive return for the S&P index in next 6 months following a bear market drop in Sept and October, lower interest rates to come, the Obama effect, Santa Claus rally, extreme pessimism, etc, all this is a perfect set up for a short term recovery in the stock market.
However come the first half of 2009, the full effect of the credit crisis, recession, unemployment, bankcrupcies will result in more bad news, driving stocks price down by April/May. So I agree that the best time to get in is now, and to sell by May 2009, go away on vacation with the profits and come back to the market again in Nov. 2009.
Personally, I was a bit timid and did not put my full weighting into the market 2 Thursday ago when the index hit my target of SPY at $75. I was distracted by some projecting that the S&P could drop to 600 (SPY at $60). Oh well, at least I put some money to work from 20th. My latest buy was the double bull Natural Gas,
HNU on Friday when it was down 13%.
John
By John Gan on Nov 30, 2008
John
I was thinking of buying a gas ETF too. I’d like to hear your reasons for buying.
LM
By Larry MacDonald on Dec 1, 2008
Larry,
Sold my HNU today which I bought only last Friday at a small profit. I was freaked out by oil trading down while HNU moved up today. I was also stopped out of my positons today on my longs on Nov.20,21,24,25. With the cash, I have limit orders to get in again with HNU (natural gas price is low and winter is approaching), HOU (oil is oversold short term), BCE (waiting for hedge and arbritrage funds to liquidate), HDD (waiting for Can $ to weaken due to politial uncertaity), HXU (waiting for index to retest lows), SU (low valuation)and SLF (value). All of the above except for BCE and HOU, I had bought
earlier and just sold today. I had expected the market to be softer today after the runup of last week, but did not expect such a big drop. Not sure when Cdn and US market will retest the lows of 20/21 Nov but I quite sure we’ll test it. If that level does not hold, we will be in serious trouble.
John
By John Gan on Dec 2, 2008
Interesting article Larry
If your readers are interested in what history has to offer in stock market cycles and trends etc, I suggest they pickup a copy of your book, The Right Stock at the Right Time. I constantly refer to it, more so now than ever, one of the best financial books I have ever read.
Thanks for writing it.
By Neil Bowie on Dec 5, 2008
Neil
I think Larry Williams wrote The Right Stock at the Right Time.
LM
By Larry MacDonald on Dec 5, 2008
Sorry for the mistake. Have you read his book?
Its a great read. cheers
By Neil on Dec 6, 2008
Neil:
Haven’t read the book. But I’ll put it on my list for sure.
LM
By Larry MacDonald on Dec 7, 2008